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American Economic Review Vol. 115 No. 9 2025

Micro versus Macro Labor Supply Elasticities: The Role of Dynamic Returns to Effort

Henrik Kleven1; Claus Thustrup Kreiner2; Kristian Larsen3; Jakob Egholt Søgaard4

1 Princeton University, NBER, CEPR, CESifo, and CEBI (email: ) · 2 University of Copenhagen, CEPR, CESifo, and CEBI (email: ) · 3 University of Copenhagen and CEBI (email: ) · 4 University of Copenhagen, CESifo, and CEBI (email: )

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.

DOI
10.1257/aer.20240554
Volume
115
Issue
9
Pages
2849-2890
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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