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

Henrik Kleven, Claus Kreiner, Kristian Larsen and Jacob Soegaard
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Henrik Kleven: Princeton University
Claus Kreiner: Department of Economics, University of Copenhagen
Kristian Larsen: Department of Economics, University of Copenhagen
Jacob Soegaard: Department of Economics, University of Copenhagen

No 25-03, CEBI working paper series from University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI)

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 models 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.

Keywords: Labor supply; tax distortions (search for similar items in EconPapers)
JEL-codes: H21 J22 (search for similar items in EconPapers)
Pages: 74
Date: 2025-03-17
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