Merge pull request #6821 from PolicyEngine/revert-labor-supply-elasticity-age-heterogeneity

Revert labor supply elasticity age heterogeneity

Author: PavelMakarchuk

changelog_entry.yaml

@@ -0,0 +1,4 @@
+- bump: patch
+  changes:
+    changed:
+    - Revert age heterogeneity in labor supply response elasticities (v1.426.0).

policyengine_us/parameters/gov/simulation/labor_supply_responses/elasticities/README.md

@@ -1,206 +1 @@
-# Labor Supply Response Elasticities
-
-This directory contains parameters for labor supply response elasticities used in behavioral microsimulation analysis.
-
-## Overview
-
-Labor supply elasticities measure how individuals adjust their work behavior in response to changes in economic incentives:
-
-- **Substitution elasticity**: How labor supply responds to changes in the effective marginal wage rate (after-tax wage)
-- **Income elasticity**: How labor supply responds to changes in disposable income
-
-## Age Heterogeneity: The Multiplier Approach
-
-Both elasticity types support age-based heterogeneity through an **age multiplier** that scales base elasticities for individuals aged 65 and over. This approach is based on empirical research showing that older workers have higher labor supply elasticities than working-age adults.
-
-### Research Findings
-
-- **French (2005)**: Elasticities 3.0x-3.25x higher for age 60 vs age 40 workers
-- **CBO Working Papers (2012-12, 2012-13)**: Frisch elasticity ranges from 0.27 to 0.53 (central: 0.40) for working-age adults
-- **General pattern**: Retirement-age individuals (62-70) have particularly high elasticities, especially on the extensive margin (whether to work at all)
-
-### Why a Multiplier Approach?
-
-The multiplier approach was chosen over separate age-specific parameters because:
-1. **Evidence-based**: Literature consistently shows older workers are more elastic, but doesn't provide income-decile-specific multipliers
-2. **Parsimony**: 13 total parameters instead of 44 (11 base elasticities + 2 age multipliers)
-3. **Transparency**: Users can easily understand and adjust one multiplier value
-4. **Flexibility**: Multiplier can range from 1.0 (no age effect) to 3.0+ (French 2005 finding)
-
-## Substitution Elasticity Structure
-
-The substitution elasticity uses a two-step calculation:
-
-### Step 1: Base Elasticity (by position and decile)
-
-Base elasticities vary by:
-1. **Position**: primary earner vs secondary earner within tax unit
-2. **Decile**: 10 income deciles (for primary earners only)
-
-This creates 11 base elasticity parameters:
-- 10 for primary earners by decile
-- 1 for secondary earners (all deciles)
-
-### Step 2: Age Multiplier
-
-For individuals aged 65 and over, the base elasticity is multiplied by `age_multiplier_65_and_over`.
-
-**Formula**:
-- If age < 65: `elasticity = base_elasticity`
-- If age >= 65: `elasticity = base_elasticity × age_multiplier_65_and_over`
-
-### Global Override
-
-The `all` parameter overrides all base elasticities and age multipliers if set to non-zero.
-
-## Income Elasticity Structure
-
-The income elasticity uses a simpler two-parameter structure:
-
-1. **Base elasticity**: Applied to all working-age individuals (under 65)
-2. **Age multiplier**: Applied to individuals 65 and over
-
-**Formula**:
-- If age < 65: `elasticity = base`
-- If age >= 65: `elasticity = base × age_multiplier_65_and_over`
-
-The `all` parameter overrides base and multiplier if set to non-zero.
-
-## Default Values
-
-- All base elasticities default to 0 (no behavioral response)
-- Age multipliers default to 2.0 (conservative estimate based on literature)
-- Users must explicitly set base elasticity values to enable behavioral responses
-
-## Usage Examples
-
-### Example 1: No behavioral response (default)
-```yaml
-substitution:
-  by_position_and_decile:
-    primary:
-      1: 0
-      2: 0
-      # ... all zeros
-    secondary: 0
-  age_multiplier_65_and_over: 2.0  # Doesn't matter since base is 0
-
-income:
-  base: 0
-  age_multiplier_65_and_over: 2.0  # Doesn't matter since base is 0
-```
-
-Result: Everyone has zero elasticity regardless of age.
-
-### Example 2: Same elasticity for all ages
-```yaml
-substitution:
-  by_position_and_decile:
-    primary:
-      1: 0.31  # CBO-style values
-      2: 0.27
-      # ... other deciles
-    secondary: 0.40
-  age_multiplier_65_and_over: 1.0  # No age effect
-
-income:
-  base: -0.04
-  age_multiplier_65_and_over: 1.0  # No age effect
-```
-
-Result: Same elasticity for everyone regardless of age.
-
-### Example 3: Higher elasticity for elderly (RECOMMENDED)
-```yaml
-substitution:
-  by_position_and_decile:
-    primary:
-      1: 0.31
-      2: 0.27
-      # ... other deciles
-    secondary: 0.40
-  age_multiplier_65_and_over: 2.0  # Conservative estimate
-
-income:
-  base: -0.04
-  age_multiplier_65_and_over: 2.0
-```
-
-Result:
-- Age 40, primary earner, decile 1: elasticity = 0.31
-- Age 70, primary earner, decile 1: elasticity = 0.31 × 2.0 = 0.62
-- Age 40: income elasticity = -0.04
-- Age 70: income elasticity = -0.04 × 2.0 = -0.08
-
-### Example 4: Aggressive multiplier based on French (2005)
-```yaml
-substitution:
-  age_multiplier_65_and_over: 3.0  # Upper end of literature
-
-income:
-  base: -0.04
-  age_multiplier_65_and_over: 3.0
-```
-
-Result:
-- Age 70, primary earner, decile 1 (base 0.31): elasticity = 0.31 × 3.0 = 0.93
-- Age 70: income elasticity = -0.04 × 3.0 = -0.12
-
-## Multiplier Value Guidance
-
-Based on literature review (see `age_heterogeneity_analysis.md`):
-
-| Multiplier | Interpretation | Source |
-|------------|----------------|--------|
-| 1.0 | No age difference | Ignores evidence |
-| 1.5 | Conservative | Lower end of estimates |
-| 2.0 | **Recommended default** | Conservative but evidence-based |
-| 2.5 | Moderate | Midpoint of French (2005) range |
-| 3.0 | Aggressive | French (2005) finding for age 60 vs 40 |
-| 3.25 | Upper bound | Upper end of French (2005) range |
-
-**Note**: The exact multiplier value has uncertainty. We recommend starting with 2.0 and conducting sensitivity analysis with values in the 1.5-3.0 range.
-
-## References
-
-- [French (2005): "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour"](https://academic.oup.com/restud/article-abstract/72/2/395/1558553) - Review of Economic Studies 72(2): 395-427
-- [CBO Working Paper 2012-12: "A Review of Recent Research on Labor Supply Elasticities"](https://www.cbo.gov/publication/43675) - McClelland & Mok
-- [CBO Working Paper 2012-13: "Review of Estimates of the Frisch Elasticity of Labor Supply"](https://www.cbo.gov/publication/43676) - Reichling & Whalen
-
-## Implementation Notes
-
-- Age is determined from the `age` variable for the year (`period.this_year`)
-- Age 65 is the cutoff: age < 65 uses base elasticity, age >= 65 applies multiplier
-- Primary earner is defined as the highest earner within the tax unit
-- Earnings deciles are determined using hardcoded markers (TODO: parametrize)
-- Negative total earnings result in zero elasticity (using `max_(earnings, 0)`)
-- Zero base elasticity remains zero even with multiplier (0 × multiplier = 0)
-
-## Technical Details
-
-### How Primary/Secondary Earner is Determined
-
-Within each tax unit, the person with the highest total earnings (employment + self-employment) is designated as the primary earner. All other earners in the unit are secondary earners. This means:
-- Single-person tax units: That person is always primary
-- Multi-person tax units: Only the highest earner gets primary elasticity; others get zero (since secondary earner base elasticities default to 0)
-
-### Earnings Decile Markers
-
-Current hardcoded decile boundaries (TODO: parametrize):
-- Decile 1: $0 - $14,000
-- Decile 2: $14,000 - $28,000
-- Decile 3: $28,000 - $39,000
-- Decile 4: $39,000 - $50,000
-- Decile 5: $50,000 - $61,000
-- Decile 6: $61,000 - $76,000
-- Decile 7: $76,000 - $97,000
-- Decile 8: $97,000 - $138,000
-- Decile 9: $138,000 - $1,726,000
-- Decile 10: $1,726,000+
-
-### Negative Earnings Handling
-
-To prevent negative earnings from causing sign flips in economic responses, the code applies `max_(earnings, 0)` before calculating elasticities. This means:
-- Positive net earnings: Normal elasticity calculation
-- Negative net earnings: Treated as zero earnings, resulting in zero substitution elasticity
-- Income elasticity still applies to individuals with negative earnings
+# Elasticities

policyengine_us/parameters/gov/simulation/labor_supply_responses/elasticities/income/all.yaml renamed to policyengine_us/parameters/gov/simulation/labor_supply_responses/elasticities/income.yaml

@@ -1,4 +1,4 @@
-description: Percent change (of the change in disposable income) in labor supply given a 1% change in disposable income. This parameter overrides the base income elasticity and age multiplier if provided.
+description: Percent change (of the change in disposable income) in labor supply given a 1% change in disposable income.
 values:
   2020-01-01: 0
 metadata:

policyengine_us/parameters/gov/simulation/labor_supply_responses/elasticities/income/age_multiplier_over_threshold.yaml

@@ -0,0 +1,70 @@
+all:
+  description: Percent change (of the change in the effective marginal wage) in labor supply given a 1% change in the effective marginal wage. This parameter overrides all other substitution elasticities if provided.
+  values:
+    2020-01-01: 0
+  metadata:
+    unit: /1
+    label: substitution elasticity of labor supply
+by_position_and_decile:
+  metadata:
+    label: by position and decile
+    unit: /1
+    propagate_metadata_to_children: true
+  primary:
+    metadata:
+      label: primary adult
+    1:
+      metadata:
+        label: primary adult, 1st decile substitution elasticity
+      values:
+        2020-01-01: 0
+    2:
+      metadata:
+        label: primary adult, 2nd decile substitution elasticity
+      values:
+        2020-01-01: 0
+    3:
+      metadata:
+        label: primary adult, 3rd decile substitution elasticity
+      values:
+        2020-01-01: 0
+    4:
+      metadata:
+        label: primary adult, 4th decile substitution elasticity
+      values:
+        2020-01-01: 0
+    5:
+      metadata:
+        label: primary adult, 5th decile substitution elasticity
+      values:
+        2020-01-01: 0
+    6:
+      metadata:
+        label: primary adult, 6th decile substitution elasticity
+      values:
+        2020-01-01: 0
+    7:
+      metadata:
+        label: primary adult, 7th decile substitution elasticity
+      values:
+        2020-01-01: 0
+    8:
+      metadata:
+        label: primary adult, 8th decile substitution elasticity
+      values:
+        2020-01-01: 0
+    9:
+      metadata:
+        label: primary adult, 9th decile substitution elasticity
+      values:
+        2020-01-01: 0
+    10:
+      metadata:
+        label: primary adult, 10th decile substitution elasticity
+      values:
+        2020-01-01: 0
+  secondary:
+    metadata:
+      label: secondary adult, all deciles substitution elasticity
+    values:
+      2020-01-01: 0