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Towards a micro-founded theory of aggregate labor supply

  • Andrés Erosa


    (IMDEA Social Sciences Institute)

  • Luisa Fuster


    (IMDEA Social Sciences Institute)

  • Gueorgui Kambourov


    (University of Toronto)

We build a heterogeneous life-cycle model which captures a large number of salient features of individual labor supply, by education, over the life cycle. The model provides an aggregation theory of individual labor supply, firmly grounded on micro evidence, and is used to study the aggregate labor supply responses to changes in the economic environment. We find that the aggregate labor supply elasticity to a transitory wage shock is 1.27, with the extensive margin accounting for 54% of the response. Furthermore, we also simulate the 1987 tax holiday in Iceland - a quasi-natural experiment - and find that the aggregate labor supply responses in the model are similar to those actually observed in Iceland.

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Paper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2011-13.

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Date of creation: 13 Jul 2011
Date of revision: 23 Nov 2011
Handle: RePEc:imd:wpaper:wp2011-13
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