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Labor Markets

CBO analyzes the levels and trends of employment and the compensation of workers. CBO also analyzes how various policies, such as unemployment insurance, affect labor markets.

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  • How the Supply of Labor Responds to Changes in Fiscal Policy

    October 25, 2012
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Review of Estimates of the Frisch Elasticity of Labor Supply: Working Paper 2012-13

working paper

October 25, 2012

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Abstract

Felix Reichling and Charles Whalen

Among the models that CBO uses to analyze the economic effects of changes in federal fiscal policy is a life-cycle growth model. That model requires an estimate of the responsiveness of the supply of labor to a one-time temporary change in after-tax compensation, which is described by the so-called Frisch elasticity. CBO incorporates into its analyses an estimate of the Frisch elasticity that ranges from 0.27 to 0.53, with a central estimate of 0.40. This paper describes how CBO derived that range from the research literature.


monthly archive

  • May 2013 (2)
  • April 2013 (14)
  • March 2013 (22)
  • February 2013 (10)
  • January 2013 (11)
  • December 2012 (4)
  • November 2012 (10)
  • October 2012 (4)
  • September 2012 (6)
  • August 2012 (5)
  • July 2012 (11)
  • June 2012 (8)
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How Does CBO Model the Response of Labor Supply to Changes in Tax and Spending Policies?

blog post

October 25, 2012


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related publications


  • A Review of Recent Research on Labor Supply Elasticities: Working Paper 2012-12

    October 25, 2012

  • Review of Estimates of the Frisch Elasticity of Labor Supply: Working Paper 2012-13

    October 25, 2012
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How the Supply of Labor Responds to Changes in Fiscal Policy

report

October 25, 2012

read complete document  (pdf, 172 kb)

related publications


  • How the Supply of Labor Responds to Changes in Fiscal Policy

    October 25, 2012
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A Review of Recent Research on Labor Supply Elasticities: Working Paper 2012-12

working paper

October 25, 2012

read complete document  (pdf, 341 kb)

Abstract

Robert McClelland and Shannon Mok

This paper updates a review conducted by CBO in 1996 in which the agency evaluated the academic research on the effects of changes in after-tax wages on labor supply in the U.S. economy. That review concluded that substitution elasticities were larger in absolute value than income elasticities and that the decision to work was more responsive to after-tax wages than was the choice of hours. In this update, we find that for men and single women, estimates of substitution elasticities have increased, and income elasticities still appear to be smaller in absolute value than substitution elasticities. We also find that labor supply elasticities of married women have fallen substantially in the last three decades, although they are still higher than the elasticities of men and unmarried women. Based on our review, the elasticities of broad measures of income (total income less capital gains) from tax return data are in most instances consistent with the labor supply elasticities estimated using survey data. We find little compelling evidence that high-income taxpayers have substantially higher elasticities with respect to their labor input than other taxpayers: While some studies have estimated higher elasticities of broad income among high-income taxpayers, those results appear to reflect those taxpayers’ greater ability to time their income. In contrast, we find evidence that low-income workers have higher elasticities of labor supply than other workers, especially in the component of their labor response that reflects movement in and out of the workforce.


monthly archive

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  • December 2012 (4)
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CBO Releases a Report on the Taxation of Capital and Labor Through the Self-Employment Tax

blog post

September 27, 2012


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The Taxation of Capital and Labor Through the Self-Employment Tax

report

September 27, 2012

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Unemployment Insurance in the Wake of the Recent Recession

Nov 2012 - Between 2007 and 2010, unemployment benefits expanded nearly five-fold owing to high unemployment due to the weak economy, and decisions by policymakers to increase the number of weeks for which eligible unemployed workers could receive benefits.

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Small Firms, Employment, and Federal Policy

report

March 12, 2012

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Highlights

New Small Firms Account for a Disproportionate Share of Net Job Growth

Small firms, widely believed to promote job growth, both create and eliminate jobs at higher rates than large firms do. Although small firms account for a disproportionate share of net job growth, that greater growth is driven primarily by new small firms.

In Recent Years, Small and Medium-Sized Firms Suffered Disproportionately Greater Job Losses Than Large Firms

Firm Size, by Employee CountChange in the Number of Workers Between December 2007 and December 2010
Fewer than 50 workers-7.1 percent
50 to 499 workers-8.1 percent
500 or more workers-5.4 percent

Varying Policies by Firm Size Has Advantages and Disadvantages for Job Growth

Policies that help reduce the cost to small firms of complying with federal regulations could promote employment growth. But policies favoring small firms could also discourage them from growing in order to retain that preferential treatment. Moreover, easing some regulations for small firms could cause certain problems, such as pollution, to persist more than if regulations were applied uniformly across firms of different sizes. 

Current Federal Laws and Regulations Give More Favorable Treatment to Small Firms Than Larger Firms in Many Ways

Small firms receive more favorable treatment than larger firms through:

  • A reduced capital gains tax for investments in small firms,
  • Tax provisions having the effect of allowing small firms to immediately deduct a larger share of their costs for certain capital investments,
  • Assistance from the Small Business Administration, and  
  • Exemptions from some regulatory policies, such as the Family and Medical Leave Act of 1993.


monthly archive

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  • January 2013 (11)
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The United States is Experiencing the Longest Stretch of High Unemployment Since the Great Depression

blog post

February 16, 2012


monthly archive

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  • January 2013 (11)
  • December 2012 (4)
  • November 2012 (10)
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  • August 2012 (5)
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More from CBO’s Update of the Budget and Economic Outlook: Persistent Effects of the Recent Recession on Potential Output

blog post

September 2, 2011


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