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Sick of Taxes? Evidence on the Elasticity of Labor Supply when Workers Are Free to Choose

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  • Martin Ljunge

    (University of Copenhagen and SITE)

Abstract

I estimate a price elasticity of sickness absence. Sick leave is an intensive margin of labor supply where individuals are free to adjust. I exploit variation in tax rates over two decades, which provide thousands of differential incentives across time and space, to estimate the price responsiveness. High taxes provide an incentive to take more sick leave, as less after tax income is lost when taxes are high. The panel data, which is representative of the Swedish population, allow for extensive controls including unobserved individual characteristics. I find a substantial price elasticity of sick leave, -0.7, with respect to the net of tax rate. Though large relative to traditional labor supply elasticities, Swedes are half as price elastic as bike messengers, and just as elastic as stadium vendors on the margin which they can adjust freely.

Suggested Citation

  • Martin Ljunge, 2011. "Sick of Taxes? Evidence on the Elasticity of Labor Supply when Workers Are Free to Choose," Discussion Papers 11-27, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:1127
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2011/1127.pdf
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    References listed on IDEAS

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    1. Martin Ljunge, 2012. "The Spirit of the Welfare State? Adaptation in the Demand for Social Insurance," Journal of Human Capital, University of Chicago Press, vol. 6(3), pages 187-223.

    More about this item

    Keywords

    sick leave; adjustable labor supply; work effort; taxes;

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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