The extensive macro labor supply elasticity: Integrating taxes and expenditures

Abstract

This paper shows that accounting for certain public expenditures is crucial when comparing labor tax system efficiencies across countries. To measure the extensive margin response to taxation, I assemble a large cross-country dataset consisting of the employment ratios, the average effective tax rates, the out-of-work benefits (transfers), as well as public expenditures on childcare, elderly care, and family policy, covering all OECD countries and more than two decades. When not controlling for the country- and year-fixed effects, the extensive margin elasticities are negative. Once accounting for transfers, the elasticities are negative or at most flat, even with fixed effects. Once additionally accounting for public expenditures (subsidies) on labor complements - which are robustly positively associated with the employment-to-population ratios - I obtain either flat or positive extensive margin elasticities in the lower end of the expected range.