Micro Vs Macro Labor Supply Elasticities

Micro Vs Macro Labor Supply Elasticities
Author: Henrik Kleven
Publisher:
Total Pages: 0
Release: 2023
Genre:
ISBN:

A key contention in economics is the discrepancy between micro and macro elasticities of labor supply with respect to marginal tax rates. We revisit this question, focusing on the role of dynamic returns to effort among top earners. We develop a new model of earnings responses to taxes in the presence of dynamic returns. In this model, the returns to effort are delayed and mediated by job switches such as promotions within firms or movements between firms. Short-run micro elasticities are attenuated relative to the true long-run macro elasticity. We proceed by providing two main empirical analyses using rich administrative data from Denmark. The first part presents descriptive evidence on earnings and hours-worked patterns over the lifecycle that confirm the predictions of the theoretical model. The second part presents quasi-experimental evidence on earnings responses to taxes using discrete job switches. The empirical strategy is informed by the theoretical model, according to which job switches can be used to (partially) identify the macro elasticity of labor supply. The evidence shows that, at the top of the distribution, macro elasticities are much larger than micro elasticities due to dynamic compensation effects.

Adjustment Costs, Firm Responses, and Micro Vs. Macro Labor Supply Elasticities

Adjustment Costs, Firm Responses, and Micro Vs. Macro Labor Supply Elasticities
Author:
Publisher:
Total Pages:
Release: 2009
Genre:
ISBN:

Abstract: We show that the effects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by firms. We develop a model in which firms post job offers characterized by an hours requirement and workers pay search costs to find jobs. In this model, micro elasticities are smaller than macro elasticities because they do not account for adjustment costs and firm responses. We present evidence supporting three predictions of the model by analyzing bunching at kinks using the universe of tax records in Denmark. First, larger kinks generate larger taxable income elasticities because they are more likely to overcome search costs. Second, kinks that apply to a larger group of workers generate larger elasticities because they induce changes in hours constraints. Third, firms tailor job offers to match workers' aggregate tax preferences in equilibrium. Calibrating our model to match these empirical findings, we obtain a lower bound on the intensive-margin macro elasticity of 0.34, an order of magnitude larger than the estimates obtained using standard microeconometric methods for wage earners in our data.

Reconciling micro and macro labor supply elasticities : a structural perspective

Reconciling micro and macro labor supply elasticities : a structural perspective
Author: Michael P. Keane
Publisher:
Total Pages: 113
Release: 2011
Genre: Economics
ISBN:

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.

Essays in Quantitative Macroeconomics

Essays in Quantitative Macroeconomics
Author: Minchul Yum
Publisher:
Total Pages: 105
Release: 2015
Genre:
ISBN:

In the next chapter, "Indivisible Labor with Endogenous Hours: Micro and Macro Labor Supply Elasticities," I study a long-standing discrepancy regarding the magnitude of the Frisch (intertemporal) labor supply elasticity. Empirical studies using individual level data typically uncover an estimated Frisch elasticity below 0.5. By contrast, in the quantitative macroeconomics literature on business cycles, the Frisch elasticity of the representative household (the macro labor supply elasticity) inferred from aggregate time series is often much larger, typically exceeding 2. I explore the quantitative relationship between the individual-level Frisch elasticity along the intensive hours-of-work margin and the macro-level Frisch elasticity in an equilibrium business cycle model. I extend the pure indivisible labor model of Rogerson (1988) and Hansen (1985), allowing firms to choose hours as well as employment. Although a firm would optimally select a fixed workweek given a nonlinear mapping from hours worked to labor services, it has an incentive to adjust both hours (the intensive margin) and employment (the extensive margin) over the business cycle when confronted with employment adjustment costs. A notable feature of the performance of my model is its ability to reproduce both the volatility and persistence of aggregate hours along the intensive margin while retaining the success of the pure indivisible labor models in terms of the large volatility of total hours. My quantitative analysis reveals that the macro labor supply elasticity is approximately twice as large as the individual labor supply elasticity, and thus accounts for a significant portion of the discrepancy between micro- versus macro- based measures of the elasticity of labor supply.

Does indivisible labor explain the difference between micro and macro elasticities? : A meta-analysis of extensive margin elasticities

Does indivisible labor explain the difference between micro and macro elasticities? : A meta-analysis of extensive margin elasticities
Author: Raj Chetty
Publisher:
Total Pages: 46
Release: 2011
Genre: Labor market
ISBN:

Abstract: Macroeconomic calibrations imply much larger labor supply elasticities than microeconometric studies. The most well known 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

Micro and Macro Elasticities in a Life Cycle Model with Taxes

Micro and Macro Elasticities in a Life Cycle Model with Taxes
Author: Richard Rogerson
Publisher:
Total Pages: 53
Release: 2010
Genre:
ISBN:

We build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work. We find that changes in taxes have large aggregate effects on hours of work. Moreover, we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers. In our model, micro and macro elasticities are effectively unrelated. Our model is also consistent with other cross-country patterns.

Micro and Macro Elasticities in a Life Cycle Model with Taxes

Micro and Macro Elasticities in a Life Cycle Model with Taxes
Author: Richard Donald Rogerson
Publisher:
Total Pages: 51
Release: 2007
Genre: Hours of labor
ISBN:

We build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work. We find that changes in taxes have large aggregate effects on hours of work. Moreover, we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers. In our model, micro and macro elasticities are effectively unrelated. Our model is also consistent with other cross-country patterns.