Taxes, Wages, and the Labor Supply of Older Americans

Given the aging of the U.S. population and the greater contributions of older workers to the labor force, understanding how policy levers can affect elderly labor supply has become increasingly important. The authors use data from the Health and Retirement Study linked to state identifiers to estimate the responsiveness of the labor supply of older workers to the wage and features of the tax code, both on the probability of participating in the labor market and on hours of work for those who choose to work. The authors find that a 10% increase in the wage is associated with a 5% increase in participation, and they estimate slightly larger responses to marginal tax rates. These results suggest that government policies could increase the labor supply of older individuals by changing the returns to work through the tax code.