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The CES Utility Function, Non-linear Budget Constraints and Labor Supply : Results on Prime-age Males in Japan

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  • Shun-ichiro Bessho

    (Policy Research Institute, Ministry of Finance, Government of Japan)

  • Masayoshi Hayashi

Abstract

When he labor supply is elastic with respect to the net wage rate, labor income taxation generates economic distortion and welfare loss. The substitute effect is a key determinant of the magnitude of such deadweight loss; thus, evaluating the elasticity of the labor supply has broad and significant implications for assessing the effects of changes in public policy. We estimate the labor supply function based on the CES utility function, using large microdata sets in Japan and treating the complex Japanese income tax system carefully. The results of this chapter suggest that the uncompensated elasticity of the labor supply of prime-age males is at most 0.1.

Suggested Citation

  • Shun-ichiro Bessho & Masayoshi Hayashi, 2005. "The CES Utility Function, Non-linear Budget Constraints and Labor Supply : Results on Prime-age Males in Japan," Labor Economics Working Papers 22041, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:laborw:22041
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    More about this item

    Keywords

    piecewise linear budget constraint; labor supply; CES utility function;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • 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

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