Employment, Hours per Worker and Taxes: A Life-Cycle Analysis

We build a life cycle model of labor supply in which individuals choose both the fraction of life spent in employment and hours while employed. We develop a simple graphical representation of the steady state equilibrium labor supply choice and show that a tax on labor income used to finance a lump-sum transfer leads to a reduction of labor supply along both margins. These effects are consistent with the patterns observed in cross-country data.