My Interview at the International Economics Olympiad

Income effects on labor supply

Here is a fascinating new paper by Mikhail Golosov, Michael Graber, Magne Mogstad, and David Novgorodsky on the effects of winning the lottery. The bottom line on what people do with their good fortune: "On average, an extra dollar of unearned income in a given period reduces pre-tax labor earnings by about 50 cents, decreases total labor taxes by 10 cents, and increases consumption by 60 cents." 

In other words, people use their extra wealth not only to buy more goods and services but also to buy more leisure. As a result, "the introduction of a UBI will have a large effect on earnings and tax rates. For example, even if one abstracts from any disincentive effects from higher taxes that are needed to finance this transfer program, each dollar of UBI will reduce total earnings by at least 52 cents."