Working Paper: NBER ID: w17430
Authors: Michael P. Keane; Richard Rogerson
Abstract: The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, especially the optimal design of tax policies. This paper surveys recent work that uses structural models and micro data to evaluate the size of this response. Whereas the earlier literature on this issue often concluded that aggregate labor supply elasticities were small, recent work has identified three key reasons that the aggregate elasticity may be quite large. First, earlier estimates abstracted from several key features, including human capital accumulation, leading to estimates that are dramatically negatively biased. Second, failure to understand that aggregate labor supply adjustments can occur along both the hours per worker and employment margins has led economists to misinterpret the implications of previous estimates for aggregate labor supply. Third, structural estimation of responses along the extensive (i.e., employment) margin are typically quite large.
Keywords: No keywords provided
JEL Codes: E24; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Aggregate labor supply response (J20) | occurs along both hours per worker and employment margins (J29) |
| Micro data (C81) | show small labor supply elasticities among males (J49) |
| Macroeconomic models (E19) | imply larger elasticities necessary to explain labor market fluctuations (J29) |
| Microeconomic models (E19) | fail to account for human capital and other factors (D29) |
| Omission of human capital accumulation (E22) | downward bias in aggregate labor supply elasticity estimates (J79) |
| Structural estimation of extensive margin responses (C51) | larger elasticity estimates (C51) |
| Structural modeling incorporating human capital and extensive margin adjustments (J24) | leads to larger aggregate elasticity estimates (C51) |