The aggregate implications of individual labor supply heterogeneity
AbstractThis paper examines the Frisch elasticity at the extensive margin of labor supply in an economy consistent with the observed dispersion in average employment rates across individuals. An incomplete markets economy with indivisible labor is presented where agents differ in their disutility of labor and market skills. The model's key parameters are estimated using indirect inference with panel data from the National Longitudinal Survey of the Youth-NLSY. The estimated model implies an elasticity of aggregate employment of 0.71. A simple decomposition reveals that labor disutility dierences, which capture the dispersion in employment rates, are crucial for this quantitative result. These differences alone generate an elasticity of 0.69. Meanwhile, skill differences alone imply an elasticity of 1.1. These results suggest that the literature generates large employment elasticities by ignoring individual labor supply differences.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 11-09.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-01 (All new papers)
- NEP-DGE-2012-02-01 (Dynamic General Equilibrium)
- NEP-LAB-2012-02-01 (Labour Economics)
- NEP-LMA-2012-02-01 (Labor Markets - Supply, Demand, & Wages)
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