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Aggregation and Labor Supply Elasticities

  • Kneip, Alois

    ()

    (University of Bonn)

  • Merz, Monika

    ()

    (University of Vienna)

  • Storjohann, Lidia

    ()

    (University of Bonn)

The aggregate Frisch elasticity of labor supply has played a key role in business cycle analysis. This paper develops a statistical aggregation procedure which allows for worker heterogeneity in observables and unobservables and is applicable to an individual labor supply function with non-employment as a possible outcome. Performing a thought experiment in which all offered or paid wages are subject to an unanticipated temporary change, we can derive an analytical expression for the aggregate Frisch elasticity and illustrate its main components: (i) the intensive and extensive adjustment of hours worked, (ii) the extensive adjustment of wages, and (iii) the aggregate employment rate. We use individual-specific data from the German Socio-Economic Panel (SOEP) for males at working-age in order to quantify each component. This data base provides indirect evidence on non-employed workers' reservation wages. We use this variable in conjunction with a two-step conditional density estimator to retrieve the extensive adjustment of hours worked and wages paid. The intensive hours' adjustment follows from estimating a conventional panel data model of individual hours worked. Our estimated aggregate Frisch elasticity varies between .63 and .70. These results are sensitive to the assumed nature of wage changes.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7699.

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Length: 37 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7699
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  1. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S176-S215, June.
  2. Yongsung Chang & Sun-Bin Kim, 2003. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy," Macroeconomics 0307003, EconWPA.
  3. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  4. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  5. Nikita Céspedes Reynaga & Silvio Rendon, 2012. "The Frisch Elasticity in Labor Markets with high Job Turnover," Department of Economics Working Papers 12-13, Stony Brook University, Department of Economics.
  6. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  7. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2012. "Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Chapters, in: NBER Macroeconomics Annual 2012, Volume 27, pages 1-56 National Bureau of Economic Research, Inc.
  8. John T. Addison & Mário Centeno & Pedro Portugal, 2008. "Do Reservation Wages Really Decline? Some International Evidence on the Determinants of Reservation Wages," Working Papers w200802, Banco de Portugal, Economics and Research Department.
  9. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  10. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
  11. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  12. Qi Li & Jeffrey Scott Racine, 2006. "Nonparametric Econometrics: Theory and Practice," Economics Books, Princeton University Press, edition 1, volume 1, number 8355, April.
  13. Michal Paluch & Alois Kneip & Werner Hildenbrand, 2012. "Individual Versus Aggregate Income Elasticities For Heterogeneous Populations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(5), pages 847-869, 08.
  14. Hildenbrand, Werner & Kneip, Alois, 2005. "Aggregate behavior and microdata," Games and Economic Behavior, Elsevier, vol. 50(1), pages 3-27, January.
  15. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, December.
  16. 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.
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