Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records

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. We present evidence supporting three predictions of this model by analyzing bunching at kinks using Danish tax records. First, larger kinks generate larger taxable income elasticities. Second, kinks that apply to a larger group of workers generate larger elasticities. Third, the distribution of job offers is tailored to match workers' aggregate tax preferences in equilibrium. Our results suggest that macro elasticities may be substantially larger than the estimates obtained using standard microeconometric methods. JEL Codes: H20, J20.

The Elasticity of Taxable Income and Income-Shifting: What is 'Real' and What is Not?

“…Turnover measures the overall sales revenue of the firm, which also reflects real effort and productivity. 6 We futher discuss the details of these estimations in Section 6.2.…”

“…For wages, columns (4)- (6) show that the only statistically significant effect is the income-shifting response, which is estimated to be around -0.4. The wage net-of-tax rate coefficient is insignificant in every specification.…”

“…As in Chetty et al (2011), standard errors forb(k) are calculated using a bootstrap procedure where we generate a large number of income distributions by randomly resampling the residuals from equation (17). The standard errors are defined as the standard deviation in the distribution ofb(k).…”

“…Saez (2010) shows that excess bunching around kink points is proportional to the local ETI at the kink. Many studies show that the excess mass around kink points is larger for self-employed individuals (see Saez 2010, Chetty et al 2011and Bastani and Selin 2014. This indicates that the self-employed respond actively to income tax rates, and have more opportunities to adjust their behavior to them.…”

Nonparametric Evidence on the Effects of Financial Incentives on Retirement Decisions

“…We estimate the numerator of the elasticity, capturing changes in retirement probabilities at the tenure thresholds, using bunching techniques (Saez 2010, Chetty et al 2011. The denominator of the elasticity, capturing the change in income at the tenure threshold, is also estimated from the discontinuity in severance payments.…”