Journal Article

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

Raj Chetty, John N. Friedman, Tore Olsen and Luigi Pistaferri

in The Quarterly Journal of Economics

Published on behalf of President and Fellows of Harvard University

Volume 126, issue 2, pages 749-804
Published in print May 2011 | ISSN: 0033-5533
Published online May 2011 | e-ISSN: 1531-4650 | DOI: http://dx.doi.org/10.1093/qje/qjr013
Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records

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  • Demand and Supply of Labour
  • Taxation, Subsidies, and Revenue

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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.

Keywords: H20; J20

Journal Article.  17866 words.  Illustrated.

Subjects: Demand and Supply of Labour ; Taxation, Subsidies, and Revenue

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