Abstract
Macroeconomic calibrations imply much larger labor supply elasticities than microeconometric studies. One prominent 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 metaanalysis 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.
Highlights
Macroeconomic models of ‡uctuations in hours of work over the business cycle or across countries imply much larger labor supply elasticities than microeconometric estimates of hours elasticities
We evaluate whether macro models with indivisible labor are consistent with micro evidence on extensive margin responses by focusing on the Rogerson and Wallenius (2009) model
Indivisible labor is a central feature of many modern macroeconomic models that seek to explain aggregate ‡uctuations in labor utilization using labor supply
Summary
Macroeconomic models of ‡uctuations in hours of work over the business cycle or across countries imply much larger labor supply elasticities than microeconometric estimates of hours elasticities. If labor supply is indivisible, changes in tax or wage rates can generate large changes in aggregate hours by inducing extensive margin (participation) responses even if they have little e¤ect on hours conditional on employment In view of this argument, modern macro models are calibrated to match low micro estimates of intensive margin elasticities. The RW model performs better in matching the impacts of the EITC expansion on employment rates because it generates a Hicksian aggregate hours elasticity of approximately 0.7, resulting in steady-state impacts of taxes on labor supply that are closer to micro estimates. Prescott’s (2004) widely-cited cross-country dataset implies an aggregate hours (extensive plus intensive) Hicksian elasticity of 0.7, only slightly larger than micro estimates.3 These ...ndings indicate that labor supply responses to taxation could explain much of the variation in hours of work across countries with di¤erent tax systems.. Details of the simulation methods and meta-analysis are given in the appendix
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