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The Labor Supply Curve at the Extensive Margin: A Reservation Wedge Approach

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  • Benjamin Schoefer

    (UC Berkeley)

  • Preston Mui

    (UC-Berkeley)

Abstract

We present a theoretically robust and empirically tractable representation of the aggregate labor supply curve at the extensive (employment) margin. We define household- level reservation (labor) wedge, the tax-like gap between an individual’s potential earnings and her marginal rate of substitution. This wedge collapses rich multi-dimensional heterogeneity in, e.g., tastes for leisure, marginal utilities of consumption, hours constraints, and worker-specific wages, and accommodates frictional environments. The cumulative distribution function of these wedges is the aggregate labor supply curve. In a meta study, the reservation wedge serves as a bridge between diverse models where aggregate extensive-margin labor supply has remained dicult to characterize. We construct empirical wedges as worker’s reservation-to-actual wage ratio using survey data for France, Germany, the United Kingdom, and the United States. Linking the survey to administrative social security records, we quantify the allocative consequences of this measure of desired labor supply for realized employment outcomes.

Suggested Citation

  • Benjamin Schoefer & Preston Mui, 2019. "The Labor Supply Curve at the Extensive Margin: A Reservation Wedge Approach," 2019 Meeting Papers 1560, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1560
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    Cited by:

    1. Simon Jäger & Benjamin Schoefer & Josef Zweimüller, 2023. "Marginal Jobs and Job Surplus: A Test of the Efficiency of Separations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(3), pages 1265-1303.

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