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The Anatomy of the Aggregate Labor Supply Elasticity

Author

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  • Riccardo Fiorito

    (Universita di Siena)

  • Giulio Zanella

    (Universita di Bologna)

Abstract

We show that the aggregate Frisch elasticity of labor supply can greatly exceed the corresponding individual-level parameter, and we illustrate the "anatomy" of the former in terms of intensive and extensive margins. The methodology consists of using micro data from the PSID to construct a panel of individuals and an aggregate time series obtained by aggregating these individuals each year. These two data sets represent exactly the same sample at different levels of aggregation, and we use them to identify the parameters of two distinct MaCurdy-type micro and macro equations. We find a micro elasticity of about 0.1 and a much larger macro elasticity that ranges from 1.1 to 1.7. There is no conflict between the two estimates: the micro one reflects only the intensive margin while the macro one reflects, in addition, the much more volatile extensive margin. Furthermore, aggregation of only continuously employed individuals allows us to provide a reliable estimate of the intensive margin elasticity in the range 0.3-0.4. This implies an extensive margin elasticity in the range 0.8-1.4. These findings suggest that micro evidence is not a benchmark for assessing how large the Frisch elasticity of labor supply should be in a model of the aggregate economy. (Copyright: Elsevier)

Suggested Citation

  • Riccardo Fiorito & Giulio Zanella, 2012. "The Anatomy of the Aggregate Labor Supply Elasticity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 171-187, April.
  • Handle: RePEc:red:issued:09-180
    DOI: 10.1016/j.red.2012.01.002
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    More about this item

    Keywords

    Labor supply; Intensive margin; Extensive margin; Calibration;

    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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