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 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.

Nonparametric Evidence on the Effects of Financial Incentives on Retirement Decisions

“…Figure 14 illustrates the retirement frequencies by age under the baseline and hypothetical policy regimes and with the different elasticity values. 25 This relsut highlights that, 23 See Chetty et al (2012) for a survey of previous estimates in the literature. 24 The hypothetical policy change is not constructed to be a revenue-neutral reform.…”

“…First, as pointed out by Chetty et al (2012), responses to such a hypothetical policy will depend on the density of individuals who are at the margin of retiring (versus continuing to work). In the empirical analysis of the responses to the severance pay rule, the density appears relatively uniform across the whole range of tenure levels.…”

“…Empirically, estimation of such extensive margin intertemporal elasticities has proven difficult because of a lack of credible research designs or limited data (Chetty et al 2012). From the theoretical perspective, Attanasio (2012) argues that, in general, it is not realistic to have a single labor supply parameter to capture structural features of extensive margin elasticities, because of heterogeneity, time variation, and state dependence.…”

Political preferences for redistribution in Sweden

“…Chetty et al (2012) survey recent microeconometric studies that have estimated extensive-margin elasticities and find that an extensive margin elasticity of 0.25 is most closely consistent with the evidence. One should keep in mind, however, that the participation elasticity is not a deep structural parameter, but depends on the number of workers who are, at the margin, indifferent between working and not working.…”

Short- and long-term participation tax rates and their impact on labor supply

“…Single women, particularly lone mothers, and low-educated men reveal higher extensive margin elasticities than married women and high-skilled men (see Chetty et al, 2013;Meghir and Phillips, 2010, for an overview).…”