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Labor Supply Elasticities: Can Micro be Misleading for Macro?

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  • Riccardo Fiorito
  • Giulio Zanella

Abstract

In this paper we compare, in a fully consistent manner, micro and macro labor supply elasticities. The individual elasticity is obtained from the Panel Study of Income Dynamics (PSID). The aggregate, time-series, elasticity is estimated from the aggregation of individual units in the PSID for each year. We rely on exact aggregation of first-order conditions in a lifecycle labor supply model with home production. We find an individual elasticity of approximately 0.1, a low value that is in accordance with standard micro estimates. At the same time, we find an aggregate elasticity near 1. This result derives from a pure aggregation effect, with most of the difference due to the extensive margin. An implication of our result is that micro evidence is not always a reliable guide for calibrating aggregate macroeconomic parameters.

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Bibliographic Info

Paper provided by Department of the Treasury, Ministry of the Economy and of Finance in its series Working Papers with number 4.

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Length: 26
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Handle: RePEc:itt:wpaper:wp2008-4

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Keywords: elasticity of labor supply; aggregation; calibration;

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Labor supply elasticity: micro versus macro estimates
    by Economic Logician in Economic Logic on 2009-01-26 09:34:00
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Cited by:
  1. 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.).
  2. Jeannine Bailliu & C├ęsaire Meh & Yahong Zhang, 2012. "Macroprudential Rules and Monetary Policy when Financial Frictions Matter," Working Papers 12-6, Bank of Canada.
  3. Daniel Farhat, 2009. "Endogenous Labor Supply, Heterogeneous Firms and International Business Cycles," Working Papers 0909, University of Otago, Department of Economics, revised Sep 2009.
  4. Alexandre Dmitriev & Ivan Roberts, 2013. "International Business Cycles with Complete Markets," RBA Research Discussion Papers rdp2013-08, Reserve Bank of Australia.
  5. Luisito Bertinelli & Olivier Cardi & Partha Sen, 2012. "Deregulation Shock In Product Market And Unemployment," Working papers 221, Centre for Development Economics, Delhi School of Economics.
  6. Obstbaum, Meri, 2011. "The role of labour markets in fiscal policy transmission," Research Discussion Papers 16/2011, Bank of Finland.
  7. Daniel Farhat, 2010. "Capital Accumulation, Non-traded Goods and International Macroeconomic Dynamics with Heterogeneous Firms," Working Papers 1002, University of Otago, Department of Economics, revised May 2010.

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