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Labor Supply Elasticities: Can Micro be Misleading for Macro?

  • Riccardo Fiorito
  • Giulio Zanella

In this paper we compare, in a fully consistent manner, micro and macro labor supply elasticities. The individual elasticity is obtained from the Panel Study of Income Dynamics (PSID). The aggregate, time-series, elasticity is estimated from the aggregation of individual units in the PSID for each year. We rely on exact aggregation of first-order conditions in a lifecycle labor supply model with home production. We find an individual elasticity of approximately 0.1, a low value that is in accordance with standard micro estimates. At the same time, we find an aggregate elasticity near 1. This result derives from a pure aggregation effect, with most of the difference due to the extensive margin. An implication of our result is that micro evidence is not always a reliable guide for calibrating aggregate macroeconomic parameters.

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Paper provided by Department of the Treasury, Ministry of the Economy and of Finance in its series Working Papers with number 4.

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Handle: RePEc:itt:wpaper:wp2008-4
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