Aggregation and Labor Supply Elasticities

Do Reservation Wages Really Decline? Some International Evidence on the Determinants of Reservation Wages

Alois Kneip, Monika Merz and Lidia Storjohann

Journal of the European Economic Association, 2020, vol. 18, issue 5, 2315-2358

Abstract: We outline a formal procedure for deriving the aggregate wage-elasticity of labor supply for a large group of heterogeneous workers who operate under uncertainty. Heterogeneity relates to preferences, income, wealth, and the labor market status. If each worker faces a small, possibly nonuniform wage change, the implied aggregate wage-elasticity can be represented by a closed-form expression. This expression captures an extensive and an intensive margin. We empirically implement the procedure for a dynamic model of individual labor supply and a micro panel of men in Germany from 2000 to 2013. We find that the extensive margin is less time-varying than the intensive margin, and that its size varies with the measure of reservation wages. Self-reported reservation wages render a larger extensive margin than other proxies. The estimated aggregate Frisch wage-elasticity varies between 0.85 and 1.06, and the two margins matter equally strongly for the unbalanced sample.

Date: 2020
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Related works:
Working Paper: Aggregation and Labor Supply Elasticities (2013)
Working Paper: Aggregation and Labor Supply Elasticities (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:18:y:2020:i:5:p:2315-2358.

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