Discrete Labor Supply: Empirical Evidence and Implications

Tuomas Kosonen and Tuomas Matikka

No 132, Working Papers from VATT Institute for Economic Research

Abstract: We provide novel evidence of discrete labor supply responses to tax incentives and study the broader implications of discrete rather than continuous labor supply. We utilize an income notch and a reform that shifted the location of the notch in order to study the labor supply mechanisms. We find transparent evidence of discrete labor supply responses, revealing that wage earners even in the part-time labor market can face significant restrictions in their available labor supply choices. As an implication of discrete labor supply, we show that the conventional differencesin-differences and bunching elasticity estimates can be downward-biased when labor supply is discrete.

Keywords: labor supply; discrete choices; tax elasticity; Social security; taxation and inequality; Labour markets and education; H21; H24; J22; Työmarkkinat (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-lma and nep-pbe
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Citations: View citations in EconPapers (1)

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