Working Paper: CEPR ID: DP16032
Authors: Tomas Havranek; Roman Horvath; Ali Elminejad
Abstract: The intertemporal substitution (Frisch) elasticity of labor supply governs the predictions of real business cycle models and models of taxation. We show that, for the extensive margin elasticity, two biases conspire to systematically produce large positive estimates when the elasticity is in fact zero. Among 723 estimates in 36 studies, the mean reported elasticity is 0.5. One half of that number is due to publication bias: larger estimates are reported preferentially. The other half is due to identification bias: studies with less exogenous time variation in wages report larger elasticities. Net of the biases, the literature implies a zero mean elasticity and, with 95% confidence, is inconsistent with calibrations above 0.25. To derive these results we collect 23 variables that reflect the context in which the elasticity was obtained, use nonlinear techniques to correct for publication bias, and employ Bayesian and frequentist model averaging to address model uncertainty.
Keywords: Frisch Elasticity; Labor Supply; Extensive Margin; Meta-Analysis; Publication Bias; Bayesian Model Averaging
JEL Codes: C83; E24; J21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Publication bias (C46) | Reported elasticity (D12) |
| Identification bias (D91) | Reported elasticity (D12) |
| Reported elasticity (D12) | Mean elasticity close to zero after correction (C51) |
| Mean elasticity among 723 estimates (C51) | Misleading due to biases (D91) |
| Mean elasticity for women and workers near retirement (J26) | Heterogeneity in responses (C21) |
| Publication bias exaggerates mean elasticity approximately twofold (C51) | Mean elasticity (D12) |
| Identification bias (D91) | Larger elasticities reported (H30) |