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Taxes, Natural Resource Endowment, and the Supply of Labor: New Evidence

Author

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  • Razzak, Weshah
  • Labas, Belkacem
Abstract
Using the work – leisure choice model, this paper computes equilibrium hours-worked for a number of Arab, non-oil-producing and labor-abundant countries and major oil-producing, tax-free and labor-scarce countries, for which actual data are unavailable. We estimate hours-worked for the G7, and show that the model fits the data well. We use this evidence as a yardstick to evaluate the model for the Arab countries for which no actual data are available. The model explains hours-worked in Arab, non-oil-producing countries well, but it fails to explain hours-worked in the oil-producing – tax-free countries. With the effective marginal tax rate close to zero, hours-worked increase significantly. We show that natural resource endowment is a required predicting factor for the model in this case. It turned out that natural resource capital acts exactly as a tax. In other words, it increases the wedge between real wages and marginal productivity, hence, natural resource wedge. The higher the natural resource endowment the less hours people worked. Most importantly, we provide a wider support to the model and confirm that the labor supply is elastic in all Arab countries. This finding confirms previous research that workers respond to incentives, which has serious implications for tax and social security policies. We also provide some policy simulation pertinent to poverty and welfare.

Suggested Citation

  • Razzak, Weshah & Labas, Belkacem, 2010. "Taxes, Natural Resource Endowment, and the Supply of Labor: New Evidence," MPRA Paper 21634, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:21634
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    Cited by:

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    4. Razzak, W A, 2010. "A contribution towards New Zealand's tax reform," MPRA Paper 25680, University Library of Munich, Germany, revised Sep 2010.
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    7. Cologni, Alessandro & Manera, Matteo, 2013. "Exogenous oil shocks, fiscal policies and sector reallocations in oil producing countries," Energy Economics, Elsevier, vol. 35(C), pages 42-57.

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    More about this item

    Keywords

    Hours-worked; labor wedge; natural resource endowment; poverty; welfare;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts

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