What is Labor Supply and Do Taxes Affect it?

16 Pages Posted: 9 May 2000 Last revised: 15 Feb 2021

See all articles by Harvey S. Rosen

Harvey S. Rosen

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 1979

Abstract

The issue of tax-induced changes in labor supply behavior has been receiving increasing attention. Economic theory alone can say little about the impact of income taxation on labor supply because of the well- known conflict between income and substitution effects. Therefore, an enormous amount of effort has been devoted to empirical investigation of this problem, with a focus on the impact of taxes on hours of work and labor force participation rates. In Section I of this paper, I briefly discuss this literature and its major conclusions. It has been long understood, however, that the concept "labor supply" is more general than "hours of work." If one individual is healthier, better educated, and more highly motivated than another, then presumably a given number of hours of work will lead to a greater effective labor supply for the former than for the latter. Thus, studies of the effect of taxes on other dimensions of labor supply are needed in order to assess the full impact of taxes on work incentives. The main purpose of this paper is to discuss some of this research (Section II) and to explore its policy implications (Section III).

Suggested Citation

Rosen, Harvey S., What is Labor Supply and Do Taxes Affect it? (November 1979). NBER Working Paper No. w0411, Available at SSRN: https://ssrn.com/abstract=228067

Harvey S. Rosen (Contact Author)

Princeton University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

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