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The Frisch Elasticity in Labor Markets with high Job Turnover

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  • Nikita Céspedes Reynaga

    ()
    (Central Bank of Peru)

  • Silvio Rendon

    ()
    (Department of Economics, 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 variables 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 Stony Brook University, Department of Economics in its series Department of Economics Working Papers with number 12-13.

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Date of creation: Oct 2012
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Handle: RePEc:nys:sunysb:12-13

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Web page: http://www.stonybrook.edu/economics
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Keywords: Labor Supply; Frisch Elasticity; Hours of Work; Job Turnover;

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References

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  1. Chetty, Nadarajan & Weber, Andrea & Guren, Adam Michael & Day, Manoli, 2011. "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins," Scholarly Articles 11878970, Harvard University Department of Economics.
  2. Yongsung Chang & Sun-Bin Kim, 2003. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy," Macroeconomics 0307003, EconWPA.
  3. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
  4. 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.
  5. 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.
  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. Jess Benhabib & Richard Rogerson & Randall Wright, 1991. "Homework in macroeconomics: household production and aggregate fluctuations," Staff Report 135, Federal Reserve Bank of Minneapolis.
  8. Cho, J-O. & Cooley, T.F., 1988. "Employment And Hours Over The Business Cycle," Papers 88-03, Rochester, Business - General.
  9. Joseph Altonji, 1984. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Working Papers 562, Princeton University, Department of Economics, Industrial Relations Section..
  10. Heckman, James J & MaCurdy, Thomas, 1982. "Corrigendum on a Life Cycle Model of Female Labour Supply," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 659-60, October.
  11. Gustavo Yamada, 2008. "A Downward-Sloping Labor Supply Curve: The Case of Peru," Review of Development Economics, Wiley Blackwell, vol. 12(4), pages 737-750, November.
  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, vol. 89(6), pages 1059-85, December.
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Cited by:
  1. Kneip, Alois & Merz, Monika & Storjohann, Lidia, 2013. "Aggregation and Labor Supply Elasticities," IZA Discussion Papers 7699, Institute for the Study of Labor (IZA).
  2. Céspedes, Nikita & Gutiérrez, Ana Paola & Belapatiño, Vanessa, 2013. "Determinantes de la duración del desempleo en una economía con alta informalidad," Working Papers 2013-022, Banco Central de Reserva del Perú.
  3. Nikita Céspedes & Nelson Ramírez-Rondán, 2014. "Total Factor Productivity Estimation in Peru: Primal and Dual Approaches," Working Papers 2014-11, Peruvian Economic Association.
  4. Michael Kuklik & Nikita Céspedes, 2014. "Optimal Taxation and Life Cycle Labor Supply Profile," Working Papers 2014-8, Peruvian Economic Association.
  5. Monika Merz, 2014. "Aggregation and Labor Supply Elasticities," 2014 Meeting Papers 51, Society for Economic Dynamics.

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