When the labour supply is elastic with respect to the net wage, labour 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 labour supply has broad and significant implications for assessing the effects of changes in public policy. We estimate the labout 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 labour supply of prime-age males is at most 0.1.
The CES utility function, non-linear budget constraints and labor supply: results on prime-age males in Japan