Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins

Chetty, Raj; Guren, Adam; Manoli, Day; Weber, Andrea

doi:10.1257/aer.101.3.471

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American Economic Review: Vol. 101 No. 3 (May 2011)

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Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins

Article Citation

Chetty, Raj, Adam Guren, Day Manoli, and Andrea Weber. 2011. "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins." American Economic Review, 101(3): 471-75.

DOI: 10.1257/aer.101.3.471

Abstract

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.

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Authors

Chetty, Raj (Harvard U)
Guren, Adam (Harvard U)
Manoli, Day (UCLA and RAND Corporation, Santa Monica, CA)
Weber, Andrea (U Mannheim)

JEL Classifications

E10: General Aggregative Models: General
E32: Business Fluctuations; Cycles