How Does CBO Model the Response of Labor Supply to Changes in Tax and Spending Policies?

October 25, 2012

Although much of the analysis that CBO undertakes is very technical in nature, the agency works hard to explain the basis for its findings so that Members of Congress, their staff, and outside analysts can understand the results and question the methods used.

To that end, CBO just released a report, How the Supply of Labor Responds to Changes in Fiscal Policy, that explains an important aspect of the agency’s analysis.

CBO uses two models of the economy to estimate the medium- and long-term effects of federal tax and spending policies. Those models take different approaches toward capturing the ways in which the supply of labor responds to changes in fiscal policy. CBO recently reviewed the extensive research literature on the magnitude of those responses, and today’s report describes the values the agency will be using in future analyses.

This report was prepared by Felix Reichling of CBO’s Macroeconomic Analysis Division and David Weiner of CBO’s Tax Analysis Division, with assistance from Shinichi Nishiyama and Charles Whalen of the macro division. Accompanying the release of today’s report are two CBO working papers that provide detailed assessments of the research literature: