On the Aggregate Labor Supply

Abstract

The labor supply elasticity of an individual household and the aggregate labor supply elasticity of all households can differ significantly. If individual households not only decide on their hours worked, but also on whether to work or not, then the aggregate labor supply is determined by the willingness to substitute leisure over time as well as by the distribution of reservation wages. This article presents a model economy where earnings and wealth distributions are comparable to those in the microdata. The aggregate labor supply elasticity of such an economy is around one — greater than the typical micro estimates but smaller than those often assumed in the aggregate models.