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Labor Supply Elasticities: Can Micro Be Misleading for Macro?

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  • University of Siena
  • Riccardo Fiorito

Abstract

In this paper we compare in a consistent way 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 exact aggregation of the individual units in the PSID, each year. Our aggregation procedure is legitimate since it relies on exact aggregation of first-order conditions in a simple life-cycle labor supply model with home production. We find that the individual elasticity is about 0.1, a low value that agrees with standard micro estimates, but that the aggregate elasticity is 1.5, a much larger value that incidentally agrees with the pioneering estimate of Lucas and Rapping (1969). This result derives from a pure aggregation effect: not surpisingly, most of the difference is due to the extensive margin, i.e. participation/employment decisions. An implication of our result is that micro evidence is not always a reliable guidance for calibrating aggregate macroeconomic parameters.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 902.

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Date of creation: 2008
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Handle: RePEc:red:sed008:902

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Blog mentions

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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  1. Luisito Bertinelli & Olivier Cardi & Partha Sen, 2011. "Deregulation shock in product market and unemployment," Working Papers, HAL hal-00589228, HAL.
  2. Daniel Farhat, 2010. "Capital Accumulation, Non-traded Goods and International Macroeconomic Dynamics with Heterogeneous Firms," Working Papers, University of Otago, Department of Economics 1002, University of Otago, Department of Economics, revised May 2010.
  3. William B. Peterman, 2012. "An extensive look at taxes: how does endogenous retirement affect optimal taxation?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-28, Board of Governors of the Federal Reserve System (U.S.).
  4. Daniel Farhat, 2009. "Endogenous Labor Supply, Heterogeneous Firms and International Business Cycles," Working Papers, University of Otago, Department of Economics 0909, University of Otago, Department of Economics, revised Sep 2009.
  5. Jeannine Bailliu & C├ęsaire Meh & Yahong Zhang, 2012. "Macroprudential Rules and Monetary Policy when Financial Frictions Matter," Working Papers, Bank of Canada 12-6, Bank of Canada.
  6. Dmitriev, Alexandre & Roberts, Ivan, 2012. "International business cycles with complete markets," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(6), pages 862-875.
  7. Obstbaum, Meri, 2011. "The role of labour markets in fiscal policy transmission," Research Discussion Papers, Bank of Finland 16/2011, Bank of Finland.

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