Effects of Taxes and Safety Net Pensions on Life-Cycle Labor Supply, Savings and Human Capital: The Case of Australia

The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, especially the optimal design of tax policies. Conventional wisdom based on studies in the 1980s and 1990s has long held that the analysis of micro data leads one to conclude that aggregate labor supply elasticities are quite small. In this paper we argue that this conventional wisdom does not hold up to empirically reasonable and relevant extensions of simple life cycle models that served as the basis for these conclusions. In particular, we show that several pieces of conventional wisdom fail in the presence of human capital accumulation or labor supply decisions that allow for adjustment along both the extensive and intensive margin. We conclude that previous estimates of small labor supply elasticities based on micro data are fully consistent with large aggregate labor supply elasticities. (JEL D91, E24, J22)

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Health, Human Capital, and Life Cycle Labor Supply

The American Economic Review ◽

10.1257/aer.104.5.127 ◽

2014 ◽

Vol 104 (5) ◽

pp. 127-131 ◽

Cited By ~ 12

Author(s):

Charles Hokayem ◽

James P. Ziliak

Keyword(s):

Human Capital ◽

Life Cycle ◽

Labor Supply ◽

Strong Evidence ◽

Capital Stock ◽

Good Health ◽

Learning By Doing ◽

Health Capital ◽

Supply Model

We use new PSID data on consumption and health, along with information on annual sick time, to estimate a structural labor supply model that incorporates a health capital stock with the traditional human capital learning-by-doing model. The estimates show strong evidence of learning by doing as well as strong persistence in health. However, the estimates reveal that time and money seem to have little effect on health consistent with 'flat of the curve' medicine. We find strong evidence that consumption and leisure are direct substitutes in preferences, and consumption and leisure are each utility complements with good health.

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Nonconvexities, Retirement, and the Elasticity of Labor Supply

The American Economic Review ◽

10.1257/aer.103.4.1445 ◽

2013 ◽

Vol 103 (4) ◽

pp. 1445-1462 ◽

Cited By ~ 29

Author(s):

Richard Rogerson ◽

Johanna Wallenius

Keyword(s):

Human Capital ◽

Life Cycle ◽

Labor Supply ◽

Capital Accumulation ◽

Credit Constraints ◽

Elasticity Of Substitution ◽

Human Capital Accumulation ◽

Hours Worked ◽

Younger Workers ◽

Life Cycle Models

We consider two life cycle models of labor supply that use nonconvexities to generate retirement. In each case we derive a link between hours worked prior to retirement, the intertemporal elasticity of substitution for labor (IES), and the size of the nonconvexities. This link is robust to allowing for credit constraints and human capital accumulation by younger workers and suggests values for the IES that are .75 or higher. (JEL D91, J22, J24, J26)

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Life-Cycle Labor Supply with Human Capital Accumulation

International Economic Review ◽

10.2307/2526656 ◽

1989 ◽

Vol 30 (2) ◽

pp. 431 ◽

Cited By ~ 60

Author(s):

Kathryn L. Shaw

Keyword(s):

Human Capital ◽

Life Cycle ◽

Labor Supply ◽

Capital Accumulation ◽

Human Capital Accumulation

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Labor Supply and Taxes: A Survey

Journal of Economic Literature ◽

10.1257/jel.49.4.961 ◽

2011 ◽

Vol 49 (4) ◽

pp. 961-1075 ◽

Cited By ~ 191

Author(s):

Michael P Keane

Keyword(s):

Human Capital ◽

Life Cycle ◽

Labor Supply ◽

Work Experience ◽

Fixed Costs ◽

Long Run ◽

Returns To Work ◽

Two Factors ◽

Downward Bias ◽

Life Cycle Models

I survey the male and female labor supply literatures, focusing on implications for effects of wages and taxes. For males, I describe and contrast results from three basic types of model: static models (especially those that account for nonlinear taxes), life-cycle models with savings, and life-cycle models with both savings and human capital. For women, more important distinctions are whether models include fixed costs of work, and whether they treat demographics like fertility and marriage (and human capital) as exogenous or endogenous. The literature is characterized by considerable controversy over the responsiveness of labor supply to changes in wages and taxes. At least for males, it is fair to say that most economists believe labor supply elasticities are small. But a sizable minority of studies that I examine obtain large values. Hence, there is no clear consensus on this point. In fact, a simple average of Hicks elasticities across all the studies I examine is 0.31. Several simulation studies have shown that such a value is large enough to generate large efficiency costs of income taxation. For males, I conclude that two factors drive many of the differences in results across studies. One factor is use of direct versus ratio wage measures, with studies that use the former tending to find larger elasticities. Another factor is the failure of most studies to account for human capital returns to work experience. I argue that this may lead to downward bias in elasticity estimates. In a model that includes human capital, I show how even modest elasticities—as conventionally measured—can be consistent with large efficiency costs of taxation. For women, in contrast, it is fair to say that most studies find large labor supply elasticities, especially on the participation margin. In particular, I find that estimates of “long-run” labor supply elasticities—by which I mean estimates that allow for dynamic effects of wages on fertility, marriage, education and work experience—are generally quite large. (JEL D91, J13, J16, J22, J31, H24)

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