Micro vs Macro Labor Supply Elasticities: The Role of Dynamic Returns to Effort / Henrik Kleven, Claus Thustrup Kreiner, Kristian Larsen, Jakob Egholt Søgaard.

Format:

Book

Author/Creator:

Kleven, Henrik.

Contributor:

National Bureau of Economic Research.

Kreiner, Claus Thustrup.

Larsen, Kristian.

Egholt Søgaard, Jakob.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31549.

NBER working paper series no. w31549

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

A key contention in economics is the discrepancy between micro and macro elasticities of labor supply with respect to marginal tax rates. We revisit this question, focusing on the role of dynamic returns to effort among top earners. We develop a new model of earnings responses to taxes in the presence of dynamic returns. In this model, the returns to effort are delayed and mediated by job switches such as promotions within firms or movements between firms. Short-run micro elasticities are attenuated relative to the true long-run macro elasticity. We proceed by providing two main empirical analyses using rich administrative data from Denmark. The first part presents descriptive evidence on earnings and hours-worked patterns over the lifecycle that confirm the predictions of the theoretical model. The second part presents quasi-experimental evidence on earnings responses to taxes using discrete job switches. The empirical strategy is informed by the theoretical model, according to which job switches can be used to (partially) identify the macro elasticity of labor supply. The evidence shows that, at the top of the distribution, macro elasticities are much larger than micro elasticities due to dynamic compensation effects.

Notes:

Print version record

August 2023.