Labor Supply Responses to Learning the Tax and Benefit Schedule

48 Pages Posted: 1 Dec 2020 Last revised: 29 Nov 2024

See all articles by Andreas Kostøl

Andreas Kostøl

Arizona State University (ASU) - W.P. Carey School of Business; Statistics Norway; Norges Bank; IZA Institute of Labor Economics

Andreas Myhre

Statistics Norway

Abstract

While optimization frictions have been shown to attenuate earnings responses to financial incentives, less is understood about the individual factors shaping the response. The main contribution of this paper is to separately quantify the role of learning the tax and benefit schedule versus other kinds of frictions. A unique combination of notches in the tax and benefit schedule and an information policy in a Norwegian welfare reform facilitate our study. The presence of notches allows us to measure overall frictions. Quasi-random assignment of a letter targeting misperceptions about the slope and locations of benefit phase-out regions allows us to pin down the role of information. Our analysis delivers two main findings. First, about 50% do not behave as predicted by standard labor supply models, and optimization frictions are particularly prevalent when financial incentives change. Without adjusting for these overall frictions, estimated elasticities would be attenuated by at least 70%. Second, the observed elasticity among those who receive the information letter is at least twice as large as among the non-informed, suggesting governments can partly offset the attenuation with information policy. Our calculations suggest misperceptions of the tax and benefit schedule account for two-thirds of the attenuation in earnings responses to financial work incentives. The findings have important implications for the effectiveness of tax and transfer policy.

Keywords: social security, optimization frictions, information, labor supply, disability insurance

JEL Classification: H20, H31, H55, J22, J26

Suggested Citation

Kostøl, Andreas and Myhre, Andreas, Labor Supply Responses to Learning the Tax and Benefit Schedule. IZA Discussion Paper No. 13900, Available at SSRN: https://ssrn.com/abstract=3738842

Andreas Kostøl (Contact Author)

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Statistics Norway ( email )

N-0033 Oslo
Norway

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Andreas Myhre

Statistics Norway

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
102
Abstract Views
370
Rank
525,219
PlumX Metrics