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Towards a micro-founded theory of aggregate labor supply

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  • Andrés Erosa

    ()
    (IMDEA Social Sciences Institute)

  • Luisa Fuster

    ()
    (IMDEA Social Sciences Institute)

  • Gueorgui Kambourov

    ()
    (University of Toronto)

Abstract

We build a heterogeneous life-cycle model which captures a large number of salient features of individual labor supply, by education, over the life cycle. The model provides an aggregation theory of individual labor supply, firmly grounded on micro evidence, and is used to study the aggregate labor supply responses to changes in the economic environment. We find that the aggregate labor supply elasticity to a transitory wage shock is 1.27, with the extensive margin accounting for 54% of the response. Furthermore, we also simulate the 1987 tax holiday in Iceland - a quasi-natural experiment - and find that the aggregate labor supply responses in the model are similar to those actually observed in Iceland.

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Bibliographic Info

Paper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2011-13.

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Date of creation: 13 Jul 2011
Date of revision: 23 Nov 2011
Handle: RePEc:imd:wpaper:wp2011-13

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Keywords: aggregate labor supply; intensive margin; extensive margin; heterogeneous agents; life cycle;

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References

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Towards a micro-founded theory of aggregate labor supply
    by Christian Zimmermann in NEP-DGE blog on 2011-07-31 04:04:09
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Cited by:
  1. Michael P. Keane & Richard Rogerson, 2011. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," NBER Working Papers 17430, National Bureau of Economic Research, Inc.
  2. William B. Peterman, 2012. "The effect of endogenous human capital accumulation on optimal taxation," Finance and Economics Discussion Series 2012-03, Board of Governors of the Federal Reserve System (U.S.).
  3. Klein, Paul & Telyukova, Irina A., 2013. "Measuring high-frequency income risk from low-frequency data," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 535-542.
  4. Elena Capatina, 2012. "Life Cycle Effects of Health Risk," Working Papers 201216, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  5. Andrés Erosa & Luisa Fuster & Gueorgui Kambourov, 2011. "Labor supply and government programs: A cross-country analysis," Working Papers 2011-08, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales, revised 19 Oct 2011.
  6. William B. Peterman, 2012. "An extensive look at taxes: how does endogenous retirement affect optimal taxation?," Finance and Economics Discussion Series 2012-28, Board of Governors of the Federal Reserve System (U.S.).
  7. Sun-Bin Kim & Richard Rogerson & Yongsung Chang, 2012. "Hours and Employment in the Cross-Section and Over the Cycle," 2012 Meeting Papers 82, Society for Economic Dynamics.

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