Template-type: ReDIF-Paper 1.0
Author-Name: Michael P. Keane
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Title: Life-Cycle Labor Supply with Human Capital: Econometric and Behavioral Implications
Abstract: I examine the econometric and behavioral implications of including human capital in the 
life-cycle labor supply model. With human capital, the wage no longer equals the opportunity cost of 
time – which is, instead, the wage plus returns to work experience. This has a number of important 
implications, of which I highlight four: First, labor supply elasticities become functions of both 
preference and wage process parameters. Thus, one cannot estimate elasticities without also specifying 
and estimating the wage process. Second, once human capital is accounted for, the data appear consistent 
with much larger labor supply elasticities than most prior work suggests. Third, contrary to much 
conventional wisdom, permanent tax changes can have larger effects on current labor supply than temporary 
tax changes. Fourth, human capital amplifies the labor supply response to permanent tax changes in the 
long-run, because a permanent tax reduces the rate of human capital accumulation, slowing the growth of wages.
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Length: 28 pages
Creation-Date: 2015-03-17
Number: 2015-W02
File-URL: http://www.nuffield.ox.ac.uk/economics/papers/2015/Taxes_HC_JAE_10.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1502