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Accounting for Limited Commitment between Spouses When Estimating Labor-Supply Elasticities

Christian Bredemeier (), Jan Gravert () and Falko Juessen ()
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Christian Bredemeier: University of Wuppertal
Jan Gravert: University of Wuppertal
Falko Juessen: University of Wuppertal

No 14226, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The Frisch elasticity of labor supply can be estimated by regressing hours worked on the hourly wage rate, controlling for consumption of the individual worker. However, most household panel surveys contain consumption information only at the household level. We show that proxying individual consumption by household consumption biases estimated Frisch elasticities downward as limited commitment in the household induces individual consumption to behave differently from household consumption. We develop an improved estimation approach that eliminates this bias by exploiting information on the composition of household consumption to infer its distribution. Using PSID data, we estimate Frisch elasticities of about 0.7.

Keywords: labor-supply elasticity; limited commitment; intra-household decision making; couple households; consumption (search for similar items in EconPapers)
JEL-codes: D13 D15 E21 E24 J12 J22 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2021-03
New Economics Papers: this item is included in nep-lma and nep-mac
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