Labour Supply Elasticities

Abstract

In considering potential labour supply responses to direct tax changes, emphasis is often placed on elasticities of labour supply. In the context of a microsimulation model, this is problematic because elasticities are known to vary along each individual's supply curve, and therefore also among groups, since aggregation is involved. It is necessary to be clear about the particular elasticity concept that is relevant. This chapter explores alternative labour supply elasticity concepts in cross-sectional contexts. Emphasis is placed on the elasticity of hours worked with respect to a change in the gross wage rate, though it is shown that the gross wage elasticity is usually sufficient when considering labour supply responses to effective marginal tax rate changes. Elasticities are reported for both intensive and extensive margins and for a range of demographic groups.