Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/156700
Authors: 
Haywood, Luke
Neumann, Michael
Year of Publication: 
2017
Series/Report no.: 
DIW Discussion Papers 1652
Abstract: 
Labor supply in the market for low-paid jobs in Germany is strongly influenced by tax exemptions - even for individuals to whom these exemptions do not apply. We present compelling evidence that an individual's choice set depends on other workers' preferences because firms cater their job offers to aggregate preferences in the market. We estimate an equilibrium job search model which rationalizes the strong earnings bunching at the tax exemption threshold using German administrative data. We then simulate modifications to the tax schedule that remove the discontinuity and thus the bunching at the threshold. Results highlight the indirect costs of (discontinuous) tax policies which are shown to be reinforced by firm responses: Workers who would work anyway are hurt by subsidies benefiting groups who enter the market as a result of tax incentives.
Subjects: 
tax exemptions
welfare-to-work
labor supply elasticities
minijobs
job search
firm responses
bunching
JEL: 
J64
J31
J22
J23
Document Type: 
Working Paper

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