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The myth of intertemporal labour supply substitution

Macroeconomists tend to assume that people work more when their wages are temporarily higher, and that this is a key driver of employment fluctuations This column examines how income tax holidays in Swiss cantons, which exempted earnings from income taxation for one or two years, affected the labour supply of Swiss workers.  People did not work more during the tax holiday, but the self-employed and high earners shifted earnings into the tax holiday years. The findings suggest that intertemporal labour supply responses are too small to be a key determinant in why recessions lead to large drops in employment.

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Schweinderl