Frisch Elasticity Of Labor Supply Research Articles

The Norwegian tax holiday: Salience, labor supply responses, and frictions

AbstractAn emerging consensus is that the Frisch elasticity of labor supply is small. This may reflect a lack of salience, inelastic preferences, or prevalence of frictions. Studying survey data collected during a tax holiday in Norway, when earnings were untaxed during a transition between tax systems, I report three findings. First, 80 per cent of adults were aware of the tax holiday. Second, one fifth of adults responded by working more. Third, frictions in adjusting working hours or nonworking time appear to be the reason for a majority of nonresponses. The findings support the long‐held notion that labor supply choices are constrained.

Should Italy switch to a flat tax? An assessment based on a heterogeneous agents OLG model

We use a heterogeneous agents overlapping generations (OLG) model to quantitatively assess the impact of a reform in which a personal income tax with increasing marginal tax rates is replaced by a flat tax possibly complemented with a deduction. The value of the flat tax rate is set in order to balance the government budget and accordingly it increases with the value of the deduction. The model is calibrated and simulated for Italy. For low values of the deduction, aggregate labor supply increases, though this aggregate effect masks a completely different impact on the intensive and the extensive margin of labor supply: in particular, the activity rate is reduced by the introduction of a flat tax. As to inequality, it rises and this increase can be mitigated by using an higher value of the tax deduction, which however dampens down the positive effect of a flat tax on economic performance. Finally, the effect of a flat tax on social welfare crucially depends on the degree of inequality aversion embedded in the social welfare function and on the Frisch elasticity of labor supply.

Accounting for limited commitment between spouses when estimating labor-supply elasticities

The Frisch elasticity of labor supply can be estimated by regressing hours worked on the hourly wage rate, controlling for consumption of the individual worker. However, most household panel surveys contain consumption information only at the household level. We show that proxying individual consumption by household consumption biases estimated Frisch elasticities downward as limited commitment in the household induces individual consumption to behave differently from household consumption. We develop an improved estimation approach that eliminates this bias by exploiting information on the composition of household consumption to infer its distribution. Using PSID data, we estimate Frisch elasticities of about 0.65 for men and 0.8 for women.

THE ROLE OF THE FRISCH ELASTICITY ON HOUSEHOLDS' BEHAVIOR USING THE ENDOGENOUS DISCOUNT FACTOR MODEL

Decisions made by households and society with regard to the economy are heavily influenced by the role and significance of the variables of discount factor and Frisch elasticity of labor supply, on capital formation and consumption, which are among the most significant sources of interest rate, consumption basket, and household leisure. The existence of the endogenous discount factor and the Frisch elasticity of labor supply, which demonstrate the patience of society with regard to consumption and the choice of the household's work-and-leisure mix, respectively, point to significant changes in the household's decisions that may influence the portfolio of consumption and leisure. In order to develop a DSGE model utilizing data from the Iranian economy for the years 1998 to 2020, this article explores the effects of two variables, the endogenous discount factor and Frisch's elasticity, on macroeconomic variables and household performance. The findings show that in a model with an endogenous discount component and a lower value of Frisch's elasticity, the effect of the technological shock on consumption, output, and household income variables is positive and more significant, but it is negative on the debt variable. Thus, it can be said that in general, given that the household is sensitive to the type of discount factor and the extent of the labor supply's Frisch elasticity and that these two factors are crucial in helping the household decide which purchases and activities to include in its basket of leisure activities in order to change its expected utility, an increase in Frisch's elasticity coefficient along with the endogenous discount factor in the household will change its expected utility. Additionally, this road has evolved into the best one for household decisions, and in the best distribution of resources, households place a higher value on leisure and self-importance.

Impact of oil price uncertainty shocks on China’s macro-economy

This study investigates the impacts of crude oil price uncertainty shocks on China’s macro-economy using empirical and theoretical approaches. The vector auto-regression with stochastic volatility in mean (VAR-SVM) model reveals that increasing oil price uncertainty significantly depresses output and raises inflation. To fully understand the transmission channels of oil price uncertainty shocks, we develop a new Keynesian dynamic stochastic general equilibrium (DSGE) model that incorporates oil demand of household, intermediate sector, and transportation sector. Increasing income uncertainty induced by high oil price volatility leads to enhanced precautionary saving and thus a decrease in consumption, particularly durable consumption, of individual households. The precautionary working mechanism is plausible in the changes of households’ labor supply and firms’ production behaviors when oil price uncertainty increases. Furthermore, with decreasing forward-looking market demand, intermediate firms choose higher prices to avert risk, which results in higher inflation in China. To explore how to mitigate the negative effects of oil price uncertainty, we consider a number of possible factors. The results illustrate that increasing competitiveness among transportation firms, reducing oil intensity of intermediate sector, targeting headline inflation by the central bank, and decreasing the Frisch elasticity of labor supply are effective measures. Our findings also suggest that deregulation of refined oil price in China would not amplify negative effects of oil price uncertainty.

Identifying key aspects of household behavior in a representative agent framework

We study three key aspects of household behavior, i.e. the form of household preferences, the existence of interdependence between consumption and leisure choices, and the Frisch elasticity of labor supply. We find that an appropriate form of household preferences to use in non-recursive utility functions that incorporates the feature of interdependence is of the Cobb-Douglas type. By solving the household maximization problem, we derive a simultaneous system of two equations, a consumption equation and a labor supply equation, and estimate them with non-linear GMM. Regarding our estimates, the weight of consumption in the utility function, which is on the upper side of the relevant estimates in the literature, and the elasticity of intertemporal substitution seem to drive up the Frisch elasticity value. Our work highlights the importance of both the choice of the form of household preferences and the appropriate estimation procedure in the household maximization problem for obtaining reasonable values of the preference parameters, especially the Frisch elasticity. Our results may be useful for researchers working with the calibration of preference parameters in DSGE models.

Оценка межвременной эластичности замещения предложения труда для замужних женщин в России

This paper provides an econometric analysis of the labor supply function of married women in Russia based on data from RLMS HSE and methodology from the work (Heckman, MaCurdy, 1980), in which decisions about entering the labor market and the intensity of work are made within a dynamic optimization problem. It is shown that the husband’s leisure and the number of children living in the household have a negative effect on the woman’s hours worked. The estimate of the Frisch elasticity of labor supply with respect to wages lies near 0.16.

Accounting for Limited Commitment between Spouses When Estimating Labor-Supply Elasticities

The Frisch elasticity of labor supply can be estimated by regressing hours worked on the hourly wage rate, controlling for consumption of the individual worker. However, most household panel surveys contain consumption information only at the household level. We show that proxying individual consumption by household consumption biases estimated Frisch elasticities downward as limited commitment in the household induces individual consumption to behave differently from household consumption. We develop an improved estimation approach that eliminates this bias by exploiting information on the composition of household consumption to infer its distribution. Using PSID data, we estimate Frisch elasticities of about 0.7.

Reconciling Jaimovich–Rebello preferences, habit in consumption and labor supply

This note studies a form of a utility function of consumption with habit and leisure that (a) is compatible with long-run balanced growth, (b) hits a steady state observed target for hours worked and (c) is consistent with micro-econometric evidence for the inter-temporal elasticity of substitution and the Frisch elasticity of labor supply. Employing Jaimovich–Rebello preferences our results highlight a constraint on the preference parameter needed to target the steady-state Frisch elasticity. This leads to a lower bound for the latter that cannot be reconciled empirically with external habit, but the introduction of a labor wedge solves the problem. We also propose a dynamic Frisch inverse elasticity measure and examine its business cycle properties.

Land-price dynamics and macroeconomic fluctuations with nonseparable preferences

In this paper, we introduce a complementary relationship between consumption and labor hours by revising the household’s period utility function in Liu et al. (2013). The revision concomitantly allows for a finite Frisch elasticity of labor supply and a stronger consumption smoothing motive. We find that, in general, the estimation of Liu et al. (2013) is quite robust. In addition, the propagation mechanism of the credit constraint triggered by a housing demand shock still persists. However, the amplification effect of the credit constraint triggered by the housing demand shock on key macroeconomic variables is greatly muted. We also find that, except for land price fluctuations, the housing demand shock cannot act as the primary force to drive the fluctuations in other macroeconomic variables.

Labor Market Volatility in the RBC Search Model: A Look at Hagedorn and Manovskii’s Calibration

The standard Diamond–Mortensen–Pissarides (DMP) labor search model generates low volatility in labor market variables relative to average labor productivity, the so-called Shimer puzzle. Hagedorn and Manovskii (Am Econ Rev 98(4):1692–1706, 2008) demonstrate that recalibrating the standard DMP model to be consistent with the small vacancy posting cost and wage elasticity observed in the data can resolve the Shimer puzzle. They close by stating that their calibration strategy would also resolve the Shimer puzzle in the real business cycle (RBC) search framework. In this paper, we examine their claim and find that their strategy resolves the Shimer puzzle in the RBC search model for linear preferences (with risk neutrality and infinite Frisch elasticity of labor supply), but falls significantly short for more standard assumptions on the degree of relative risk aversion (of 1–2) and Frisch elasticity (of 2–3), in line with empirical estimates. While our conclusions are based on highly accurate solutions using the Generalized Stochastic Simulation Algorithm, we also assess the accuracy of a frequently used linearization method and its implications for the assessment of labor market volatility.

Optimal Taxation with Private Insurance

We derive a fully nonlinear optimal income tax schedule in the presence of a private insurance market. The optimal tax formula is expressed in terms of sufficient statistics?such as the Frisch elasticity of labor supply, social preferences, and hazard rates of the income distributions?as in the standard Mirrleesian taxation without private insurance (e.g., Saez (2001)). However, in the presence of a private market, the standard sufficient statistics are no longer sufficient. The optimal tax rate also depends on how private savings interact with public insurance? through substitution and crowding in/out. Based on our formula, we compute the optimal tax schedule using a quantitative general equilibrium model calibrated to reproduce the U.S. income distribution.

Estimates of the Frisch Elasticity of Labor Supply: A Review

This article assesses the literature on the responsiveness of the supply of labor in the case of a temporary change in after-tax compensation. In particular, it reviews the literature on the Frisch elasticity — the sum of the substitution elasticity and a measure of people’s willingness to trade work for consumption over time. The authors find that the estimates of the Frisch elasticity most relevant for fiscal policy analysis range from 0.27 to 0.53 (with a central estimate of 0.40). Using that range, they illustrate how different Frisch elasticities affect the responsiveness of labor supply to changes in fiscal policies. The illustration shows that estimation of the Frisch elasticity can have a significant influence on analyses of the economic effects of such policy changes.

Are taxes a good predictor of time use patterns? Examining the role of some key elasticities

A home-production model is used to explain the allocation of time between leisure, work and home production. We show that differences in taxes alone explain to a great extent the time use patterns in a set of OECD countries once several key elasticities — the elasticity of substitution between market- and home-produced goods, the Frisch elasticity of labor supply, and the relative risk aversion — are set according to empirical evidence. We also show that a realistic calibration of these key elasticities results to be more important than introducing government expenditures substitutive for home-produced goods in order to bring the model's time use predictions in line with data. This is true even for Scandinavian countries, which had posed a challenge in previous studies.

Externalities, endogenous productivity, and poverty traps

We present a version of the neoclassical model with an endogenous industry structure. We construct a distribution of firms׳ productivity that implies multiple steady-state equilibria even with an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and total factor productivity. The distributions of employment by firm size across steady states are consistent with the empirical observation that poor countries have a higher fraction of employment in small firms than rich countries. Differences in output and total factor productivity across steady states are increasing in the degree of returns to scale, the capital share, and the Frisch elasticity of labor supply.

Technical Note on "Assessing Bayesian Model Comparison in Small Samples"

This technical note is developed as a companion to the paper ‘Assessing Bayesian Model Comparison in Small Samples’ (Globalization and Monetary Policy Institute working paper no. 189). Taking the workhorse open-economy model of Martinez-Garcia and Wynne (2010) with nominal rigidities under monopolistic competition as our Data-Generating Process, we investigate with simulated data how Bayesian model comparison based on posterior odds performs when the model becomes arbitrarily close to a closed-economy and/or an economy with flexible prices and perfect competition. This technical note elaborates on three key technical points relevant for Martinez-Garcia and Wynne (2014). First, we explain the building blocks of the open-economy model of Martinez-Garcia and Wynne (2010). We also derive the equilibrium conditions (and the steady state) under producer-currency pricing. Second, we discuss the log-linearization of the equilibrium conditions around the deterministic steady state and our benchmark parameterization. The linear rational expectations model that results from the log-linearization is used to simulate the data under our benchmark parameterization. These simulated data is used in Martinez-Garcia and Wynne (2014) to conduct their Bayesian model comparison exercises. Third, we describe the Bayesian estimation and model comparison techniques with special emphasis on the questions of: (a) how we elicit priors on the models themselves and the parameters of a given model, and (b) how we compute posterior model probabilities. Simultaneously, commentary is provided whenever appropriate to clarify the economic significance of the assumptions embedded in our workhorse open-economy model. JEL codes: C11, C13, F41 * Enrique Martinez-Garcia, Research Department, Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, TX 75201. 214-922-5262. enrique.martinez-garcia@dal.frb.org. Mark A. Wynne, Research Department, Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, TX 75201. 214-922-5159. Mark.A.Wynne@dal.frgb.org. We would like to thank Nathan Balke, Maria Teresa Martinez-Garcia and Valentin Martinez Mira for helpful suggestions. Diego Vilan was a co-author in a related project and contributed to the early stages of development of this paper. We gratefully acknowledge the outstanding research assistance provided by Valerie Grossman, the help of Kuhu Parasrampuria, and the Federal Reserve Bank of Dallas support. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System. 1 New Open Economy Macro (NOEM) Model The NOEM model that we use in Martinez-Garcia and Wynne (2014) is a variant of the workhorse model of Clarida et al. (2002) introduced in Martinez-Garcia and Wynne (2010). This is a symmetric two-country model with a continuum of unit mass of households and consumption varieties, equally divided between the Home country and the Foreign country. We employ this framework because it integrates an open-economy New Keynesian Phillips curve that ‡eshes out the content of the global slack hypothesis into a stylized dynamic stochastic general equilibrium model, but also because it nests model speci cations without nominal rigidities (monetary neutrality) and/or under autarky (closed-economies) as limiting cases. We abstract from a number of relevant modelling features like capital and investment (see, e.g., Chari et al. (2002), and Martinez-Garcia and Sondergaard (2008)), durable goods (see, e.g., Engel and Wang (2011)), and monopolistically competitive suppliers of labor (see, e.g., Clarida et al. (2002)) in order to assess Bayesian model comparison solely in the presence of e¤ects from increased trade openness and monetary non-neutrality induced by nominal rigidities. Households. The lifetime utility for the representative household in the Home country is additively separable in consumption, Ct, and labor, Lt, i.e., X+1 =0 Et ln (Ct+ ) 1 1 + ' (Lt+ ) 1+' ; (1) and similarly the lifetime utility for the representative household in the Foreign country is additively separable in consumption, C t , and labor, L t , i.e., X+1 =0 Et ln C t+ 1 1 + ' L t+ 1+' ; (2) where 0 0 is the inverse of the Frisch elasticity of labor supply. The inverse of the intertemporal elasticity of substitution is equal to 1 under the assumption of log-utility on consumption. The Home household maximizes its lifetime utility subject to the sequence of budget constraints,

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Aggregation and Labor Supply Elasticities

The aggregate Frisch elasticity of labor supply has played a key role in business cycle analysis. This paper develops a statistical aggregation procedure which allows for worker heterogeneity in observables and unobservables and is applicable to an individual labor supply function with non-employment as a possible outcome. Performing a thought experiment in which all offered or paid wages are subject to an unanticipated temporary change, we can derive an analytical expression for the aggregate Frisch elasticity and illustrate its main components: (i) the intensive and extensive adjustment of hours worked, (ii) the extensive adjustment of wages, and (iii) the aggregate employment rate. We use individual-specific data from the German Socio-Economic Panel (SOEP) for males at working-age in order to quantify each component. This data base provides indirect evidence on non-employed workers' reservation wages. We use this variable in conjunction with a two-step conditional density estimator to retrieve the extensive adjustment of hours worked and wages paid. The intensive hours' adjustment follows from estimating a conventional panel data model of individual hours worked. Our estimated aggregate Frisch elasticity varies between .63 and .70. These results are sensitive to the assumed nature of wage changes.

The Prospect of Higher Taxes and Weak Job Growth During the Recovery from The Great Recession: Macro versus Micro Frisch Elasticities

Labor input growth during the recovery of the U.S. economy from the Great Recession of 2008–2009 has been considerably lower than expected. A number of scholars have attributed this disappointing outcome to the prospect of higher taxes, induced by the fiscal imbalances that will materialize in coming decades under current policies. The paper examines this fiscal sentiment hypothesis from the perspective of a neoclassical growth model, under the assumption that the typical household's preferences can be represented by a utility function that implies a constant intertemporal (Frisch) elasticity of substitution for aggregate hours of work, and for a hypothetical tax regime that incorporates the Congressional Budget Office' s assessment of the U.S. fiscal situation. The paper finds that the empirical relevance of the fiscal sentiment hypothesis depends on whether this Frisch elasticity of labor supply is closer to the relatively large values needed to account for the observed volatility of labor input at business cycle frequencies, than to the lower values estimated by microeconomic and quasi-experimental studies.

Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities

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.