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

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  • Martin Ljunge

    (University of Copenhagen and SITE)

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.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2011/1127.pdf
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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 11-27.

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Length: 37 pages
Date of creation: 18 Oct 2011
Date of revision:
Handle: RePEc:kud:kuiedp:1127

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Keywords: sick leave; adjustable labor supply; work effort; taxes;

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References

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  1. Puhani, Patrick A. & Sonderhof, Katja, 2010. "The effects of a sick pay reform on absence and on health-related outcomes," Journal of Health Economics, Elsevier, Elsevier, vol. 29(2), pages 285-302, March.
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  3. Martin Ljunge, 2011. "The Spirit of the Welfare State? Adaptation in the Demand for Social Insurance," Discussion Papers 11-30, University of Copenhagen. Department of Economics.
  4. Chen, Susan & van der Klaauw, Wilbert, 2008. "The work disincentive effects of the disability insurance program in the 1990s," Journal of Econometrics, Elsevier, Elsevier, vol. 142(2), pages 757-784, February.
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  6. Johansson, Per & Palme, Mårten, 2001. "Assessing the effect of public policy on worker absenteeism," Working Paper Series, IFAU - Institute for Evaluation of Labour Market and Education Policy 2002:13, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  7. Bound, John, 1989. "The Health and Earnings of Rejected Disability Insurance Applicants," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 482-503, June.
  8. Nicolas R. Ziebarth & Martin Karlsson, 2009. "A Natural Experiment on Sick Pay Cuts, Sickness Absence, and Labor Costs," SOEPpapers on Multidisciplinary Panel Data Research 244, DIW Berlin, The German Socio-Economic Panel (SOEP).
  9. Gerald S. Oettinger, 1999. "An Empirical Analysis of the Daily Labor Supply of Stadium Vendors," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 360-392, April.
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  13. Kahn, Shulamit & Lang, Kevin, 1991. "The Effect of Hours Constraints on Labor Supply Estimates," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 605-11, November.
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  15. William P. Curington, 1994. "Compensation for Permanent Impairment and the Duration of Work Absence: Evidence from Four Natural Experiments," Journal of Human Resources, University of Wisconsin Press, vol. 29(3), pages 888-910.
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  18. Per Pettersson-Lidbom & Peter Skogman Thoursie, 2013. "Temporary Disability Insurance and Labor Supply: Evidence from a Natural Experiment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 115(2), pages 485-507, 04.
  19. Allen, Steven G, 1981. "An Empirical Model of Work Attendance," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 77-87, February.
  20. Barmby, Tim A. & Ercolani, Marco G. & Treble, John G., 2000. "Sickness Absence: An International Comparison," IRISS Working Paper Series, IRISS at CEPS/INSTEAD 2000-03, IRISS at CEPS/INSTEAD.
  21. Crawford, Vincent P. & Meng, Juanjuan, 2008. "New York City Cabdrivers' Labor Supply Revisited: Reference-Dependence Preferences with Rational-Expectations Targets for Hours and Income," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt94w5n6j9, Department of Economics, UC San Diego.
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Cited by:
  1. Martin Ljunge, 2012. "The Spirit of the Welfare State? Adaptation in the Demand for Social Insurance," Journal of Human Capital, University of Chicago Press, University of Chicago Press, vol. 6(3), pages 187 - 223.

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