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Towards a Micro-Founded Theory of Aggregate Labor Supply

  • Andres Erosa
  • Luisa Fuster
  • Gueorgui Kambourov

We build a heterogeneous life-cycle model which captures a large number of salient features of individual labor supply, by education, over the life cycle. The model provides an aggregation theory of individual labor supply, firmly grounded on micro evidence, and is used to study the aggregate labor supply responses to changes in the economic environment. We find that the aggregate labor supply elasticity to a transitory wage shock is 1.27, with the extensive margin accounting for 54% of the response. Furthermore, we also simulate the 1987 tax holiday in Iceland - a quasi-natural experiment - and find that the aggregate labor supply responses in the model are similar to those actually observed in Iceland.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-443.

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Date of creation: 23 Nov 2011
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Handle: RePEc:tor:tecipa:tecipa-443
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