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The aggregate implications of individual labor supply heterogeneity

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  • Jose Mustre-del-Rio

Abstract

This paper examines the Frisch elasticity at the extensive margin of labor supply in an economy consistent with the observed dispersion in average employment rates across individuals. An incomplete markets economy with indivisible labor is presented where agents differ in their disutility of labor and market skills. The model's key parameters are estimated using indirect inference with panel data from the National Longitudinal Survey of the Youth-NLSY. The estimated model implies an elasticity of aggregate employment of 0.71. A simple decomposition reveals that labor disutility dierences, which capture the dispersion in employment rates, are crucial for this quantitative result. These differences alone generate an elasticity of 0.69. Meanwhile, skill differences alone imply an elasticity of 1.1. These results suggest that the literature generates large employment elasticities by ignoring individual labor supply differences.

Suggested Citation

  • Jose Mustre-del-Rio, 2011. "The aggregate implications of individual labor supply heterogeneity," Research Working Paper RWP 11-09, Federal Reserve Bank of Kansas City, revised 2011.
  • Handle: RePEc:fip:fedkrw:rwp11-09
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    Cited by:

    1. Axelle Ferriere & Gaston Navarro, 2013. "The Heterogeneous Effects of Government Spending: It's All About Taxes," Working Papers 13-18, New York University, Leonard N. Stern School of Business, Department of Economics.

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