TY - JOUR AU - Chetty,Raj AU - Friedman,John N. AU - Olsen,Tore AU - Pistaferri,Luigi TI - Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records JF - National Bureau of Economic Research Working Paper Series VL - No. 15617 PY - 2009 Y2 - December 2009 UR - http://www.nber.org/papers/w15617 L1 - http://www.nber.org/papers/w15617.pdf N1 - Author contact info: Raj Chetty Department of Economics Harvard University 1805 Cambridge St. Cambridge, MA 02138 Tel: 617-744-9492 E-Mail: chetty@fas.harvard.edu John N. Friedman Harvard Kennedy School Taubman 356 79 JFK St. Cambridge, MA 02138 Tel: 617/233-6965 Fax: 617/496-1722 E-Mail: john_friedman@harvard.edu Tore Olsen University of Copenhagen and CAM E-Mail: tolsen@fas.harvard.edu Luigi Pistaferri Department of Economics 579 Serra Mall Stanford University Stanford, CA 94305-6072 Tel: 650/724-4904 Fax: 650/725-5702 E-Mail: pista@stanford.edu AB - We show that the effects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by firms. We develop a model in which firms post job offers characterized by an hours requirement and workers pay search costs to find jobs. In this model, micro elasticities are smaller than macro elasticities because they do not account for adjustment costs and firm responses. We present evidence supporting three predictions of the model by analyzing bunching at kinks using the universe of tax records in Denmark. First, larger kinks generate larger taxable income elasticities because they are more likely to overcome search costs. Second, kinks that apply to a larger group of workers generate larger elasticities because they induce changes in hours constraints. Third, firms tailor job offers to match workers’ aggregate tax preferences in equilibrium. Calibrating our model to match these empirical findings, we obtain a lower bound on the intensive-margin macro elasticity of 0.34, an order of magnitude larger than the estimates obtained using standard microeconometric methods for wage earners in our data. ER -