Adjustment Costs, Firm Responses and Labor Supply Elasticities: Evidence from Danish Tax Records,” Quarterly

We show that the e¤ects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by \u85rms. We develop a model in which rms post job o¤ers characterized by an hours requirement and workers pay search costs to \u85nd jobs. In this model, micro elasticities are smaller than macro elasticities because they do not account for adjustment costs and \u85rm responses. We present evidence supporting three predictions of the model by analyzing bunching at kinks using the universe of tax records in Denmark. First, larger kinks generate larger taxable income elasticities because they are more likely to overcome search costs. Second, kinks that apply to a larger group of workers generate larger elasticities because they induce changes in hours constraints. Third, \u85 rms tailor job o¤ers to match workersaggregate tax preferences in equilibrium. Calibrating our model to match these empirical \u85ndings, we obtain a lower bound on the intensive-margin macro elasticity of 0:34, an order of magnitude larger than the estimates obtained using standard microeconometric method