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Aggregation and Labor Supply Elasticities

  • Monika Merz

    (University of Vienna)

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    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.

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    File URL: https://www.economicdynamics.org/meetpapers/2014/paper_51.pdf
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    Paper provided by Society for Economic Dynamics in its series 2014 Meeting Papers with number 51.

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    Date of creation: 2014
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    Handle: RePEc:red:sed014:51
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    Web page: http://www.EconomicDynamics.org/society.htm
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