Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective

Michael Keane, Richard Rogerson

Research output: Contribution to journalArticlepeer-review

30 Scopus citations

Abstract

The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, including the optimal design of tax policies. Whereas the earlier literature often concluded that aggregate labor supply elasticities were small, we argue that recent work using structural models and micro data credibly supports large aggregate elasticities. We focus on three issues. First, earlier analyses abstracted from several key features, including human capital accumulation, that severely negatively biased estimates of a key preference parameter. Second, failure to understand that aggregate labor supply adjustments can occur along both the hours per worker and employment margins has led economists to misinterpret the implications of preference parameters for aggregate labor supply. Third, structural estimation of models that feature choice along the extensive margin using micro data typically finds large responses.

Original languageEnglish (US)
Pages (from-to)89-117
Number of pages29
JournalAnnual Review of Economics
Volume7
Issue number1
DOIs
StatePublished - Aug 2 2015

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • employment
  • human capital
  • life cycle
  • taxes

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