The empirical foundations of supply-side economics – Michael Keane – YouTube

Most economists believe male labour supply elasticities are small, but a sizable minority of studies have large values. There is no clear consensus on this point.

The key factor driving these tensions is the failure of most studies to account for human capital returns to work experience.

In a model that includes human capital, even modest elasticities—as conventionally measured—can be consistent with large efficiency costs of taxation.

Conventional estimates of male labour supply elasticities have a severe downward bias because of their failure to include human capital accumulation. The opportunity cost of time includes their after tax wage and present value of increased earnings in all future years.

The return to work experience is high so working more has large long-term payoffs for younger male workers. Wages start low for young grow and then peak in 40s. When adjusted for the return for work experience, a large part of compensation when younger is human capital, and this peters away by the 40s.

Estimates where wages grow with work experience, with the accumulation of human capital, yield large male labour supply elasticities, as high as 3.8 rather than close to zero (Keane 2010, 2011). That is a profound difference.

Women have high labour supply elasticities, especially on the labour force participation margin, as most agree.

Estimates of long-run female labour supply elasticities—estimates that allow for dynamic effects of wages on fertility, marriage, education and work experience—are generally quite high.

This entry was posted in labour economics, taxation and tagged , by Jim Rose. Bookmark the permalink.

About Jim Rose

Utopia - you are standing in it promotes a classical liberal view of the world and champion the mass flourishing of humanity through capitalism and the rule of law. The origin of the blog is explained in the first blog post at

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