Hours constraints set at the firm level have been proposed as an important friction that regulates labor supply responses to tax changes. Yet, little evidence exists on the source of these constraints or the magnitude of their effects. In this paper we use new data on hours worked at the firm-level in  Denmark to explore one mechanism that leads firms to constrain hours: the need for coordination of hours among coworkers. We first document evidence of positive correlations between wages, productivity and the degree of hours coordination - measured as the dispersion of hours - within firms. We then estimate labor supply elasticities using changes to the personal income tax schedule in 2010, which affected high-wage earners differently. We find evidence of higher labor supply elasticity in firms with lower hours coordination. Furthermore, we find evidence of substantial spillover effects on hours worked by coworkers not directly affected by the reform. These findings have important implications for the evaluation of the efficiency costs of tax reforms.

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Colin Clark Building (#39)
Room: 
629