Working Paper: NBER ID: w15617
Authors: Raj Chetty; John N. Friedman; Tore Olsen; Luigi Pistaferri
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. In this model, micro elasticities are smaller than macro elasticities because they do not account for adjustment costs and firm responses. We present evidence supporting three predictions of the model by analyzing bunching at kinks using the universe of tax records in Denmark. First, larger kinks generate larger taxable income elasticities because they are more likely to overcome search costs. Second, kinks that apply to a larger group of workers generate larger elasticities because they induce changes in hours constraints. Third, firms tailor job offers to match workers' aggregate tax preferences in equilibrium. Calibrating our model to match these empirical findings, we obtain a lower bound on the intensive-margin macro elasticity of 0.34, an order of magnitude larger than the estimates obtained using standard microeconometric methods for wage earners in our data.
Keywords: Labor Supply Elasticities; Taxation; Adjustment Costs; Danish Tax Records
JEL Codes: E62; H2; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger kinks in the tax system (H29) | Larger taxable income elasticities (H30) |
| Kinks affecting a larger group of workers (J59) | Larger elasticities (H30) |
| Firm responses to taxes (H32) | Individual responses to taxes (H31) |
| Adjustment costs and hours constraints (D24) | Attenuate micro elasticity estimates for wage earners (J39) |
| Broader labor market responses to tax variations (H31) | Larger macro elasticities (H30) |