The Marginal Worker and The Aggregate Elasticity of Labor Supply
AbstractThis paper attempts to reconcile the high apparent aggregate elasticity of labor supply with small micro estimates. We elaborate on Rogerson’s seminal work (1988) and show that his results rely neither on complete markets nor on lotteries, but rather on the indivisibility of labor supply and the marginal homogeneity of the workforce. We derive two robust implications of a setup with indivisible labor but without lotteries, using either a complete markets model or an incomplete markets model. Implication (1) is that agents with reservation wages far above or below the market wage are less responsive (in labor supply) to the business cycle than agents whose reservation wage is around the market wage. Implication (2) is that the aggregate elasticity is given by the marginal homogeneity of the workforce. We test implication (1) using the PSID and find support for it. We build an incomplete market model and calibrate it to cross-sectional moments of hours worked. We show that it can reproduce the feature (1). This allows us to use the model to evaluate the importance of feature (2), i.e. to estimate the aggregate elasticity of labor supply implied by the marginal homogeneity.
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Bibliographic InfoPaper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-009.
Length: 37 pages
Date of creation: Mar 2006
Date of revision:
indivisible labor; reservation wage distribution; labor supply; business cycles.;
Other versions of this item:
- Francois Gourio & Pierre-Alexandre Noual, 2006. "The Marginal Worker and the Aggregate Elasticity of Labor Supply," 2006 Meeting Papers 509, Society for Economic Dynamics.
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-28 (All new papers)
- NEP-DGE-2006-10-28 (Dynamic General Equilibrium)
- NEP-LAB-2006-10-28 (Labour Economics)
- NEP-MAC-2006-10-28 (Macroeconomics)
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