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Towards a Micro-Founded Theory of Aggregate Labor Supply

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  • Andres Erosa
  • Luisa Fuster
  • Gueorgui Kambourov

Abstract

We build a heterogeneous life-cycle model which captures a large number of salient features of individual labor supply, by education, over the life cycle. The model provides an aggregation theory of individual labor supply, firmly grounded on micro evidence, and is used to study the aggregate labor supply responses to changes in the economic environment. We find that the aggregate labor supply elasticity to a transitory wage shock is 1.27, with the extensive margin accounting for 54% of the response. Furthermore, we also simulate the 1987 tax holiday in Iceland - a quasi-natural experiment - and find that the aggregate labor supply responses in the model are similar to those actually observed in Iceland.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-443.

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Length: Unknown pages
Date of creation: 23 Nov 2011
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Handle: RePEc:tor:tecipa:tecipa-443

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Keywords: Aggregate labor supply; intensive margin; extensive margin; heterogeneous agents; life cycle;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Towards a micro-founded theory of aggregate labor supply
    by Christian Zimmermann in NEP-DGE blog on 2011-07-31 04:04:09
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Cited by:
  1. Michael Keane & Richard Rogers, 2012. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Economics Series Working Papers 2012-W12, University of Oxford, Department of Economics.
  2. Andrés Erosa & Luisa Fuster & Gueorgui Kambourov, 2011. "Labor supply and government programs: A cross-country analysis," Working Papers, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales 2011-08, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales, revised 19 Oct 2011.
  3. Elena Capatina, 2012. "Life Cycle Effects of Health Risk," Working Papers, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales 201216, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  4. William Peterman, 2012. "The Effect of Endogenous Human Capital Accumulation on Optimal Taxation," 2012 Meeting Papers, Society for Economic Dynamics 204, Society for Economic Dynamics.
  5. Klein, Paul & Telyukova, Irina A., 2013. "Measuring high-frequency income risk from low-frequency data," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(3), pages 535-542.
  6. Sun-Bin Kim & Richard Rogerson & Yongsung Chang, 2012. "Hours and Employment in the Cross-Section and Over the Cycle," 2012 Meeting Papers, Society for Economic Dynamics 82, Society for Economic Dynamics.
  7. 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.).

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