Reservation Raises: The Aggregate Labor Supply Curve at the Extensive Margin

Benjamin Schoefer and Preston Mui

No 14209, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We measure extensive-margin labor supply (employment) preferences in two representative surveys of the U.S. and German populations. We elicit reservation raises: the percent wage change that renders a given individual indifferent between employment and nonemployment. It is equal to her reservation wage divided by her actual, or potential, wage. The reservation raise distribution is the nonparametric aggregate labor supply curve. Locally, the curve exhibits large short-run elasticities above 3, consistent with business cycle evidence. For larger upward shifts, arc elasticities shrink towards 0.5, consistent with quasi-experimental evidence from tax holidays. Existing models fail to match this nonconstant, asymmetric curve.

Date: 2019-12
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Working Paper: Reservation Raises: The Aggregate Labor Supply Curve at the Extensive Margin (2021)
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