Estimating labour supply responses using tax reforms

The 1980s' tax reforms and the changing dispersion of wages offer one of the best opportunities yet to estimate labour supply effects. Nevertheless, changing sample composition, aggregate shocks, the changing composition of the tax paying population and discontinuities in the tax system create serious identification and estimation problems. We develop grouping estimators, that address these issues. Our results reveal positive and moderately-sized wage elasticities. We also find negative income effects for women with children.

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