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

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 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.

Reconciling Micro and Macro Estimates of the Frisch Labor Supply Elasticity

“…The authors use a meta‐analysis of separate quasi‐experimental studies to independently determine the parts of the macro Frisch elasticity that come from the intensive and extensive margins. Overall, Chetty et al () estimate lower values than this study for both pieces of the macro Frisch elasticity. Since Chetty et al () use a number of studies to form their estimates, there are a number of differences between the studies used to inform their estimate and the estimation strategy in this paper (see Section for detailed discussion).…”

“…Chetty et al () also examine whether calibration values are consistent with micro evidence on the response of hours to changes in wages. The study uses a meta‐analysis approach that relies on estimates of the macro Frisch elasticity from previous studies.…”

“…In this section, I provide some context for the results from this paper. In particular, I begin by discussing the potential reasons for the different estimates in Fiorito and Zanella () and Chetty et al (). Next, I test the sensitivity of the results in this paper with regard to weak instruments and also the ages of individuals included in the sample.…”

“…There are a few exceptions, other than Fiorito and Zanella (), that examine both restrictions in tandem. These other studies include Mulligan (), Faberman (), and Chetty et al (). In contrast to this paper, which estimates that the macro Frisch elasticity is in the range of typical calibration values, these other studies estimate that the macro Frisch elasticity is lower, between 0.6 and 1.6.…”

“…Chetty et al () also use a different approach to estimate the macro Frisch elasticity. The authors use a meta‐analysis of separate quasi‐experimental studies to independently determine the parts of the macro Frisch elasticity that come from the intensive and extensive margins.…”