Micro vs Macro Labor Supply Elasticities: The Role of Dynamic Returns to Effort

Henrik Kleven, Claus Kreiner, Kristian Larsen and Jakob Søgaard

No 31549, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate long-run earnings responses to taxes in the presence of dynamic returns to effort. First, we develop a theoretical model of earnings determination with dynamic returns to effort. In this model, earnings responses are delayed and mediated by job switches. Second, using administrative data from Denmark, we verify our model’s predictions about earnings and hours-worked patterns over the lifecycle. Third, we provide a quasi-experimental analysis of long-run earnings elasticities. Informed by our model, the empirical strategy exploits variation among job switchers. We find that the long-run elasticity is around 0.5, considerably larger than the short-run elasticity of roughly 0.2.

JEL-codes: C1 D6 E6 H2 H3 J2 J3 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-eur, nep-lma and nep-pbe
Note: EFG LS PE
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Citations: View citations in EconPapers (3)

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Working Paper: Micro vs Macro Labor Supply Elasticities: The Role of Dynamic Returns to Effort (2023)
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