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The Frisch Elasticity in Labor Markets with High Job Turnover

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  • Céspedes Reynaga, Nikita

    ()
    (Central Bank of Peru)

  • Rendon, Silvio

    ()
    (Stony Brook University)

Abstract

We estimate Frisch elasticity in a labor market with high job turnover. In a context where only around 18% of the employed labor force has formal and stable jobs, we perform a fixed effects estimation as proposed by MaCurdy (1981) with a Heckman correction for selection into unemployment. We identify the positive slope of the labor supply using firms' size as an instrumental variable for wages. We use Peruvian data from the Permanent Employment Survey of Lima. We find that neglecting wage endogeneity implies a downward sloping labor supply, while the job turnover bias, not accounting for job turnover, overestimates Frisch elasticity. We estimate Frisch elasticity at around 0.38, which indicates fairly adjustable wages and little reaction of hours of work to wage variations. Moreover, we find that the Frisch elasticity is decreasing in income and tended to increase in the last decade.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6991.

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Length: 22 pages
Date of creation: Nov 2012
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Handle: RePEc:iza:izadps:dp6991

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Keywords: labor supply; Frisch elasticity; hours of work; job turnover;

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  1. Jeffrey M. Wooldridge, 2001. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262232197, December.
  2. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2011. "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins," American Economic Review, American Economic Association, vol. 101(3), pages 471-75, May.
  3. Heckman, James J & MaCurdy, Thomas, 1982. "Corrigendum on a Life Cycle Model of Female Labour Supply," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(4), pages 659-60, October.
  4. Yongsung Chang & Sun-Bin Kim, 2003. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy," Macroeconomics, EconWPA 0307003, EconWPA.
  5. 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.
  6. Domeij, David & Floden, Martin, 2001. "The labor-supply elasticity and borrowing constraints: Why estimates are biased," Working Paper Series in Economics and Finance 480, Stockholm School of Economics.
  7. Cho, Jang-Ok & Cooley, Thomas F., 1994. "Employment and hours over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 411-432, March.
  8. Gustavo Yamada, 2008. "A Downward-Sloping Labor Supply Curve: The Case of Peru," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 12(4), pages 737-750, November.
  9. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages S176-S215, June.
  10. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(6), pages 1166-87, December.
  11. Céspedes, Nikita, 2011. "Tendencia de las horas de trabajo en el mercado laboral peruano," Revista Moneda, Banco Central de Reserva del Perú, issue 149, pages 13-17.
  12. González, Roberto & Sala, Hector, 2011. "The Frisch Elasticity in the Mercosur Countries: A Pseudo-Panel Approach," IZA Discussion Papers 5993, Institute for the Study of Labor (IZA).
  13. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1059-85, December.
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Cited by:
  1. Amado, María, 2014. "Macroprudential Rules in Small Open Economies," Working Papers, Banco Central de Reserva del Perú 2014-009, Banco Central de Reserva del Perú.
  2. Nikita Céspedes & Nelson Ramírez-Rondán, 2014. "Total Factor Productivity Estimation in Peru: Primal and Dual Approaches," Working Papers 2014-11, Peruvian Economic Association.
  3. Nikita Céspedes & Ana Paola Gutiérrez & Vanessa Belapatiño, 2014. "Determinantes de la duración del desempleo en una economía con alta informalidad," Working Papers 2014-2, Peruvian Economic Association.
  4. Monika Merz, 2014. "Aggregation and Labor Supply Elasticities," 2014 Meeting Papers, Society for Economic Dynamics 51, Society for Economic Dynamics.
  5. Michael Kuklik & Nikita Cespedes, 2013. "Optimal Taxation and Life Cycle Labor Supply Profile," Documentos de Trabajo, Departamento de Economía - Pontificia Universidad Católica del Perú 2013-352, Departamento de Economía - Pontificia Universidad Católica del Perú.
  6. Kneip, Alois & Merz, Monika & Storjohann, Lidia, 2013. "Aggregation and Labor Supply Elasticities," IZA Discussion Papers 7699, Institute for the Study of Labor (IZA).

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