Micro versus Macro Labor Supply Elasticities: The Role of Dynamic Returns to Effort
Henrik Kleven, Claus Kreiner, Kristian Larsen, Jakob Søgaard
American Economic Review · 2025 · Volume 115 · Issue 9
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 model's predictions about earnings and hours-worked patterns over the life cycle. 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.
Keywords
Personal Income, Wealth, and Their Distributions, Personal Income and Other Nonbusiness Taxes and Subsidies, includes inheritance and gift taxes, Fiscal Policies and Behavior of Economic Agents: Household, Time Allocation and Labor Supply, Wage Level and Structure, Wage Differentials, Job, Occupational, and Intergenerational Mobility, Promotion
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