We build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work. We find that changes in taxes have large aggregate effects on hours of work. Moreover, we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers. In our model, micro and macro elasticities are effectively unrelated. Our model is also consistent with other cross-country patterns.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13017.
Length: Date of creation: Apr 2007 Date of revision: Handle: RePEc:nbr:nberwo:13017
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Find related papers by JEL classification: E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment J2 - Labor and Demographic Economics - - Demand and Supply of Labor
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