Advanced Search
MyIDEAS: Login to save this paper or follow this series

Labor supply response in macroeconomic models: Assessing the empirical validity of the intertemporal labor supply response from a stochastic overlapping generations model with incomplete markets

Contents:

Author Info

  • Contreras, Juan
  • Sinclair, Sven

Abstract

We evaluate the labor supply response in a stochastic overlapping generations model with incomplete markets and a non separable utility function in labor and consumption. Using a simulated panel from the model, we calculate the labor supply response to anticipated changes in wages (holding the marginal utility of wealth constant-that is, the Frisch elasticity) and to unanticipated change in wages (which describes the effect of uncertainty in labor supply responses). The model's Frisch elasticity estimate is 0.33, which is slightly higher than the empirical estimates in the earlier literature but somewhat lower than more recent estimates. The paper also shows that the borrowing constraints in the model reduce substantially the estimates of the Frisch elasticity. The labor supply response to an unanticipated change in wages is small because of large wealth effects. Having all the variables required and no measurement error, we calculate the omitted variable bias of not controlling for the level and variance (risk) of the unexpected changes in wages. Omitting both variables biases the estimates of the Frisch elasticity downward by a factor of 8; omitting measures of wage risk alone biases it by a factor of 1.4

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://mpra.ub.uni-muenchen.de/10533/
File Function: original version
Download Restriction: no

Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10533.

as in new window
Length:
Date of creation: 17 Sep 2008
Date of revision:
Handle: RePEc:pra:mprapa:10533

Contact details of provider:
Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC

Related research

Keywords: labor supply; intertemporal substitution; Frisch elasticity; stochastic GE models;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. James P. Ziliak & Thomas J. Kniesner, 2005. "The Effect of Income Taxation on Consumption and Labor Supply," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 23(4), pages 769-796, October.
  2. Joshua Angrist, 1988. "Grouped Data Estimation and Testing in Simple Labor Supply Models," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 614, Princeton University, Department of Economics, Industrial Relations Section..
  3. Shinichi Nishiyama, 2002. "Bequests, Inter Vivos Transfers, and Wealth Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages 892-931, October.
  4. Eric French, 2004. "The Labor Supply Response to (Mismeasured but) Predictable Wage Changes," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 86(2), pages 602-613, May.
  5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  6. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
  7. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(3), pages 469-494, December.
  8. Chiappori, P.A., 1989. "Collective Labour Supply and Welfare," DELTA Working Papers, DELTA (Ecole normale supérieure) 89-07, DELTA (Ecole normale supérieure).
  9. Blundell, Richard & Meghir, Costas & Neves, Pedro, 1993. "Labour supply and intertemporal substitution," Journal of Econometrics, Elsevier, Elsevier, vol. 59(1-2), pages 137-160, September.
  10. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier.
  11. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, 05.
  12. Yongsung Chang & Sun-Bin Kim, 2006. "From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, 02.
  13. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers, Wisconsin Madison - Social Systems 9722, Wisconsin Madison - Social Systems.
  14. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, Econometric Society, vol. 56(1), pages 63-90, January.
  15. 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.
  16. Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, American Economic Association, vol. 83(2), pages 116-21, May.
  17. Shinichi Nishiyama & Kent Smetters, 2005. "Consumption Taxes and Economic Efficiency with Idiosyncratic Wage Shocks," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(5), pages 1088-1115, October.
  18. Chul-In Lee, 2001. "Finite Sample Bias In Iv Estimation Of Intertemporal Labor Supply Models: Is The Intertemporal Substitution Elasticity Really Small?," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 83(4), pages 638-646, November.
  19. 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.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. William B. Peterman, 2012. "Reconciling micro and macro estimates of the Frisch labor supply elasticity," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-75, Board of Governors of the Federal Reserve System (U.S.).
  2. Peterman, William B. & Sommer, Kamila, 2014. "How Well Did Social Security Mitigate the Effects of the Great Recession?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-13, Board of Governors of the Federal Reserve System (U.S.).
  3. William B. Peterman, 2012. "The effect of endogenous human capital accumulation on optimal taxation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-03, Board of Governors of the Federal Reserve System (U.S.).
  4. Kamila Sommer & William Peterman, 2013. "How Well Did Social Security Mitigate the Effects of the Great Recession?," 2013 Meeting Papers, Society for Economic Dynamics 1150, Society for Economic Dynamics.
  5. William B. Peterman, 2011. "Determining the motives for a positive optimal tax on capital," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-55, Board of Governors of the Federal Reserve System (U.S.).
  6. González, Roberto & Sala, Hector, 2011. "The Frisch Elasticity in the Mercosur Countries: A Pseudo-Panel Approach," IZA Discussion Papers, Institute for the Study of Labor (IZA) 5993, Institute for the Study of Labor (IZA).
  7. Vivek Prasad, 2014. "Balanced budget stimulus with tax cuts in a liquidity constrained economy," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 1401, Birkbeck, Department of Economics, Mathematics & Statistics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:10533. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.