19. Labor supply - early retirement scheme, balanced budget

Increasing the labor supply has a positive effect on the public savings balance. The additional public savings can be used to increase spending or income tax rates can be reduced to create expansionary effects in the economy. Table 19 presents the effect of a permanent increase in labor supply accompanied by a permanent decrease in income tax rates. The number of people in early retirement scheme is reduced by 10000 and at the same time the central government income tax rates are reduced permanently by 3.3 percent to balance the public budget in the long run. (See experiment)

 

Table 19. The effect of a permanent increase in labor supply, balanced budget

    1. yr 2. yr 3. yr 4. yr 5. yr 10. yr 15. yr 20. yr 25. yr 30. yr
    Million 2010-Dkr.
Priv. consumption fCp 1317 3181 4296 4803 4942 4202 3732 3632 3770 4117
Pub. consumption fCo 0 0 0 1 2 3 2 3 2 1
Investment fI 583 1785 2746 3137 3252 2598 1902 1754 1870 2081
Export fE 225 506 815 1150 1497 3092 4449 5710 6780 7546
Import fM 798 2051 2834 3105 3151 2714 2601 2874 3280 3693
GDP fY 1347 3446 5033 5987 6537 7158 7451 8181 9087 9991
    1000 Persons
Employment Q 0.97 2.87 4.76 6.25 7.29 8.67 8.60 8.93 9.39 9.69
Unemployment Ul 4.87 3.51 2.56 1.83 1.32 0.67 0.70 0.53 0.30 0.15
    Percent of GDP
Pub. budget balance Tfn_o/Y -0.21 -0.15 -0.08 -0.03 0.00 0.01 -0.01 -0.02 -0.01 0.00
Priv. saving surplus Tfn_hc/Y 0.17 0.04 -0.07 -0.13 -0.16 -0.11 -0.04 -0.01 0.00 0.00
Balance of payments Enl/Y -0.04 -0.11 -0.16 -0.17 -0.16 -0.10 -0.06 -0.03 -0.01 0.00
Foreign receivables Wnnb_e/Y -0.04 -0.19 -0.37 -0.54 -0.70 -1.17 -1.28 -1.22 -1.11 -0.97
Bond debt Wbd_os_z/Y 0.20 0.34 0.41 0.45 0.46 0.44 0.53 0.66 0.77 0.84
    Percent
Capital intensity fKn/fX -0.06 -0.14 -0.18 -0.19 -0.17 -0.06 -0.02 -0.03 -0.06 -0.07
Labour intensity hq/fX -0.03 -0.06 -0.07 -0.07 -0.05 -0.03 -0.03 -0.04 -0.04 -0.03
User cost uim -0.04 -0.09 -0.12 -0.15 -0.17 -0.22 -0.26 -0.29 -0.31 -0.31
Wage lna -0.11 -0.24 -0.33 -0.39 -0.43 -0.52 -0.59 -0.65 -0.67 -0.65
Consumption price pcp -0.04 -0.08 -0.12 -0.14 -0.16 -0.21 -0.25 -0.30 -0.32 -0.33
Terms of trade bpe -0.03 -0.06 -0.08 -0.09 -0.10 -0.14 -0.16 -0.18 -0.19 -0.19
    Percentage-point
Consumption ratio bcp -0.17 -0.06 0.03 0.08 0.11 0.08 0.03 0.01 -0.01 -0.01
Wage share byw -0.05 -0.10 -0.12 -0.12 -0.11 -0.10 -0.11 -0.12 -0.11 -0.10

(See details)

 

Compared to section 10, where labor supply increases without changes in the income tax rates, there are two opposing effects on public saving balance. We reduce the number of people outside the labor force receiving transfers from the government and this will have a positive impact on public savings as expenditures on transfers fall. At the same time the lower income tax rates reduce government revenues and public savings fall. In the short run, the negative effect dominates and public savings deteriorate but in the long term public debt as a ratio of GDP remains unchanged.

 

The higher labor supply is not automatically employed, so unemployment increases immediately. The higher unemployment exerts a downward pressure on wages and prices, which improves competitiveness. Accordingly, exports start to expand so production and employment increase. The expansionary effect is reinforced by the higher private consumption, which peaks after five years. The higher consumption reflects that the lower income tax rates increase disposable income. The stronger domestic demand makes unemployment fall more sharply compared to section 10. Employment increases until the additional labor force is employed and the rate of unemployment returns to the baseline. The higher production increases investments permanently. Imports also increase to meet the higher domestic demand.

 

In the long run, the need for higher competitiveness and lower wages moderates the increase in private consumption. The initial consumption boom raises the demand for housing, and housing investment and house price increase, and the higher housing wealth in turn stimulates private consumption. The initial expansion of the housing capital is stronger than the long run effect, and the excess supply of houses reduces house price and investment in housing undergoes a negative adjustment process before the housing market reaches equilibrium.

 

Figure 19. The effect of a permanent increase in labor supply, balanced budget

 

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fig_19_3_zoom38fig_19_4_zoom38

 

 

fig_19_5_zoom38fig_19_6_zoom38

 

 

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