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

By Raj Chetty, John N. Friedman, Tore Olsen, Luigi Pistaferri. Quarterly Journal of Economics, 2011

803 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Gender Studies

View Paper: https://www.semanticscholar.org/paper/9575502bd18205a73ceccfcfe1b206bbba359e65

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Citations in the corpus

Reference-Dependent Preferences: Evidence from Marathon Runners (2014, methodology): “Using the Chetty et al. (2011) procedure on this sample, we estimated 5.7% excess mass for clock time and 13.4% excess mass for chip time at 4 hours.”
Bunching and Non-Bunching at Kink Points of the Swedish Tax Schedule (2012, positive): “It lies beyond the scope of the present analysis to assess to what extent this phenomenon reflects ’broad bunching’ (in the language of Chetty et al 2011) around the first central government kink point.”
The Surprising Incidence of Tax Credits for the Toyota Prius (2011, background): “None of these papers utilize price data, and, with the exception of the work by Kahn (2007), all of them 1 See Joel Slemrod (2010) for an overview of tax notches; Sallee and Slemrod (2010) for an empirical analysis of notches in the vehicle market; Emmanuel Saez (2010) for a study of bunching around”
Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing (2014, methodology): “My first empirical strategy is to examine bunching of consumers at the kink points of nonlinear price schedules (Heckman 1983; Saez 2010; Chetty et al. 2011).”
Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange (2012, positive): “Chetty et al. (2011) examine labor supply elasticities, and show that observed responses match the pattern predicted by an adjustment cost model: larger tax changes lead to larger estimated elasticities.”
The elasticity of corporate taxable income: new evidence from UK tax records (2014, methodology): “To address the second issue, we follow Chetty et al. (2011) and shift the counterfactual distribution to the right of the kink upward until it satis es the constraint that the area under the counterfactual must equal the area under the empirical distribution.”
Production versus Revenue Efficiency with Limited Tax Capacity: Theory and Evidence from Pakistan (2015, positive): “Hence, this is a kink ða discontinuous change inmarginal tax incentivesÞ as opposed to a notch ða discontinuous change in total tax liabilityÞ, but a type of kink concep- production versus revenue efficiency 1323 tually different from those explored in previous work ðSaez 2010; Chetty et al. 2011Þ b”
A Few Bad Apples? Racial Bias in Policing (2017, background): “…traditionally attempt to estimate the hypothetical distribution of interest in the absence of bunching by looking at the distribution outside a region around the manipulated area and inferring out-of-sample how the distribution should look at the discontinuity (Chetty et al., 2011; Saez, 2010).”
Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark (2014, neutral): “Excess bunching and missing mass is estimated following the method developed by Chetty et al. (2011) and adapting it to a differences-in-differences setting to take advantage of the counterfactual distribution before the introduction of the tax scheme (see online appendix for details). The presence ”
Bounds on Elasticities with Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply (2012, background): “…of 0.47 is roughly consistent with the macro evidence on business cycle fluctuations in hours of work conditional on employment.30 However, Chetty et al. (2011b) find that fluctuations in employment rates over the business cycle imply Frisch elasticities that are an order of magnitude…”
Estimating Taxable Income Responses using Danish Tax Reforms (2014, background): “Even though there is visually clear bunching at the top kink in Denmark, it affects a small part of the population (see Table A1) and is small in magnitude, especially for wage earners where the elasticity implied by bunching is only 0.01 (Chetty et al. 2011).”
Evaluating Behaviorally Motivated Policy: Experimental Evidence from the Lightbulb Market (2015, positive): “First, we use an excess mass test inspired by Chetty et al. (2011) to show that about 38 percent of the Treatment group is excess mass on w1 ∈ [−2, 4] relative to a prediction based on the density on the rest of the demand curve.28 This excess mass can also be visually approximated on Figure 3 by…”
Using Differences in Knowledge Across Neighborhoods to Uncover the Impacts of the EITC on Earnings (2013, neutral): “Figure 1a shows EITC amounts (on the right y-axis) as a function of earnings for single ﬁlers with one vs. two or more qualifying dependents, expressed in real 2010 dollars.”