The CES Utility Function, Non-linear Budget Constraints and Labor Supply: Results on Prime-age Males in Japan

Shun-ichiro Bessho, Masayoshi Hayashi
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When he labor supply is elastic with respect to the net wage rate, labor income taxation generates economic distortion and welfare loss. The substitute effect is a key determinant of the magnitude of such deadweight loss; thus, evaluating the elasticity of the labor supply has broad and significant implications for assessing the effects of changes in public policy. We estimate the labor supply function based on the CES utility function, using large microdata sets in Japan and treating the complex Japanese income tax system carefully. The results of this chapter suggest that the uncompensated elasticity of the labor supply of prime-age males is at most 0.1.