Discrete Labor Supply: Empirical Evidence and Implications

Abstract

We provide novel evidence of discrete labor supply responses to tax incentives and study the broader implications of discrete rather than continuous labor supply.We utilize an income notch and a reform that shifted the location of the notch in order to study the labor supply mechanisms. We find transparent evidence of discrete labor supply responses, revealing that wage earners even in the part-time labor market can face significant restrictions in their available labor supply choices.As an implication of discrete labor supply, we show that the conventional differencesin-differences and bunching elasticity estimates can be downward-biased when labor supply is discrete.

Threshold-dependent tax enforcement and the size distribution of firms: evidence from Germany

“…Hence, information costs are conditional on the complexity of the threshold-dependent enforcement regime. Imperfect information resulting from information costs can prevent taxpayers from optimal behavior, a phenomenon referred to as inattention in the prior literature (Bosch et al, 2019;Kleven and Waseem, 2013;Kosonen and Matikka, 2019;Søgaard, 2019). 6 For instance, according to prior research, taxpayers seem to have systematic misperceptions of their average and marginal tax rate, leading to suboptimal tax decisions.…”

The Ability Gradient in Bunching

“…Our paper also contributes to the literature on how individuals understand and respond to the complexity of tax rules (see Chetty et al 2009, Abeler and Jäger 2015, Taubinsky and Rees-Jones 2018 and papers highlighting the "regressive" nature of complexity, such as Aghion et al (2018) who find, in the context of self-employed individuals in France, that more educated individuals adopt better tax-filing strategies. 6 Finally, as ability can be important for the possibilities to overcome optimization frictions, our paper is also related to papers that have analyzed the role of optimization frictions for observed bunching behavior (see, for example, Chetty 2012, Kleven and Waseem 2013, Søgaard 2019, Kosonen and Matikka 2019, and Gelber et al 2020.…”