From Individual to Aggregate Labor Supply: A Quantitative Analysis based on a Heterogeneous-Agent Macroeconomy

Abstract

We investigate the mapping from individual to aggregate labor supply using a general equilibrium heterogeneous-agent model with an incomplete market. The nature of heterogeneity among workers is calibrated using wage data from the PSID. The gross worker flows between employment and nonemployment and the cross-sectional earnings and wealth distributions in our model are comparable to those in the micro data. We find that the aggregate labor supply elasticity of such an economy is around 1, bigger than micro estimates but smaller than those often assumed in aggregate models.

The contractionary effects of tax shocks on productivity: An empirical and theoretical analysis

“…23 To have a larger labor supply elasticity in macro models than what micro estimates suggest is normal in the literature. See Chang and Kim (2006). 24 The empirical impulse responses are the responses of various variables to total tax shocks estimated from the VAR and presented earlier.…”

Net exports, consumption volatility and international business cycle models

“…In this environment, aggregate preferences are actually linear in leisure. More recently, Chang andKim (2006), andGourio andNoual (2007), estimate structural models by first specifying explicitly the aggregation mechanism and obtain the same dichotomy between micro and macro elasticities. The range of estimates they obtain for the Frisch elasticity of labor supply is between 0.4 and 0.5 at the individual level, between 1 and 1.5 at the aggregate level.…”

Methods versus substance: Measuring the effects of technology shocks

“…Hansen (1985) used these lottery arrangements as the source of his calibration strategy in a seminal paper and not surprisingly found that hours move a lot in response to productivity shocks. Chang and Kim (2006) in multi-person households and Rogerson and Wallenius (2010) explicitly considering retirement have recently revisited the role played by non-convexities without using lotteries. Both papers argue that the macroelasticity, the elasticity that applies to an aggregate model with a stand-in household, is much larger than the elasticity that arises from studies using micro-data, and advocate a value for the aggregate Frisch elasticity of around n ¼ 1.…”