The Labor Supply Curve at the Extensive Margin: A Reservation Wedge Approach

Benjamin Schoefer and Preston Mui
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Preston Mui: UC-Berkeley

No 1560, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We present a theoretically robust and empirically tractable representation of the aggregate labor supply curve at the extensive (employment) margin. We define household- level reservation (labor) wedge, the tax-like gap between an individual’s potential earnings and her marginal rate of substitution. This wedge collapses rich multi-dimensional heterogeneity in, e.g., tastes for leisure, marginal utilities of consumption, hours constraints, and worker-specific wages, and accommodates frictional environments. The cumulative distribution function of these wedges is the aggregate labor supply curve. In a meta study, the reservation wedge serves as a bridge between diverse models where aggregate extensive-margin labor supply has remained dicult to characterize. We construct empirical wedges as worker’s reservation-to-actual wage ratio using survey data for France, Germany, the United Kingdom, and the United States. Linking the survey to administrative social security records, we quantify the allocative consequences of this measure of desired labor supply for realized employment outcomes.

Date: 2019
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