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

Henrik Kleven, Claus Kreiner, Kristian Larsen and Jakob Søgaard

American Economic Review, 2025, vol. 115, issue 9, 2849-90

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 life cycle. 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: D31 H24 H31 J22 J31 J62 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/aer.20240554

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