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Aggregation and Labor Supply Elasticities

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  • Monika Merz

    (University of Vienna)

Abstract

This paper develops a statistical aggregation procedure for the Frisch elasticity of labor supply. It allows for worker heterogeneity in observables and unobservables and is applicable to an individual labor supply function with non-employment as a possible outcome. Subjecting all offered or paid wages to an unanticipated temporary change we analytically derive the aggregate Frisch wage-elasticity of labor supply and its main components. We quantify each component using individual-specific data from the German SOEP for males at working-age. This database provides indirect evidence on unemployed 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 change.

Suggested Citation

  • Monika Merz, 2014. "Aggregation and Labor Supply Elasticities," 2014 Meeting Papers 51, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:51
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