Robust Inference for the Frisch Labor Supply Elasticity

Michael P. Keane and Timothy Neal

No 81, Opportunity and Inclusive Growth Institute Working Papers from Federal Reserve Bank of Minneapolis

Abstract: The Frisch labor supply elasticity plays a key role in many economic policy debates, but its magnitude remains controversial. Many studies estimate the Frisch elasticity using 2SLS regressions of hours changes on wage changes. But a little appreciated power asymmetry property of 2SLS causes estimates to appear spuriously imprecise when they are shifted away from the OLS bias. This makes it difficult for a 2SLS t-test to detect a true positive Frisch elasticity. We illustrate this problem in an application to NLSY97 data. We obtain an estimate of 0.60 for young men, but the t-test indicates it is insignificant. In contrast, the Anderson-Rubin (AR) test – which avoids the power asymmetry problem – implies the estimate is highly significant. The same power asymmetry issue that afflicts the t-test here will arise in many IV applications. Thus, we argue the AR test should be widely adopted in lieu of the t-test.

Keywords: continuously updated GMM; Labor supply; 2SLS; LIML; weak instruments; Frisch elasticity; Anderson-Rubin test (search for similar items in EconPapers)
JEL-codes: C12 C26 D15 J22 (search for similar items in EconPapers)
Date: 2023-11-17
New Economics Papers: this item is included in nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.minneapolisfed.org/institute/working-papers-institute/iwp81.pdf (application/pdf)

Related works:
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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmoi:97510

DOI: 10.21034/iwp.81

Access Statistics for this paper

More papers in Opportunity and Inclusive Growth Institute Working Papers from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().