The effect of the within firm coordination of hours worked on the elasticity of labor supply (Effect)

Abstract:

The main aim of this project is to assess, both theoretically and empirically, how the within-firm coordination of hours worked affects the labor supply response to tax schedule changes. This project aims at contributing to four different strands of the literature. First, it will contribute to the public economics literature by providing a new view on the mechanisms through which tax rate changes affect labor supply decisions. Second, it will provide an alternative way of understanding why micro studies find very small intensive margin elasticity of labor supply, whereas macroeconomic estimations, mainly based on cross-countries tax variations, show larger labor supply responses (Chetty 2012). Several explanations have been offered to understand those differences (Richard and Walleneius 2009; Chetty et al. 2011 and Kleven and Waseem 2013). In this study we propose the coordination of hours worked at the firm level as one alternative and/or concurrent explanation for the observed difference. Third, this project will contribute to the labor economics literature providing a new way of explaining wage differentials across firms. Finally, this study will inform the policy debate on the optimal taxation system in Denmark. It will do so by providing a better knowledge of the effects of taxation on the supply of labor. This project will consist of two main parts. In the first part we will develop a theoretical framework that will deliver testable predictions on how the coordination of hours worked at the firm level can affect labor supply response of different workers within the same firm. In the second part we will then focus in testing the predictions of the model developed in first part analyzing the labor supply effects of the 2010 Danish tax reform.