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Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective

  • Michael P. Keane
  • Richard Rogerson

The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, especially the optimal design of tax policies. This paper surveys recent work that uses structural models and micro data to evaluate the size of this response. Whereas the earlier literature on this issue often concluded that aggregate labor supply elasticities were small, recent work has identified three key reasons that the aggregate elasticity may be quite large. First, earlier estimates abstracted from several key features, including human capital accumulation, leading to estimates that are dramatically negatively biased. Second, failure to understand that aggregate labor supply adjustments can occur along both the hours per worker and employment margins has led economists to misinterpret the implications of previous estimates for aggregate labor supply. Third, structural estimation of responses along the extensive (i.e., employment) margin are typically quite large.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17430.

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Date of creation: Sep 2011
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Publication status: published as Micro and Macro Labor Supply Elasticities: A Reassessment of Conventional Wisdom June 2012 By: Richard Rogerson With Michael Keane; Journal of Economic Literature, Vol. 50, No. 2
Handle: RePEc:nbr:nberwo:17430
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