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Adjustment Costs, Firm Responses, and Labor Supply Elasticities: Evidence from Danish Tax Records

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Listed:
  • Raj Chetty

    (Harvard University)

  • John N. Friedman

    (Harvard University)

  • Tore Olsen

    (Harvard University)

  • Luigi Pistaferri

    (Harvard University)

Abstract

We show that the effects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by firms. We develop a model in which firms post job offers characterized by an hours requirement and workers pay search costs to find jobs. In this model, micro elasticities are smaller than macro elasticities because they do not account for adjustment costs and firm responses. We present evidence supporting three predictions of the model by analyzing bunching at kinks using the universe of tax records in Denmark. First, larger kinks generate larger taxable income elasticities because they are more likely to overcome search costs. Second, kinks that apply to a larger group of workers generate larger elasticities because they induce changes in hours constraints. Third, firms tailor job offers to match workers.aggregate tax preferences in equilibrium. Calibrating our model to match these empirical findings, we obtain a lower bound on the intensive-margin macro elasticity of 0:34, an order of magnitude larger than the estimates obtained using standard microeconometric methods for wage earners in our data.

Suggested Citation

  • Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2010. "Adjustment Costs, Firm Responses, and Labor Supply Elasticities: Evidence from Danish Tax Records," CAM Working Papers 2010-03, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  • Handle: RePEc:kud:kuieca:2010_03
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    File URL: http://www.econ.ku.dk/cam/wp0910/2010-03.pdf/
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    Cited by:

    1. le Maire, Daniel & Schjerning, Bertel, 2013. "Tax bunching, income shifting and self-employment," Journal of Public Economics, Elsevier, vol. 107(C), pages 1-18.
    2. José Mustre-del-Río, 2011. "The aggregate implications of individual labor supply heterogeneity," Research Working Paper RWP 11-09, Federal Reserve Bank of Kansas City.
    3. Schoefer, Benjamin, 2010. "Regulation and taxation: A complementarity," Journal of Comparative Economics, Elsevier, vol. 38(4), pages 381-394, December.
    4. Frederiksen, Anders & Halliday, Timothy J. & Koch, Alexander K., 2010. "What Do We Work For? An Anatomy of Pre- and Post-Tax Earnings Growth," IZA Discussion Papers 5298, Institute for the Study of Labor (IZA).
    5. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
    6. Keith M. Marzilli Ericson, 2014. "When Consumers Do Not Make an Active Decision: Dynamic Default Rules and their Equilibrium Effects," NBER Working Papers 20127, National Bureau of Economic Research, Inc.
    7. Kowalski, Amanda E., 2015. "Estimating the tradeoff between risk protection and moral hazard with a nonlinear budget set model of health insurance," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 122-135.
    8. Day Manoli & Andrea Weber, 2016. "Nonparametric Evidence on the Effects of Financial Incentives on Retirement Decisions," American Economic Journal: Economic Policy, American Economic Association, vol. 8(4), pages 160-182, November.
    9. Dominic Coey, 2011. "Estimating Income Tax Salience," Discussion Papers 10-026, Stanford Institute for Economic Policy Research.
    10. Riccardo Fiorito & Giulio Zanella, 2012. "The Anatomy of the Aggregate Labor Supply Elasticity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 171-187, April.
    11. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    12. Gelber, Alexander, 2010. "Taxation and the Earnings of Husbands and Wives," MPRA Paper 20345, University Library of Munich, Germany.
    13. Richard Rogerson, 2011. "Individual and Aggregate Labor Supply with Coordinated Working Times," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 7-37, August.
    14. Xunzhou Ma & Shiqiu Zhang & Quan Mu, 2014. "How Do Residents Respond to Price under Increasing Block Tariffs? Evidence from Experiments in Urban Residential Water Demand in Beijing," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(14), pages 4895-4909, November.

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