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Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities

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  • Raj Chetty
  • Adam Guren
  • Day Manoli
  • Andrea Weber

Abstract

Macroeconomic calibrations imply much larger labor supply elasticities than microeconometric studies. The most well known explanation for this divergence is that indivisible labor generates extensive margin responses that are not captured in micro studies of hours choices. We evaluate whether existing calibrations of macro models are consistent with micro evidence on extensive margin responses using two approaches. First, we use a standard calibrated macro model to simulate the impacts of tax policy changes on labor supply. Second, we present a meta-analysis of quasi-experimental estimates of extensive margin elasticities. We find that micro estimates are consistent with macro evidence on the steady-state (Hicksian) elasticities relevant for cross-country comparisons. However, micro estimates of extensive-margin elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours. Hence, indivisible labor supply does not explain the large gap between micro and macro estimates of intertemporal substitution (Frisch) elasticities.

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Article provided by University of Chicago Press in its journal NBER Macroeconomics Annual.

Volume (Year): 27 (2013)
Issue (Month): 1 ()
Pages: 1 - 56

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Handle: RePEc:ucp:macann:doi:10.1086/669170

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