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Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective

Michael Keane () and Richard Rogerson ()

Annual Review of Economics, 2015, vol. 7, issue 1, 89-117

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.

Keywords: life cycle; taxes; employment; human capital (search for similar items in EconPapers)
JEL-codes: D91 E24 J22 (search for similar items in EconPapers)
Date: 2015
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Related works:
Working Paper: Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective (2012) Downloads
Working Paper: Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective (2011) Downloads
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