Using Labor Supply Elasticities to Learn about Income Inequality: The Role of Productivities versus Preferences

Katy Bergstrom and William Dodds

American Economic Journal: Economic Policy, 2021, vol. 13, issue 3, 28-62

Abstract: Using a general labor supply model in which individuals choose how much to work conditional on productivities and preferences for consumption relative to leisure, we show that the mapping from earnings and hours worked to productivities and preferences can be expressed entirely in terms of reduced-form labor supply elasticities. We investigate the roles that productivities and preferences play in driving income inequality in the United States. Benchmark labor supply elasticity estimates from the literature imply that productivities drive most income inequality. Preferences become increasingly important relative to benchmark, with larger income effects or larger differences between earnings and hours-worked elasticities.

JEL-codes: D31 H24 H31 J22 J24 J31 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1257/pol.20200100

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