The Role of Aggregate Preferences for Labor Supply: Evidence from Low-Paid Employment

Luke Haywood and Michael Neumann

No 1652, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Labor supply in the market for low-paid jobs in Germany is strongly influenced by tax exemptions - even for individuals to whom these exemptions do not apply. We present compelling evidence that an individual's choice set depends on other workers' preferences because firms cater their job offers to aggregate preferences in the market. We estimate an equilibrium job search model which rationalizes the strong earnings bunching at the tax exemption threshold using German administrative data. We then simulate modifications to the tax schedule that remove the discontinuity and thus the bunching at the threshold. Results highlight the indirect costs of (discontinuous) tax policies which are shown to be reinforced by firm responses: Workers who would work anyway are hurt by subsidies benefiting groups who enter the market as a result of tax incentives.

Keywords: Tax exemptions; welfare-to-work; labor supply elasticities; minijobs; job search; firm responses; bunching (search for similar items in EconPapers)
JEL-codes: J22 J23 J31 J64 (search for similar items in EconPapers)
Pages: 56 p.
Date: 2017
New Economics Papers: this item is included in nep-eur and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.diw.de/documents/publikationen/73/diw_01.c.555019.de/dp1652.pdf (application/pdf)

Related works:
Journal Article: Equilibrium effects of tax exemptions for low pay (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp1652

Access Statistics for this paper

More papers in Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Bibliothek ().