Human Capital, Taxes and Labour Supply

The standard life‐cycle labour supply model accounts for asset accumulation, but ignores human capital investment. This article describes some recent work that introduces human capital into the standard model. This has some interesting, and even surprising, implications for labour supply elasticitie...

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Bibliographic Details
Published in:The Economic record 2011-09, Vol.87 (s1), p.37-44
Main Author: KEANE, MICHAEL P.
Format: Article
Language:English
Subjects:
Capital accumulation
Capital theory
D91
Elasticity
H21
Human capital
Income taxes
J22
J24
Labor supply
Labour supply
Life cycles
Optimal taxation
Studies
Tax systems
Taxation
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Summary:The standard life‐cycle labour supply model accounts for asset accumulation, but ignores human capital investment. This article describes some recent work that introduces human capital into the standard model. This has some interesting, and even surprising, implications for labour supply elasticities. In particular, once we account for the effects of human capital, it appears that labour supply elasticities may be much larger than conventional wisdom would suggest. This, in turn, implies that the efficiency costs of labour income taxation may be much larger than is commonly assumed. Consequently, labour income taxation should be viewed as comparably costly to other types of taxation (such as capital income taxation).
ISSN:0013-0249
1475-4932
DOI:10.1111/j.1475-4932.2011.00736.x