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On the measurement of the elasticity of labour

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  • Gottlieb, Charles
  • Onken, Joern
  • Valladares-Esteban, Arnau

Abstract

We use a simple theoretical framework, a building block of many macroeconomic models, to study the prominently debated relationship between the model parametrisation of the Frisch elasticity and the reduced-form evidence on the elasticity of labour. Focusing on tax holidays, we show that the elasticity measured with a reduced-form approach is only equal to the Frisch-elasticity parameter if there are no income or general equilibrium effects. Furthermore, for a wide range of standard values of the Frisch-elasticity parameter, the response of labour generated by a tax holiday in the model is aligned with the reduced-form evidence.

Suggested Citation

  • Gottlieb, Charles & Onken, Joern & Valladares-Esteban, Arnau, 2021. "On the measurement of the elasticity of labour," European Economic Review, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:eecrev:v:139:y:2021:i:c:s0014292121001975
    DOI: 10.1016/j.euroecorev.2021.103879
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    Cited by:

    1. Michael Keane & Timothy Neal, 2021. "Robust Inference for the Frisch Labor Supply Elasticity," Discussion Papers 2021-07b, School of Economics, The University of New South Wales.
    2. Michael Keane & Timothy Neal, 2021. "2SLS Using Weak Instruments: Implications for Estimating the Frisch Labor Supply Elasticity," Discussion Papers 2021-07, School of Economics, The University of New South Wales.
    3. Christopher Rauh & Aranu Valladares-Esteban, 2023. "On the black-white gaps in labor supply and earnings over the lifecycle in the US," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 424-449, December.
    4. David Staines, 2023. "Stochastic Equilibrium the Lucas Critique and Keynesian Economics," Papers 2312.16214, arXiv.org.

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    More about this item

    Keywords

    Frisch elasticity; Labour supply; Aggregate hours; Tax holidays;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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