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Working Paper Series - Taxes, Natural Resource Endowment, and the Supply of Labor: New Evidence



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


Volume : 0

No : 0

ISSN : WPS1005

Publisher : Arab Planning Institute - Kuwait

Author (s) : Belkacem Laabas  &  Weshah Razzak 

Published Date : 1/1/2010


Contents :
Using the work – leisurechoice model, this paper computes equilibrium hours-worked for a number ofArab, non-oil-producing and labor-abundant countries and major oil-producing,tax-free and labor-scarce countries, for which actual data are unavailable. Weestimate 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 Arabcountries for which no actual data are available. The model explainshours-worked in Arab, non-oil-producing countries well, but it fails to explainhours-worked in the oil-producing – tax-free countries. With the effectivemarginal tax rate close to zero, hours-worked increase significantly. We showthat natural resource endowment is a required predicting factor for the model inthis case. It turned out that natural resource capital acts exactly as a tax.In other words, it increases the wedge between real wages and marginalproductivity, hence, natural resource wedge. The higher the natural resourceendowment the less hours people worked. Most importantly, we provide a widersupport to the model and confirm that the labor supply is elastic in all Arabcountries. This finding confirms previous research that workers respond toincentives, which has serious implications for tax and social securitypolicies. We also provide some policy simulation pertinent to poverty andwelfare. 

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