Thesis (Ph. D.)--University of Rochester. Dept. of Economics, 2012.
This dissertation considers two distinct issues in macroeconomics. The first and
second chapters look at the effects of changes in tax policy on productivity of an
economy from an empirical and theoretical stand point. The third chapter concerns
the implications of cross-national migration for long-run growth and welfare.
In the first chapter, I analyze the effects of tax policy changes on US total factor
productivity (TFP). A substantial fraction of the income differences between
countries can be explained by differences in TFP. Thus it is important to know
the effects of policy changes on TFP. This is the first study that looks at the effect
of changes in tax policy on TFP. Data on tax shocks comes from the sources
used by Romer and Romer (2009). Empirical estimates show that a 1 percent
permanent exogenous rise in total taxes lowers TFP by up to 1.75 percent in the
long run. The drop in output associated with the increase in taxes is between 2
and 3 percent. Thus the change in TFP explains most of the movement in output
that follows a tax change. Individual income taxes have a strong and significant
effect on TFP whereas corporate income taxes do not significantly affect TFP or
most other macroeconomic variables. The analysis also shows that the effects of
tax changes on output and on observable inputs have become smaller over time
while the effects on TFP and on wages have become larger over time.
In the second chapter, I build a dynamic stochastic general equilibrium model to explain the dynamic macroeconomic effects of tax changes. The model has two
key features: learning-by-doing at the worker level and endogenous TFP evolution
whereby TFP growth depends on investment and human capital. When I calibrate
the learning-by-doing and TFP evolution processes using micro evidence on the
effect of human capital accumulation on productivity, the effect of taxes on TFP
in the model is substantially less elastic than in the data. When I instead select
parameters to match key aggregate moments, the estimated model is successful
in accounting for the qualitative and quantitative nature of the empirical results.
However, this requires stronger learning-by-doing than seems reasonable given the
microeconomic evidence. I argue that the gap between the model and data may
arise because some of the tax changes labeled as exogenous by Romer and Romer
(2009) are in fact endogenous in which case the empirical results would overstate
the true effects of tax changes on TFP. The difference between model and data
may also arise because of the model not being rich enough. The model drives its
components from both the business cycle and endogenous growth literature, thus
the gap between model and data perhaps shows that the literature is not adequate
in explaining observed patterns in the data.
The third chapter characterizes the effect of the much-discussed "brain drain"
- the migration of relatively skilled workers from less to more advanced economies
- on long-run development in the workers' home nation. A summary of the model
is as follows: I employ a life cycle model with two countries, one poor and one
rich, with endogenous migration and return migration decisions from and to the
poor country. Workers working in the poor country receive wage offers from the
rich country and decide to migrate to the rich country if the wage offer and subsequent
wage growth gives them a higher lifetime utility than from staying in the
poor country. The workers who migrate to the rich country have higher wage and
skill growth rates than the workers in poor. The central question of this chapter is to evaluate the costs and benefits of a policy where the government of the
poor country incentivizes the expatriates to return from the rich country to the
poor country to take advantage of their superior skills that they accumulate while
working in the rich country. The direct benefit from calling back workers from the
rich country is the increase in output of the poor country because of the higher
skills of return migrants relative to domestic workers. The indirect benefit to the
poor country is the increase in skill level of domestic workers because of the positive
externalities from the returning workers. However, every worker that is called
back to work in the poor country must also be given high enough compensation
so that he is indifferent between working in the two countries. This is the cost
of bringing a worker back. These costs and benefits determine 1) whether it is
beneficial to call expatriates back or not, and 2) which workers benefit the country
the most. Results show that the economy can gain the most by calling back
workers with skill levels that are 1.28 standard deviations above the mean skill
level of domestic workers. In the model, since skill is a combination of education
and experience, this skill level in real life can either correspond to highly skilled
young professionals or highly experienced professional or a combination of both.
Calling back workers of lower skill levels will lower the gain since their experience
in the rich country would not be high and hence the superior skill accumulation
would be lower. Calling back workers of higher skill levels will lower the gain since
the cost of calling them back would be too high.