Working Paper: NBER ID: w16729
Authors: Raj Chetty; Adam Guren; Dayanand S. Manoli; Andrea Weber
Abstract: Macroeconomic calibrations imply much larger labor supply elasticities than microeconometric studies. One prominent explanation for this divergence is that indivisible labor generates extensive margin responses that are not captured in micro studies of hours choices. We evaluate whether existing calibrations of macro models are consistent with micro evidence on extensive margin responses using two approaches. First, we use a standard calibrated macro model to simulate the impacts of tax policy changes on labor supply. Second, we present a meta-analysis of quasi-experimental estimates of extensive margin elasticities. We find that micro estimates are consistent with macro evidence on the steady-state (Hicksian) elasticities relevant for cross-country comparisons. However, micro estimates of extensive-margin elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours. Hence, indivisible labor supply does not explain the large gap between micro and macro estimates of intertemporal substitution (Frisch) elasticities. Our synthesis of the micro evidence points to Hicksian elasticities of 0.3 on the intensive and 0.25 on the extensive margin and Frisch elasticities of 0.5 on the intensive and 0.25 on the extensive margin.
Keywords: Labor Supply Elasticities; Indivisible Labor; Micro vs Macro; Extensive Margin
JEL Codes: E24; E32; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| micro estimates of extensive margin elasticities (D22) | business cycle fluctuations in aggregate hours (E32) |
| Hicksian elasticities (D11) | extensive margin elasticities (H31) |
| Frisch elasticities (D11) | extensive margin elasticities (H31) |
| extensive margin responses (C24) | fluctuations in employment rates (J63) |
| macro models calibrated with extensive margin elasticities (C51) | discrepancies with micro evidence (D00) |
| tax policy changes (H29) | labor supply (J20) |