Labor Supply and Taxes: A Survey

Abstract

I survey the male and female labor supply literatures, focusing on implications for effects of wages and taxes. For males, I describe and contrast results from three basic types of model: static models (especially those that account for nonlinear taxes), life-cycle models with savings, and life-cycle models with both savings and human capital. For women, more important distinctions are whether models include fixed costs of work, and whether they treat demographics like fertility and marriage (and human capital) as exogenous or endogenous. The literature is characterized by considerable controversy over the responsiveness of labor supply to changes in wages and taxes. At least for males, it is fair to say that most economists believe labor supply elasticities are small. But a sizable minority of studies that I examine obtain large values. Hence, there is no clear consensus on this point. In fact, a simple average of Hicks elasticities across all the studies I examine is 0.31. Several simulation studies have shown that such a value is large enough to generate large efficiency costs of income taxation. For males, I conclude that two factors drive many of the differences in results across studies. One factor is use of direct versus ratio wage measures, with studies that use the former tending to find larger elasticities. Another factor is the failure of most studies to account for human capital returns to work experience. I argue that this may lead to downward bias in elasticity estimates. In a model that includes human capital, I show how even modest elasticities—as conventionally measured—can be consistent with large efficiency costs of taxation. For women, in contrast, it is fair to say that most studies find large labor supply elasticities, especially on the participation margin. In particular, I find that estimates of "long-run" labor supply elasticities—by which I mean estimates that allow for dynamic effects of wages on fertility, marriage, education and work experience—are generally quite large. ( JEL D91, J13, J16, J22, J31, H24)

Taxing women: A macroeconomic analysis

“…Therefore, as a measure of childlessness we use the fraction of married couples between ages 35-39 who have no children at home. 19 17 The CPS June Supplement provides data on the total number of live births and the age at last birth for females, which are not available in the U.S. Census. 18 The CPS June Supplement is not particularly useful for the calculation of childlessness in married couples.…”

Income tax progressivity, growth, income inequality and welfare

“…16 I endogenously obtain δ in a straightforward manner. Consider the law of motion for the aggregate stock of capital, K a,t , on an annual basis, Keane (2011) concludes, however, there exists a controversy over the responsiveness of labor supply to changes in wages and taxes: even though (at least for males) most economists believe labor supply elasticities are small, a considerable minority of studies finds large values. Additionally, estimates of small labor supply elasticities based on micro data are consistent with large aggregate labor supply elasticities.…”

Earnings responses to social security contributions

“…B N (B) states the absolute (relative) excess or missing mass, Bse is the correspondig standard error. This graph is generated by a slight modification of the program code provided by Chetty et al (2011). labour supply: 0.1 is frequently estimated in static empirical studies; 0.5, alternatively, is quite high in the distribution of estimates (see Keane (2011) for a recent survey).…”