On the measurement of the elasticity of labour

Abstract

We use a simple macroeconomic model to illustrate the difference between the Frisch elasticity, understood as a structural behavioural parameter, and the elasticity of labour measured through a tax holiday; a setup used in the micro-applied literature to measure the responsiveness of labour to changes in the returns to work.We show that a high Frisch elasticity is compatible with a measured elasticity of the same order of magnitude as the micro-applied estimates.