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Reconciling micro and macro estimates of the Frisch labor supply elasticity

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  • William B. Peterman

Abstract

There are large differences between the microeconometeric estimates of the Frisch labor supply elasticity (0-0.5) and the values used by macroeconomists to calibrate general equilibrium models (2-4). The microeconometric estimates of the Frisch are typically estimated by regressing changes in hours on changes in wages conditional on the individual being a married male head of household, working some minimum number of hours and being of prime working age. In contrast macroeconomic calibration values are typically set such that fluctuations in a general equilibrium model match the observed changes in the aggregate hours and wages from the whole population over time. This paper aims to explain the gap by estimating an aggregate Frisch elasticity which is consistent with the concept of macro calibration values using the microeconometric techniques. In order to estimate the Frisch consistent with the macro concept, this paper alters the typical microeconometric approach in order to incorporate fluctuations on the extensive margin and also broadens the scope of the sample to include single males, females, secondary earners, young individuals, and old individuals. This paper finds that estimates of the aggregate macro Frisch elasticity are in the middle of the range of macroeconomic calibration values (around 3.0). Furthermore, it finds that the key to explaining the difference are the fluctuations on the extensive margin of single males, females, secondary earners, older individuals, and younger individuals.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-75.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-75

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  1. Sebastian Dyrda & Greg Kaplan & José-Víctor Ríos-Rull, 2012. "Business Cycles and Household Formation: The Micro vs the Macro Labor Elasticity," NBER Working Papers 17880, National Bureau of Economic Research, Inc.
  2. Pistaferri, Luigi, 2002. "Anticipated and Unanticipated Wage Changes, Wage Risk, and Intertemporal Labour Supply," CEPR Discussion Papers 3628, C.E.P.R. Discussion Papers.
  3. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, 05.
  4. Contreras, Juan & Sinclair, Sven, 2008. "Labor supply response in macroeconomic models: Assessing the empirical validity of the intertemporal labor supply response from a stochastic overlapping generations model with incomplete markets," MPRA Paper 10533, University Library of Munich, Germany.
  5. Wooldridge, Jeffrey M., 1995. "Selection corrections for panel data models under conditional mean independence assumptions," Journal of Econometrics, Elsevier, vol. 68(1), pages 115-132, July.
  6. Casey B. Mulligan, . "The Intertemporal Substitution of Work--What Does the Evidence Say?," University of Chicago - Population Research Center 95-11, Chicago - Population Research Center.
  7. Riccardo Fiorito & Giulio Zanella, 2012. "The Anatomy of the Aggregate Labor Supply Elasticity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 171-187, April.
  8. Raj Chetty & Adam Guren & Dayanand S. Manoli & Andrea Weber, 2011. "Does Indivisible Labor Explain the Difference Between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Working Papers 16729, National Bureau of Economic Research, Inc.
  9. Michael Keane & Richard Rogerson, 2012. "Micro and Macro Labor Supply Elasticities: A Reassessment of Conventional Wisdom," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 464-76, June.
  10. Kimmel, Jean & Kniesner, Thomas J., 1998. "New evidence on labor supply:: Employment versus hours elasticities by sex and marital status," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 289-301, July.
  11. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
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  1. Reconciling macro and micro estimate of the Frisch labor supply elasticity
    by Economic Logician in Economic Logic on 2013-01-23 14:54:00
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Cited by:
  1. William T. Gavin & Benjamin D. Keen & Alexander Richter & Nathaniel Throckmorton, 2013. "Global dynamics at the zero lower bound," Working Papers 2013-007, Federal Reserve Bank of St. Louis.
  2. Oxana A. Malakhovskaya & Alexey R. Minabutdinov, 2013. "Are commodity price shocks important? A Bayesian estimation of a DSGE model for Russia," HSE Working papers WP BRP 48/EC/2013, National Research University Higher School of Economics.
  3. Bai, Yuting & Kirsanova, Tatiana, 2013. "Infrequent Fiscal Stabilization," SIRE Discussion Papers 2013-17, Scottish Institute for Research in Economics (SIRE).
  4. Burkhard Heer & Stefan Rohrbacher & Christian Scharrer, 2014. "Aging, the Great Moderation and Business-Cycle Volatility in a Life-Cycle Model," CESifo Working Paper Series 4584, CESifo Group Munich.
  5. Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers 1412, School of Economics, University of Surrey.

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