Public Finance, 3rd Edition

Appendix

The Intensive and Extensive Margins

The analysis in the text on the labor supply response to taxes and transfers has assumed that people are already working and vary their hours worked as tax and transfer parameters are changed. Economists refer to these responses as occurring along the intensive margin. Another important response, however, is the decision of whether to participate in the labor force at all. A tax will cause some people who are currently working to stop working. Similarly, a wage subsidy will cause some people who are not working to take a job. Economists refer to these participation responses as occurring along the extensive margin. Empirical evidence suggests that responses to taxes and transfers along the extensive ...