Returns to Experience and the Elasticity of Labor Supply

Abstract

When wages increase with work experience, estimation of standard labor supply models that assume exogenous wage formation suffers from omitted variable bias and produces downward-biased estimates of the intertemporal elasticity of substitution (IES). We test this theory in a novel way. Using a large data set of the daily labor supply decisions of Florida fishermen, we identify a sample of highly-experienced, near-retirement fishermen, for whom the returns to experience are negligible and the standard model is a close approximation. Using this sample, we estimate an IES of 2.7, more than twice estimates that ignore the role of learning-by-doing.

Keywords: intertemporal elasticity of substitution, human capital, learning by doing, Frisch, extensive margin, endogenous

JEL Classification: D91, E24, J22, J24, J31