We evaluate whether state-of-the-art macro models featuring indivisible labor are consistent with modern quasi-experimental micro evidence by synthesizing evidence on both the intensive and extensive margins. We find that micro estimates are consistent with macro estimates of the steady-state (Hicksian) elasticities relevant for cross-country comparisons on both the extensive and intensive margins. However, micro estimates of intertemporal substitution (Frisch) elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences. The key puzzle to be resolved is why micro and macro estimates of the Frisch extensive margin elasticity are so different.
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 …nd 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 ‡uctuations 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.Emails: chetty@fas.harvard.edu, guren@fas.harvard.edu, dsmanoli@econ.ucla.edu, a.weber@uni-mannheim.de. We would like to thank Daron Acemoglu, Orazio Attanasio, Mark Bils, Richard Blundell, Gregory Bruich, David Card, John Friedman, Bob Hall, Greg Mankiw, Jonathan Parker, Luigi Pistaferri, Richard Rogerson, Robert Shimer, Michael Woodford, Danny Yagan, Susan Yang, and the conference participants for helpful comments. We are extremely grateful to Peter Ganong and Jessica Laird for outstanding research assistance. Thanks to Richard Rogerson and Johanna Wallenius for sharing their simulation code.
Alexei Tchistyi, and Andreas Fuster for useful comments. Guren acknowledges research support from the National Science Foundation under grant #1623801 and from the Boston University Center for Finance, Law, and Policy. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
House prices exhibit substantially more momentum, positive autocorrelation in price changes over two to three years, than existing theories can explain. This paper introduces, empirically grounds, and quantitatively analyzes an amplification mechanism for momentum that can reconcile theory with the data. Sellers have an incentive not to set a unilaterally high or low list price because the demand curve they face is concave in relative price: increasing the list price of an above-averaged priced house rapidly reduces its probability of sale, while cutting the price of a below-average-priced home reduces revenue but only slightly improves its chance of selling. The resulting strategic complementarity amplifies frictions that generate sluggish price adjustment because sellers adjust their price gradually to stay near the average. I provide new micro-empirical evidence that the demand curve faced by sellers is concave and show using a search model calibrated to the micro evidence that concave demand amplifies momentum by a factor of two to three.
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