Using Labor Supply Elasticities to Learn about Income Inequality: The Role of Productivities versus Preferences
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Abstract
Using a general labor supply model in which individuals choose how much to work conditional on productivities and preferences for consumption relative to leisure, we show that the mapping from earnings and hours worked to productivities and preferences can be expressed entirely in terms of reduced-form labor supply elasticities. We investigate the roles that productivities and preferences play in driving income inequality in the United States. Benchmark labor supply elasticity estimates from the literature imply that productivities drive most income inequality. Preferences become increasingly important relative to benchmark, with larger income effects or larger differences between earnings and hours-worked elasticities.Citation
Bergstrom, Katy, and William Dodds. 2021. "Using Labor Supply Elasticities to Learn about Income Inequality: The Role of Productivities versus Preferences." American Economic Journal: Economic Policy, 13 (3): 28-62. DOI: 10.1257/pol.20200100Additional Materials
JEL Classification
- D31 Personal Income, Wealth, and Their Distributions
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H31 Fiscal Policies and Behavior of Economic Agents: Household
- J22 Time Allocation and Labor Supply
- J24 Human Capital; Skills; Occupational Choice; Labor Productivity
- J31 Wage Level and Structure; Wage Differentials
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