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Sick of Taxes? Evidence on the Elasticity of Labor Supply when Workers Are Free to Choose

Martin Ljunge

No 11-27, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: I estimate a price elasticity of sickness absence. Sick leave is an intensive margin of labor supply where individuals are free to adjust. I exploit variation in tax rates over two decades, which provide thousands of differential incentives across time and space, to estimate the price responsiveness. High taxes provide an incentive to take more sick leave, as less after tax income is lost when taxes are high. The panel data, which is representative of the Swedish population, allow for extensive controls including unobserved individual characteristics. I find a substantial price elasticity of sick leave, -0.7, with respect to the net of tax rate. Though large relative to traditional labor supply elasticities, Swedes are half as price elastic as bike messengers, and just as elastic as stadium vendors on the margin which they can adjust freely.

Keywords: sick leave; adjustable labor supply; work effort; taxes (search for similar items in EconPapers)
JEL-codes: H31 I31 J22 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011-10-18
New Economics Papers: this item is included in nep-acc, nep-bec, nep-hea, nep-hrm, nep-iue, nep-lab, nep-lma, nep-pbe and nep-pub
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