Adjustment Costs, Firm Responses, and Labor Supply Elasticities: Evidence from Danish Tax Records,NBERWorking Paper No

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 \u85rms post job o¤ers characterized by an hours requirement and workers pay search costs to \u85nd jobs. We present evidence supporting three predictions of this model by analyzing bunching at kinks using Danish tax records. First, larger kinks generate larger taxable income elasticities. Second, kinks that apply to a larger group of workers generate larger elasticities. Third, the distribution of job o¤ers is tailored to match workersaggregate tax preferences in equilibrium. Our results suggest that macro elasticities may be an order of magnitude larger than the estimates obtained using standard microeconometric methods