Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities

53 Pages Posted: 31 Jan 2011 Last revised: 23 Jul 2012

See all articles by Raj Chetty

Raj Chetty

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Adam M. Guren

Boston University - Department of Economics

Dayanand Manoli

University of California, Los Angeles (UCLA) - Department of Economics

Andrea Weber

Vienna University of Economics and Business; Austrian Institute of Economic Research (WIFO); Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2011

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.

Suggested Citation

Chetty, Nadarajan (Raj) and Guren, Adam M. and Manoli, Dayanand and Weber, Andrea Michaela, Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities (January 2011). NBER Working Paper No. w16729. Available at SSRN: https://ssrn.com/abstract=1749889

Nadarajan (Raj) Chetty (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Adam M. Guren

Boston University - Department of Economics ( email )

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Dayanand Manoli

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Andrea Michaela Weber

Vienna University of Economics and Business ( email )

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Austrian Institute of Economic Research (WIFO) ( email )

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Institute for the Study of Labor (IZA)

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Bonn, D-53072
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CESifo (Center for Economic Studies and Ifo Institute)

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