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Labor Supply Elasticities: Can Micro Be Misleading for Macro?

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Riccardo Fiorito ()
Giulio Zanella ()

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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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Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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  1. Alessandra Casarico & Alessandro Sommacal, 2008. "Labor Income Taxation, Human Capital and Growth: The Role of Child Care," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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