Discrete Labor Supply: Quasi-Experimental Evidence and Implications

Abstract

We provide quasi-experimental evidence of discrete labor supply. We utilize a novel institutional setting where a reform shifted an income notch to a higher income level, and compare earnings distributions of treated and non-treated individuals before and after the reform. We find transparent evidence of widespread changes in the earnings distribution, which is consistent with discrete but not continuous labor supply. We present a simple application for estimating changes in a distribution to detect discrete responses to local tax changes.