Micro and Macro Elasticities in a Life Cycle Model With Taxes
We build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work. We find that changes in taxes have large aggregate effects on hours of work. Moreover, we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers. In our model, micro and macro elasticities are effectively unrelated. Our model is also consistent with other cross-country patterns.
We thank Ed Prescott, Martin Evans, Nobu Kiyotaki, and seminar participants at the University of Pennsylvania, University of Maryland, Georgetown University, ASU, Kansas City Fed, Philadelphia Fed and Atlanta Fed for useful comments. Rogerson thanks the NSF for financial support, and Wallenius thanks the Yrjo Jahnsson Foundation for financial support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November. citation courtesy of