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Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective

  • Michael P. Keane

    ()

    (Nuffield College, University of Oxford)

  • Richard Rogerson

    (Princeton University, USA)

The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, including the optimal design of tax policies. Whereas the earlier literature often concluded that aggregate labor supply elasticities were small, we argue that recent work using structural models and micro data credibly supports large aggregate elasticities. We focus on three issues. First, earlier analyses abstracted from several key features, including human capital accumulation, that severely negatively biased estimates of a key preference parameter. 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 preference parameters for aggregate labor supply. Third, structural estimation of models that feature choice along the extensive margin using micro data typically finds large responses.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2012/KR_final_oxford.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2012-W12.

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Length: 117 pages
Date of creation: 31 Oct 2012
Handle: RePEc:nuf:econwp:1212
Contact details of provider: Web page: https://www.nuffield.ox.ac.uk/economics/

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