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Wealth and Labor Supply Heterogeneity

Jose Mustre-del-Rio ()

Review of Economic Dynamics, 2015, vol. 18, issue 3, 619-634

Abstract: This paper examines the importance of ex-ante heterogeneity for understanding the relationship between wealth and labor supply when markets are incomplete. An infinite horizon model is estimated where labor supply is indivisible and households are ex-ante heterogeneous in their labor disutility and market skills. The model replicates key features of the distribution of employment, wages, and wealth observed in the data. Importantly, it reverses the prediction that employment falls with wealth, a pervasive feature of models without ex-ante heterogeneity. A byproduct of the model's empirical performance is that it implies labor supply responses to unanticipated wages changes (e.g., Frisch elasticities) that are a half to two-thirds of those recovered from models with only ex-post heterogeneity. (Copyright: Elsevier)

Keywords: Indivisible labor; Frisch elasticity; Incomplete markets; Structural estimal (search for similar items in EconPapers)
JEL-codes: C15 D31 E21 E24 J22 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.red.2014.09.002

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