Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective

Posted: 7 Aug 2015

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

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Date Written: August 2015

Abstract

The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, including the optimal design of tax policies. Whereas the earlier literature often concluded that aggregate labor supply elasticities were small, we argue that recent work using structural models and micro data credibly supports large aggregate elasticities. We focus on three issues. First, earlier analyses abstracted from several key features, including human capital accumulation, that severely negatively biased estimates of a key preference parameter. 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 preference parameters for aggregate labor supply. Third, structural estimation of models that feature choice along the extensive margin using micro data typically finds large responses.

Suggested Citation

Keane, Michael P. and Rogerson, Richard, Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective (August 2015). Annual Review of Economics, Vol. 7, pp. 89-117, 2015, Available at SSRN: https://ssrn.com/abstract=2640079 or http://dx.doi.org/10.1146/annurev-economics-080614-115601

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)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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

Princeton University
Princeton, NJ 08544-1021
United States

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