Discrete Labor Supply: Empirical Evidence and Implications

VATT Institute for Economic Research Working Papers 132

76 Pages Posted: 19 Jun 2020

See all articles by Tuomas Kosonen

Tuomas Kosonen

University of Helsinki - Department of Political and Economic Studies

Tuomas Matikka

VATT Institute for Economic Research

Date Written: May 25, 2020

Abstract

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

Kosonen, Tuomas and Matikka, Tuomas, Discrete Labor Supply: Empirical Evidence and Implications (May 25, 2020). VATT Institute for Economic Research Working Papers 132, Available at SSRN: https://ssrn.com/abstract=3609866 or http://dx.doi.org/10.2139/ssrn.3609866

Tuomas Kosonen

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

Tuomas Matikka (Contact Author)

VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

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