The Marginal Worker and the Aggregate Elasticity of Labor Supply
This paper attempts to reconcile the high apparent aggregate elasticity of labor supply with small micro estimates. We elaborate on Rogerson's seminal work (1988) and show that his results rely neither on complete markets nor on lotteries, but rather on the indivisibility and the fact that the workforce is homogeneous at the margin. We derive two robust implications of a setup with indivisible labor but without lotteries, using either a complete markets model or an incomplete markets model (solved numerically). (1) Agents with reservation wages far above or below the market wage are less responsive (in labor supply) to the business cycle than agents whose reservation wage is around the market wage. (2) The aggregate elasticity is given by the marginal homogeneity of the workforce. We test implication (1) using the PSID and find support for it. We build an incomplete markets model and calibrate it to cross-sectional moments of hours worked. We show that it can reproduce the feature (1). This allows us to use the model to evaluate the importance of feature (2), i.e. to estimate the aggregate elasticity of labor supply implied by the marginal homogeneity.
|Date of creation:||03 Dec 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Yongsung Chang & Sun-Bin Kim, 2006.
"From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, 02.
- Yongsung Chang & Sun-Bin Kim, 2003. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy," Macroeconomics 0307003, EconWPA.
- Yongsung Chang & Sun-Bin Kim, 2003. "From individual to aggregate labor supply : a quantitative analysis based on a heterogeneous agent macroeconomy," Working Paper 03-05, Federal Reserve Bank of Richmond.
- S. Rao Aiyagari, 1994.
"Uninsured Idiosyncratic Risk and Aggregate Saving,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 109(3), pages 659-684.
- Casey B. Mulligan, 2001.
"Aggregate Implications of Indivisible Labor,"
NBER Working Papers
8159, National Bureau of Economic Research, Inc.
- Hansen, Gary D., 1985.
"Indivisible labor and the business cycle,"
Journal of Monetary Economics,
Elsevier, vol. 16(3), pages 309-327, November.
- Robert Shimer, 2012.
"Reassessing the Ins and Outs of Unemployment,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
- Rogerson, Richard, 1988.
"Indivisible labor, lotteries and equilibrium,"
Journal of Monetary Economics,
Elsevier, vol. 21(1), pages 3-16, January.
- Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, vol. 83(2), pages 116-21, May.
- David K. Levine & William R. Zame, 2002.
"Does Market Incompleteness Matter?,"
Econometric Society, vol. 70(5), pages 1805-1839, September.
When requesting a correction, please mention this item's handle: RePEc:red:sed006:509. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.