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Taxes, wages and working hours

Author

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  • Peter Ericson
  • Lennart Flood
  • Nizamul Islam

Abstract

This paper presents estimates of individuals’ responses in hourly wages to changes in marginal tax rates. Estimates based on register panel data of Swedish households covering the period 1992 to 2011 produce significant but relatively small net-of-tax rate elasticities. The results vary with family type, with the largest elasticities obtained for single males and the smallest for married/cohabitant females. Despite these seemingly small elasticities, evaluation of the effects of a reduced state tax using a microsimulation model shows that the effort effect matters. The largest effect is due to changes in number of working hours yet including the effort effect results in an almost self-financed reform. As a reference to the earlier literature, we also estimate taxable income elasticities. As expected, these are larger than for the hourly wage rates. However, both specifications produce significantly and positive income effects. One contribution is related to the definition of the instruments used to solve the well-known problem of endogeneity. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Peter Ericson & Lennart Flood & Nizamul Islam, 2015. "Taxes, wages and working hours," Empirical Economics, Springer, vol. 49(2), pages 503-535, September.
    • Handle: RePEc:spr:empeco:v:49:y:2015:i:2:p:503-535
    DOI: 10.1007/s00181-014-0880-0
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    Cited by:

    1. Spencer Bastani & Jacob Lundberg, 2017. "Political preferences for redistribution in Sweden," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 15(4), pages 345-367, December.
    2. Carina Neisser, 2021. "The Elasticity of Taxable Income: A Meta-Regression Analysis [The top 1% in international and historical perspective]," The Economic Journal, Royal Economic Society, vol. 131(640), pages 3365-3391.
    3. Egbert L. W. Jongen & Maaike Stoel, 2019. "The Elasticity of Taxable Labour Income in the Netherlands," De Economist, Springer, vol. 167(4), pages 359-386, December.
    4. Lundberg, Jacob, 2017. "The Laffer curve for high incomes," Working Paper Series 2017:9, Uppsala University, Department of Economics.
    5. Sedigh, Golnaz & Devlin, Rose Anne & Grenier, Gilles & Deri Armstrong, Catherine, 2017. "Revisiting the relationship between wages and sleep duration: The role of insomnia," Economics & Human Biology, Elsevier, vol. 24(C), pages 125-139.
    6. Aronsson, Thomas & Jenderny, Katharina & Lanot, Gauthier, 2022. "The quality of the estimators of the ETI," Journal of Public Economics, Elsevier, vol. 212(C).
    7. Lundberg, Jacob, 2017. "Analyzing tax reforms using the Swedish Labour Income Microsimulation Model," Working Paper Series 2017:12, Uppsala University, Department of Economics.

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    More about this item

    Keywords

    Income taxation; Hourly wage rates; Work effort ; Microsimulation; C8; D31; H24; J22; J31;
    All these keywords.

    JEL classification:

    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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