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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, 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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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
Date of revision:
Handle: RePEc:nuf:econwp:1212
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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