Robust Inference for the Frisch Labor Supply Elasticity

Michael Keane and Timothy Neal

Journal of Labor Economics, 2025, vol. 43, issue S1, S179 - S219

Abstract: Many studies estimate the Frisch elasticity via two-stage least squares (2SLS) regression of hours changes on wage changes. However, 2SLS suffers from a power asymmetry problem that makes estimates far away from ordinary least squares appear spuriously imprecise. Hence, it is difficult for t-tests to detect a positive Frisch elasticity. We illustrate the problem using NLSY97 data. We estimate an elasticity of 0.60 for young men, but the t-test indicates that it is insignificant. The Anderson-Rubin (AR) test, which avoids the power asymmetry problem, indicates that it is highly significant. We argue that the AR test should be widely adopted in lieu of the t-test in instrumental variable applications.

Date: 2025
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Related works:
Working Paper: Robust Inference for the Frisch Labor Supply Elasticity (2023)
Working Paper: Robust Inference for the Frisch Labor Supply Elasticity (2022)
Working Paper: Robust Inference for the Frisch Labor Supply Elasticity (2022)
Working Paper: Robust Inference for the Frisch Labor Supply Elasticity (2021)
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