Labour Supply: the Roles of Human Capital and the Extensive Margin

By Michael Keane and Nada Wasi

In this paper we specify and estimate a life-cycle labour supply model that expands on earlier work by simultaneously including human capital accumulation, saving and bequests, an active extensive margin, a realistic specification of the Social Security system, an accounting for private pensions and health expenditures, and a realistic specification of the progressive tax structure. By accounting for all these features, we develop new insights into how taxes affect life-cycle labour supply. For instance, we find that labour supply elasticities vary in important ways with age, education and the tax structure itself. We also show how human capital affects elasticities on the intensive vs. extensive margins.

This is a nice paper with a very rich model. I hope it is used to answer some policy questions, which is where I see its real potential.


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