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Micro vs Macro Labor Supply Elasticities: The Role of Dynamic Returns to Effort

Author

Listed:
  • Henrik Kleven

    (Princeton University)

  • Claus Kreiner

    (Department of Economics, University of Copenhagen)

  • Kristian Larsen

    (Department of Economics, University of Copenhagen)

  • Jacob Soegaard

    (Department of Economics, University of Copenhagen)

Abstract

We investigate long-run earnings responses to taxes in the presence of dynamic returns to effort. First, we develop a theoretical model of earnings determination with dynamic returns to effort. In this model, earnings responses are delayed and mediated by job switches. Second, using administrative data from Denmark, we verify our models predictions about earnings and hours-worked patterns over the lifecycle. Third, we provide a quasi-experimental analysis of long-run earnings elasticities. Informed by our model, the empirical strategy exploits variation among job switchers. We find that the long-run elasticity is around 0.5, considerably larger than the short-run elasticity of roughly 0.2.

Suggested Citation

  • Henrik Kleven & Claus Kreiner & Kristian Larsen & Jacob Soegaard, 2025. "Micro vs Macro Labor Supply Elasticities: The Role of Dynamic Returns to Effort," CEBI working paper series 25-03, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    • Handle: RePEc:kud:kucebi:2503
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    File URL: https://www.econ.ku.dk/cebi/publikationer/working-papers/CEBI_WP_03-25.pdf
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    More about this item

    Keywords

    Labor supply; tax distortions;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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