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What is Labor Supply and Do Taxes Affect It?

  • Harvey S. Rosen

The issue of tax-induced changes in labor supply behavior has been receiving increasing attention. Economic theory alone can say little about the impact of income taxation on labor supply because of the well- known conflict between income and substitution effects. Therefore, an enormous amount of effort has been devoted to empirical investigation of this problem, with a focus on the impact of taxes on hours of work and labor force participation rates. In Section I of this paper, I briefly discuss this literature and its major conclusions. It has been long understood, however, that the concept "labor supply" is more general than "hours of work." If one individual is healthier, better educated, and more highly motivated than another, then presumably a given number of hours of work will lead to a greater effective labor supply for the former than for the latter. Thus, studies of the effect of taxes on other dimensions of labor supply are needed in order to assess the full impact of taxes on work incentives. The main purpose of this paper is to discuss some of this research (Section II) and to explore its policy implications (Section III).

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0411.

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Date of creation: Nov 1979
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Publication status: published as Rosen, Harvey S. "What is Labor Supply and Do Taxes Affect It?" The American Economic Review, Vol. 70, No. 2, (May 1980), pp. 171-176.
Handle: RePEc:nbr:nberwo:0411
Note: PE
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  1. Stiglitz, Joseph E, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, MIT Press, vol. 83(2), pages 263-83, May.
  2. Gronau, Reuben, 1977. "Leisure, Home Production, and Work-The Theory of the Allocation of Time Revisited," Journal of Political Economy, University of Chicago Press, vol. 85(6), pages 1099-1123, December.
  3. Robert J. Willis & Sherwin Rosen, 1978. "Education and Self-Selection," NBER Working Papers 0249, National Bureau of Economic Research, Inc.
  4. G. Burtless & J. A. Hausman, 1977. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiment," Working papers 211, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc.
  6. R. E. Hall, 1970. "Wages, Income and Hours of Work in the U. S. Labor Force," Working papers 62, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Stafford, Frank & Duncan, Greg J., 1979. "The Use of Time and Technology by Households in the United States," Working Paper Series 21, Research Institute of Industrial Economics.
  8. Gordon, Roger H. & Blinder, Alan S., 1980. "Market wages, reservation wages, and retirement decisions," Journal of Public Economics, Elsevier, vol. 14(2), pages 277-308, October.
  9. Rosen, Harvey S, 1976. "Taxes in a Labor Supply Model with Joint Wage-Hours Determination," Econometrica, Econometric Society, vol. 44(3), pages 485-507, May.
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