Life‐cycle Labour Supply with Human Capital: Econometric and Behavioural Implications

Abstract

I examine econometric and behavioural implications of including human capital in the life-cycle labour supply model. With human capital, the wage is no longer the price of time - which is, instead, the wage plus returns to work experience. This has important implications: first, labour supply elasticities become functions of both preference and wage process parameters. One cannot estimate them separately. Second, the data appear consistent with larger elasticities than prior work suggests. Third, contrary to conventional wisdom, permanent tax changes can have larger effects on current labour supply than temporary changes. Fourth, effects of permanent tax changes grow over time