Aging of the Baby Boomers: Demographics and Propagation of Tax Shocks

Transcription

1 1 / 29 Aging of the Baby Boomers: Demographics and Propagation of Tax Shocks Domenico Ferraro Arizona State University Giuseppe Fiori North Carolina State University February 1, 216

2 2 / 29 MOTIVATION POLICY REACTION TO THE GREAT RECESSION OF How do tax cuts affect aggregate unemployment? American Recovery and Reinvestment Act of 29 (ARRA) was enacted with the following primary objective: To preserve and create jobs and promote economic recovery. (see Public Law 111-5) ARRA reignited the long-standing debate on the role of tax cuts as a tool of counter-cyclical fiscal policy There remains uncertainty about the propagation mechanisms of tax cuts

3 3 / 29 THIS PAPER Question: How does the aging of the Baby Boomers change the effects of tax cuts on unemployment? Finding: The aging of the Baby Boomers considerably reduces the effects of tax cuts on unemployment Channel: Aging of the Baby Boomers changes age composition of the labor force Labor force share of young (2-34 years old) is declining Unemployment of young (2-34 years old) more responsive to tax cuts than unemployment of prime-age (35-64 years old)

4 4 / 29 ROADMAP A bird s eye view of the data: Population and labor force shares of young and prime-age Aggregate response to tax cuts: Unemployment rate response to tax shocks Propagation mechanisms Demographics and aggregate response to tax cuts: Unemployment rate responses to tax shocks by age Quantifying relative contribution of young and prime-age Quantifying impact of aging on effectiveness of tax cuts

5 5 / 29 THE UNITED STATES IS AGING A BIRD S EYE VIEW OF THE DATA Civilian noninstitutional population: Population is aging Population share of young is declining Labor force (employment + unemployment): Labor force is aging Labor force share of young is declining

6 6 / 29 THE U.S. POPULATION IS AGING LARGE SHIFTS IN THE AVERAGE AGE OF THE U.S. POPULATION 42 Average Age of the U.S. Civilian Noninstitutional Population (2 64 s Old) Average age

7 7 / 29 THE AGING OF THE BABY BOOMERS LARGE SHIFTS IN THE AGE COMPOSITION OF THE U.S. POPULATION 55 U.S. Civilian Noninstitutional Population Shares by Age (2 64 s Old) Percent Percent

8 7 / 29 THE AGING OF THE BABY BOOMERS LARGE SHIFTS IN THE AGE COMPOSITION OF THE U.S. POPULATION 55 U.S. Civilian Noninstitutional Population Shares by Age (2 64 s Old) Percent Percent

9 7 / 29 THE AGING OF THE BABY BOOMERS LARGE SHIFTS IN THE AGE COMPOSITION OF THE U.S. POPULATION 55 U.S. Civilian Noninstitutional Population Shares by Age (2 64 s Old) Percent 15 Percent

10 8 / 29 THE U.S. LABOR FORCE IS AGING LARGE SHIFTS IN THE AVERAGE AGE OF THE U.S. LABOR FORCE 42 Average Age of the U.S. Labor Force (2 64 s Old) Average age

11 9 / 29 THE AGING OF THE BABY BOOMERS LARGE SHIFTS IN THE AGE COMPOSITION OF THE U.S. LABOR FORCE 55 U.S. Labor Force Shares by Age (2 64 s Old) Percent 2 34 Percent

12 9 / 29 THE AGING OF THE BABY BOOMERS LARGE SHIFTS IN THE AGE COMPOSITION OF THE U.S. LABOR FORCE 55 U.S. Labor Force Shares by Age (2 64 s Old) Percent Percent

13 9 / 29 THE AGING OF THE BABY BOOMERS LARGE SHIFTS IN THE AGE COMPOSITION OF THE U.S. LABOR FORCE 55 U.S. Labor Force Shares by Age (2 64 s Old) Percent Percent

14 1 / 29 THE AGGREGATE RESPONSE TO TAX CUTS Unemployment rate response to tax cuts: Vector autoregressions (VARs) Identification Impulse responses Propagation mechanisms

15 EMPIRICAL STRATEGY Average marginal tax rate (AMTR): Wages, self-employment, partnership, and S-corporation income Federal individual income tax + payroll tax (FICA) What is a tax shock? It is a VAR innovation to AMTR: Orthogonal to current and lagged endogenous variables Uncorrelated with other shocks (e.g., technology, oil price shocks) Unanticipated Narrative approach to identify AMTR shocks: Narrative shocks are unanticipated changes in tax liabilities Projected impact on tax liabilities assuming no change in tax base 11 / 29

16 12 / 29 HOW DO WE IDENTIFY TAX SHOCKS? NARRATIVE SHOCKS AS AN INSTRUMENT FOR AMTR ( PROXY SVAR ) 4 A. Average Marginal Tax Rate 35 Percent B. Narrative Shocks.5 Percent

17 13 / 29 ESTIMATING RESPONSE TO AMTR SHOCKS ANNUAL SAMPLE, VAR equation for average marginal tax rate (AMTR): AMTR t = α α 1j AMTR t j + j=1 2 j=1 β 1j X 1t j + ɛ AMTR t VAR equation for unemployment rate: u t = α α 2j u t j + j=1 2 j=1 β 2j X 2t j + η ɛ AMTR t

18 AGGREGATE UNEMPLOYMENT RATE LARGE AGGREGATE EFFECTS OF TAX CUTS.5 A. Average Marginal Tax Rate.5 B. Unemployment Rate More 14 / 29

19 15 / 29 INSPECTING PROPAGATION MECHANISM SEPARATION- VS. HIRING-DRIVEN EFFECTS.2 A. Job Separation Rate B. Job Finding Rate

20 16 / 29 IS TURNOVER DYNAMICS RELEVANT? Unemployment rate evolves over time as u t+1 u t = s t e t f t u t w/o any disturbance u ss t = s t s t + f t s t is job-separation rate f t is job-finding rate u ss t u ss t is the steady-state approximation of u t u t in the data as s t + f t.5 on a monthly basis

21 TURNOVER DYNAMICS IS NOT RELEVANT STEADY-STATE APPROXIMATION ACTUAL DATA Unemployment Rate 16+ Actual data Steady state approx Percent / 29

22 RESPONSE UNDER STEADY-STATE APPROX. Let s decompose changes in u ss t = st s t+f t du ss t as ū ss (1 ū ss ) ds t s ūss (1 ū ss ) df t f Let s construct the implied response to a tax cut du ss h as du ss h ū ss (1 ū ss ) ds h s ūss (1 ū ss ) df h f du ss h is the counterfactual impulse response of u t ds h is the estimated impulse response of s t df h is the estimated impulse response of f t h is years after shock 18 / 29

23 19 / 29 TURNOVER DYNAMICS IS NOT RELEVANT COUNTERFACTUAL IMPULSE RESPONSE IMPULSE RESPONSE OF ACTUAL DATA.5 Unemployment Rate 16+ Actual data Steady state approx

24 SEPARATION VS. HIRING SEPARATION-DRIVEN VIEW OF UNEMPLOYMENT DYNAMICS WINS Let s decompose the unemployment rate response as du ss h = ū ss (1 ū ss ) ds h s } {{ } du jsr h ū ss (1 ū ss ) df h f }{{} du jfr h TABLE: Decomposing separation- and hiring-driven effects h (years after shock): du jsr h as % of du ss h du jfr h as % of du ss h / 29

25 21 / 29 THE AGGREGATE RESPONSE TO TAX CUTS DEMOGRAPHICS AND THE EFFECTS OF AN AGING LABOR FORCE Unemployment rate response to tax cuts: Impulse responses of unemployment rates by age Quantifying relative contribution of young and prime-age Elasticities versus average unemployment rates by age Quantifying impact of aging on effectiveness of tax cuts

26 LABOR FORCE SHARES VS. UNEMPLOYMENT Let s decompose the aggregate unemployment rate u t as u t 55+ a=16 ( ) Ea,t + U a,t } E t + U {{ t } φ a,t φ a,t is age-specific labor force share u a,t is age-specific unemployment rate ( Ua,t ) E a,t + U }{{ a,t } u a,t Let s fix labor force shares φ a,t at their sample averages φ a u FLFS t 55+ a=16 φ a u a,t u FLFS t is the fixed-labor-force-shares counterfactual of u t 22 / 29

27 23 / 29 IT IS ALL IN THE UNEMPLOYMENT RATES COUNTERFACTUAL IMPULSE RESPONSE IMPULSE RESPONSE OF ACTUAL DATA.5 Unemployment Rate 16+ Actual data Fixed labor force shares approx

28 24 / 29 YOUNG VS. PRIME-AGE YOUNG MORE RESPONSIVE TO TAX CUTS THAN PRIME-AGE A. Unemployment Rate B. Unemployment Rate C. Unemployment Rate D. Unemployment Rate E. Unemployment Rate F. Unemployment Rate

29 25 / 29 YOUNG VS. PRIME-AGE QUANTIFYING RELATIVE CONTRIBUTION OF YOUNG AND PRIME-AGE Let s decompose the impulse response of u FLFS t as du FLFS h 65+ a=16 φ a du a,h Age group a accounts for share a h of aggregate response: share a h φ a du a,h du FLFS h

30 26 / 29 YOUNG VS. PRIME-AGE IT IS ALL IN THE 2-34 AND AGE GROUP TABLE: Quantifying relative contribution of young and prime-age h (years after shock): share h share 2-34 h share h share h share 65+ h

31 27 / 29 UNEMPLOYMENT ELASTICITIES VARY BY AGE INVERTED U-SHAPE LIFE-CYCLE PROFILE TABLE: Age-specific unemployment elasticities Age group: Impact elas Lagged elas

32 28 / 29 AGING REDUCES THE EFFECTS OF TAX CUTS Counterfactual Unemployment Rate Response to a 1 PP Cut in AMTR (16 s Old and Over) Impact response Lagged response

33 29 / 29 CONCLUSION Demographic change affects the propagation of tax cuts Aging of the Baby Boomers considerably reduces the effects of tax cuts on unemployment Implications for counter-cyclical fiscal policy: Needed: policy actions targeted to spur labor force participation

34 RELATED LITERATURE Demographics and the labor market: Shimer (NBER Macroeconomics Annual 1998, 1999) Jaimovich and Siu (AER, 29) Davis and Haltiwanger (NBER WP, 214) Age differences in volatility of hours: Jaimovich, Pruitt, and Siu (AER, 213) Dyrda, Kaplan, and Ríos-Rull (NBER WP, 212) Narrative identification of fiscal policy shocks: Romer and Romer (AER, 21) Mertens and Ravn (AER, 213; JME, 214); Mertens (WP, 215) Ramey (QJE, 211) 3 / 29

35 31 / 29 NARRATIVE APPROACH ROMER AND ROMER (AER, 21) Sources: Economic Report of the President, presidential speeches and statements, Annual Report of the Secretary of the Treasury on the State of the Finances, Budget of the United States Government Congressional Record, Social Security Bulletin, Annual Report of Board of Trustees of the Federal Old Age and Survivors Insurance Trust Fund Legislated tax changes: Systematic vs. discretionary tax changes Endogenous tax changes: Actions taken in response to current economic conditions, i.e., business cycle Exogenous tax changes: Actions taken in response to inherited budget deficits or for long-run considerations

36 AGGREGATE UNEMPLOYMENT RATE LARGE AGGREGATE EFFECTS OF TAX CUTS.5 A. Average Marginal Tax Rate.5 B. Unemployment Rate Go back 32 / 29

37 AGGREGATE PARTICIPATION RATE NO AGGREGATE EFFECTS OF TAX CUTS 1 A. Average Marginal Tax Rate.5 B. Participation Rate Go back 33 / 29

38 34 / 29 AGGREGATE UNEMPLOYMENT RATE STEADY-STATE APPROXIMATION AND FIXED LABOR FORCE SHARES.5 A. Unemployment Rate 16+ Actual data Steady state approx..5 B. Unemployment Rate 16+ Actual data Fixed labor force shares

39 35 / 29 AGING REDUCES THE EFFECTS OF TAX CUTS.2 Counterfactual Unemployment Rate Response to a 1 PP Cut in AMTR (2 64 s Old) Impact response Lagged response