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Towards a Micro-Founded Theory of Aggregate Labor Supply

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  • Andres Erosa
  • Luisa Fuster
  • Gueorgui Kambourov

Abstract

We build a heterogeneous life-cycle model which captures a large number of salient features of individual labor supply over the life cycle, by education, both along the intensive and extensive margins. The model provides an aggregation theory of individual labor supply, firmly grounded on individual-level 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 1.75, with the extensive margin accounting for 62% of the response. Furthermore, we find that the aggregate labor supply elasticity to a permanent-compensated wage change is 0.44.

Suggested Citation

  • Andres Erosa & Luisa Fuster & Gueorgui Kambourov, 2014. "Towards a Micro-Founded Theory of Aggregate Labor Supply," Working Papers tecipa-516, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-516
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    References listed on IDEAS

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    Cited by:

    1. Yurdagul, Emircan, 2017. "Production complementarities and flexibility in a model of entrepreneurship," Journal of Monetary Economics, Elsevier, pages 36-51.
    2. repec:asb:wpaper:201216 is not listed on IDEAS
    3. Erosa, Andrés & Fuster, Luisa & Kambourov, Gueorgui, 2012. "Labor supply and government programs: A cross-country analysis," Journal of Monetary Economics, Elsevier, pages 84-107.
    4. Rupert, Peter & Zanella, Giulio, 2015. "Revisiting wage, earnings, and hours profiles," Journal of Monetary Economics, Elsevier, pages 114-130.
    5. William Peterman, 2012. "The Effect of Endogenous Human Capital Accumulation on Optimal Taxation," 2012 Meeting Papers 204, Society for Economic Dynamics.
    6. Kitao, Sagiri, 2015. "Fiscal cost of demographic transition in Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 54(C), pages 37-58.
    7. Valerie K. Bostwick & Douglas G. Steigerwald, 2014. "Obtaining critical values for test of Markov regime switching," Stata Journal, StataCorp LP, pages 481-498.
    8. William Peterman, 2016. "The effect of endogenous human capital accumulation on optimal taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 46-71, July.
    9. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, August.
    10. Rupert, Peter & Zanella, Giulio, 2015. "Revisiting wage, earnings, and hours profiles," Journal of Monetary Economics, Elsevier, pages 114-130.
    11. Capatina, Elena, 2015. "Life-cycle effects of health risk," Journal of Monetary Economics, Elsevier, pages 67-88.
    12. repec:eee:hapoch:v1_457 is not listed on IDEAS
    13. Klein, Paul & Telyukova, Irina A., 2013. "Measuring high-frequency income risk from low-frequency data," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 535-542.
    14. William B. Peterman, 2012. "An extensive look at taxes: how does endogenous retirement affect optimal taxation?," Finance and Economics Discussion Series 2012-28, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Aggregate labor supply; intensive margin; extensive margin; life cycle; fixed cost of work; non-linear earnings; precautionary savings; preference heterogeneity;

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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