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Labor Supply Elasticities: Can Micro Be Misleading for Macro?

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  • Riccardo Fiorito

    ()

  • Giulio Zanella

    ()

Abstract

In this paper we compare “micro” and “macro” labor supply elasticities in a MaCurdy-type equation. Using PSID data, we obtain the micro elasticity from standard panel techniques, and the macro elasticity from the time series generated by aggregating individuals every year. This procedure relies on the exact aggregation of first-order conditions in a life-cycle model with home production. We find an individual elasticity of about 0.1, a low value in line with mainstream microeconometric studies, and an aggregate elasticity of about 1, a much larger value often assumed in calibration studies. This discrepancy is not due to aggregation bias: it is due to the fact that individual and total hours are different variables, with the extensive margin that empirically dominates. A broader implication of our result is that micro evidence is not always appropriate for calibrating an aggregate model economy

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Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 547.

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Date of creation: Nov 2008
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Handle: RePEc:usi:wpaper:547

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Keywords: elasticity of labor supply; aggregation; calibration;

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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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Cited by:
  1. Jeannine Bailliu & Césaire Meh & Yahong Zhang, 2012. "Macroprudential Rules and Monetary Policy when Financial Frictions Matter," Working Papers 12-6, Bank of Canada.
  2. William B. Peterman, 2012. "An extensive look at taxes: how does endogenous retirement affect optimal taxation?," Finance and Economics Discussion Series 2012-28, Board of Governors of the Federal Reserve System (U.S.).
  3. Bertinelli, Luisito & Cardi, Olivier & Sen, Partha, 2013. "Deregulation shock in product market and unemployment," Journal of Economic Dynamics and Control, Elsevier, vol. 37(4), pages 711-734.
  4. Daniel Farhat, 2009. "Endogenous Labor Supply, Heterogeneous Firms and International Business Cycles," Working Papers 0909, University of Otago, Department of Economics, revised Sep 2009.
  5. Obstbaum, Meri, 2011. "The role of labour markets in fiscal policy transmission," Research Discussion Papers 16/2011, Bank of Finland.
  6. Daniel Farhat, 2010. "Capital Accumulation, Non-traded Goods and International Macroeconomic Dynamics with Heterogeneous Firms," Working Papers 1002, University of Otago, Department of Economics, revised May 2010.
  7. Alexandre Dmitriev & Ivan Roberts, 2013. "International Business Cycles with Complete Markets," RBA Research Discussion Papers rdp2013-08, Reserve Bank of Australia.

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