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

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  • Katy Bergstrom
  • William Dodds

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.

Suggested Citation

  • Katy Bergstrom & William Dodds, 2021. "Using Labor Supply Elasticities to Learn about Income Inequality: The Role of Productivities versus Preferences," American Economic Journal: Economic Policy, American Economic Association, vol. 13(3), pages 28-62, August.
    • Handle: RePEc:aea:aejpol:v:13:y:2021:i:3:p:28-62
    DOI: 10.1257/pol.20200100
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    Cited by:

    1. Rakhe Balachandran & Jerrod Penn & Maria Bampasidou, 2023. "Understanding the variation in estimates of off‐farm labour supply elasticities: A meta‐analysis," Journal of Agricultural Economics, Wiley Blackwell, vol. 74(1), pages 116-134, February.
    2. Katy Bergstrom & William Dodds, 2023. "A General Theory of Inverse Welfare Functions," Working Papers 2308, Tulane University, Department of Economics.

    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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