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Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective

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  • Michael Keane

    () (Department of Economics, University of Oxford, Oxford OX1 3UQ, United Kingdom)

  • Richard Rogerson

    () (Woodrow Wilson School, Princeton University, Princeton, New Jersey 08544)

Abstract

The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, including the optimal design of tax policies. Whereas the earlier literature often concluded that aggregate labor supply elasticities were small, we argue that recent work using structural models and micro data credibly supports large aggregate elasticities. We focus on three issues. First, earlier analyses abstracted from several key features, including human capital accumulation, that severely negatively biased estimates of a key preference parameter. Second, failure to understand that aggregate labor supply adjustments can occur along both the hours per worker and employment margins has led economists to misinterpret the implications of preference parameters for aggregate labor supply. Third, structural estimation of models that feature choice along the extensive margin using micro data typically finds large responses.

Suggested Citation

  • Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, August.
  • Handle: RePEc:anr:reveco:v:7:y:2015:p:89-117
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    More about this item

    Keywords

    life cycle; taxes; employment; human capital;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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