Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective

118 Pages Posted: 21 Sep 2011 Last revised: 15 Feb 2021

See all articles by Michael P. Keane

Michael P. Keane

University of New South Wales

Richard Rogerson

Arizona State University (ASU) - Economics Department; National Bureau of Economic Research (NBER); Princeton University - Princeton School of Public and International Affairs

Multiple version iconThere are 2 versions of this paper

Date Written: September 2011

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.

Suggested Citation

Keane, Michael P. and Rogerson, Richard, Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective (September 2011). NBER Working Paper No. w17430, Available at SSRN: https://ssrn.com/abstract=1931202

Michael P. Keane (Contact Author)

University of New South Wales ( email )

Sydney, NSW
Australia

Richard Rogerson

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States
480-727-6671 (Phone)
602-965-0748 (Fax)

National Bureau of Economic Research (NBER)

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Princeton University - Princeton School of Public and International Affairs ( email )

Princeton University
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