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Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records

Year: 2011

Type: article

Abstract: We show that the effects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by firms. We develop a model in which firms post job offers characterized by an hours requirement and workers pay search costs to find jobs. We present evidence supporting three predictions of this model by analyzing bunching at kinks using Danish tax records. First, larger kinks generate larger taxable income elasticities. Second, kinks that apply to a larger group of workers generate larger elasticities. Third, the distribution of job offers is tailored to match workers' aggregate tax preferences in equilibrium. Our results suggest that macro elasticities may be substantially larger than the estimates obtained using standard microeconometric methods.

Source: The Quarterly Journal of Economics

DOI: 10.1093/qje/qjr013

Authors: R. Chetty, J. N. Friedman, T. Olsen, L. Pistaferri

Institutions: University of Copenhagen, National Bureau of Economic Research, Harvard University, Stanford University

Language: English

Topic: Gender, Labor, and Family Dynamics

Subfield: Gender Studies

Field: Social Sciences

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: bronze

Funders: National Science Foundation, Robert Wood Johnson Foundation, National Institute on Aging