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Aggregation and Labor Supply Elasticities
[Do Reservation Wages Really Decline? Some International Evidence on the Determinants of Reservation Wages]

Author

Listed:
  • Alois Kneip
  • Monika Merz
  • Lidia Storjohann

Abstract

We outline a formal procedure for deriving the aggregate wage-elasticity of labor supply for a large group of heterogeneous workers who operate under uncertainty. Heterogeneity relates to preferences, income, wealth, and the labor market status. If each worker faces a small, possibly nonuniform wage change, the implied aggregate wage-elasticity can be represented by a closed-form expression. This expression captures an extensive and an intensive margin. We empirically implement the procedure for a dynamic model of individual labor supply and a micro panel of men in Germany from 2000 to 2013. We find that the extensive margin is less time-varying than the intensive margin, and that its size varies with the measure of reservation wages. Self-reported reservation wages render a larger extensive margin than other proxies. The estimated aggregate Frisch wage-elasticity varies between 0.85 and 1.06, and the two margins matter equally strongly for the unbalanced sample.

Suggested Citation

  • Alois Kneip & Monika Merz & Lidia Storjohann, 2020. "Aggregation and Labor Supply Elasticities [Do Reservation Wages Really Decline? Some International Evidence on the Determinants of Reservation Wages]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2315-2358.
    • Handle: RePEc:oup:jeurec:v:18:y:2020:i:5:p:2315-2358.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvz039
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    2. David Staines, 2023. "Stochastic Equilibrium the Lucas Critique and Keynesian Economics," Papers 2312.16214, arXiv.org.

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    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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