Regression-Kink Approach for Wage Effect on Male Work Hours

Abstract

In finding the effect of after-tax wage rate on work hours, the main difficulty is the endogeneity of after-tax wage rate that equals one minus average tax rate' times wage rate. To overcome this endogeneity problem, we take advantage of jumps in the marginal income tax rate, which is a regression discontinuity (RD) idea. This RD, in turn, makes the average income tax rate kink-continuous', which is a regression kink (RK) idea. We provide a simple economic model resulting in the RD and RK features, explain how to implement RK in practice, and then apply our methods to Korean male data. Our main RK-based labour supply elasticity estimate 7.16% turned out to be insignificant with t-value 1.52, but it is much larger than most estimates in the literature. This may be attributed to, among other things, the facts that the RK instrument is unique, that RK identifies only the local elasticity at the kink point and that RK requires large data as regression derivatives are estimated.