The Impact of Home Sector Fiscal Policies on Labour Supply: The Case of Sweden

As it is the case for other Scandinavian countries throughout the last few decades, observed hours worked per worker in Sweden are typically higher than in many countries in Continental Europe with a similar total tax burden. This suggests that taxes alone are not able to adequately explain different labour supply trends between countries. The main hypothesis of this paper is that a substantial proportion of this discrepancies can be accounted for by home sector fiscal policies. More specifically, it is claimed that an increase in the rate of labour-conditional transfers of domestic good inputs incentivizes the household to spend a higher proportion of its time working in the market. A dynamic general equilibrium (DGE) model with a home production sector is calibrated in order to quantify the effects of a policy change of such style in Sweden. The model is able to account for almost 80 percent of the rise in observed hours worked at the market per worker between the periods of 1980-90 and 1990-2000, taking into account the interaction with different simultaneous changes in consumption, capital and labour taxes. Results suggest that the rate of public labour-conditional transfers acts like a subsidy for market labour, effectively reducing labour income tax rate distortions.