Nationaløkonomisk tidsskrift,
Nationaløkonomisk Forening

Abstract: This article examines the significance of the assumption of the perfect divisibility of time worked which is normally made in modelling the labour market, but which does not reflect reality. In this study, a limited number of discrete choices are used in a model of the labour market – to work a specified number of hours full or part time, or not to work at all. An option of working overtime is introduced in order to increase realism and ensure smooth aggregate behaviour. Numerical simulations are then carried out to investigate the consequences of a change from progressive to proportional taxation of labour income. The simulations show that indivisibility does indeed matter. The impact of the policy experiment is much greater with an assumption of continuous labour supply, the welfare effect being more than twice as great than when the labour supply is not assumed to be perfectly divisible. The sensitivity analysis shows that the results depend on how the indivisible quantities are specified, but in almost all cases the welfare gains indicated from the tax reform are more than twice as great with an assumption of perfect divisibility.

Keywords: økonomisk teori; arbejdskraft

JEL-codes: A10

Language: Danish

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