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Estimating the welfare cost of labor supply frictions

Author

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  • Bergstrom, Katy
  • Dodds, William
  • Lacoste, Nicholas
  • Rios, Juan

Abstract

This paper quantifies how much people would be willing to pay to remove frictions that impede them from working their ideal number of hours using two sufficient statistics: (1) the percentage difference between ideal (i.e., frictionless) hours and actual hours, and (2) the Hicksian elasticity of ideal hours with respect to the after-tax wage rate. We implement this method to construct estimates of the willingness-to-pay to remove frictions in the United States and Germany. There are three core findings: (1) the cost of adjustment frictions (an omnibus measure encompassing, for example, fixed costs of adjustment, discrete choice sets, and search costs) is large for any reasonable value of the Hicksian ideal hours elasticity, even when accounting for multiple labor supply decisions, endogenous wages, and dynamic decisions; (2) the cumulative cost of adjustment frictions and tax misperceptions is even larger: individuals in the U.S. (Germany) would be willing to pay at least 7 % (4 %) of their income on average to remove these two frictions in hours worked; and (3) adjustment frictions appear to be much more costly than tax misperceptions.

Suggested Citation

  • Bergstrom, Katy & Dodds, William & Lacoste, Nicholas & Rios, Juan, 2026. "Estimating the welfare cost of labor supply frictions," Journal of Public Economics, Elsevier, vol. 253(C).
    • Handle: RePEc:eee:pubeco:v:253:y:2026:i:c:s0047272725002555
    DOI: 10.1016/j.jpubeco.2025.105556
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    Keywords

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    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • 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

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