Discrete Labor Supply: Empirical Evidence and Implications
VATT Institute for Economic Research Working Papers 132
76 Pages Posted: 19 Jun 2020
Date Written: May 25, 2020
We provide novel evidence of discrete labor supply responses to tax incentives and study the broader implications of discrete rather than continuous labor supply. We utilize an income notch and a reform that shifted the location of the notch in order to study the labor supply mechanisms. We find transparent evidence of discrete labor supply responses, revealing that wage earners even in the part-time labor market can face significant restrictions in their available labor supply choices. As an implication of discrete labor supply, we show that the conventional differences-in-differences and bunching elasticity estimates can be downward-biased when labor supply is discrete.
Keywords: labor supply, discrete choices, tax elasticity
JEL Classification: H21, H24, J22
Suggested Citation: Suggested Citation