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Micro versus Macro Labor Supply Elasticities: The Role of Dynamic Returns to Effort

Author

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  • Henrik Kleven
  • Claus Kreiner
  • Kristian Larsen
  • Jakob Søgaard

Abstract

We investigate long-run earnings responses to taxes in the presence of dynamic returns to effort. First, we develop a theoretical model of earnings determination with dynamic returns to effort. In this model, earnings responses are delayed and mediated by job switches. Second, using administrative data from Denmark, we verify our model's predictions about earnings and hours-worked patterns over the life cycle. Third, we provide a quasi-experimental analysis of long-run earnings elasticities. Informed by our model, the empirical strategy exploits variation among job switchers. We find that the long-run elasticity is around 0.5, considerably larger than the short-run elasticity of roughly 0.2.

Suggested Citation

  • Henrik Kleven & Claus Kreiner & Kristian Larsen & Jakob Søgaard, 2025. "Micro versus Macro Labor Supply Elasticities: The Role of Dynamic Returns to Effort," American Economic Review, American Economic Association, vol. 115(9), pages 2849-2890, September.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:9:p:2849-90
    DOI: 10.1257/aer.20240554
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    Citations

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    Cited by:

    1. Massenz, Gabriella, 2025. "Tax-Motivated Firm Splitting," Working Paper Series 1539, Research Institute of Industrial Economics.
    2. Raquel Fonseca & Etienne Lalé & François Langot & Thepthida Sopraseuth, 2025. "The College Premium Rollercoaster and the Rebound of Lifetime Wage Growth: A Structural Analysis," Cahiers de recherche / Working Papers 2503, Chaire de recherche sur les enjeux économiques intergénérationnels / Research Chair in Intergenerational Economics.
    3. Bruno Paolo Bosco & Carlo Federico Bosco & Paolo Maranzano, 2025. "Income Tax Treatment and Labour Supply in a multi-level hierarchical Difference-in-Differences model," Working Papers 2025.20, Fondazione Eni Enrico Mattei.

    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
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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