Discussion paper

DP17848 Heterogeneity, Transfer Progressivity, and Business Cycles

This paper studies how transfer progressivity influences aggregate fluctuations when interacting with household heterogeneity. Using a simple static model of the extensive margin labor supply, we analytically characterize how transfer progressivity influences differential labor supply responses to aggregate conditions across heterogeneous households. We then build a quantitative dynamic general equilibrium model with both idiosyncratic and aggregate productivity shocks and show that it delivers moderately procyclical average labor productivity and a large cyclical volatility of aggregate hours relative to output. A counterfactual exercise shows that higher progressivity achieved by a faster phase-out of transfers would strengthen our mechanism. Finally, we provide suggestive empirical evidence on the heterogeneity of employment responses across the wage distribution.


Jang, Y, T Sunakawa and M Yum (2023), ‘DP17848 Heterogeneity, Transfer Progressivity, and Business Cycles‘, CEPR Discussion Paper No. 17848. CEPR Press, Paris & London. https://cepr.org/publications/dp17848