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Perspectives on Neoclassical Labor Supply

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PST)

Marriott Marquis, Point Loma
Hosted By: American Economic Association
  • Chair: Benjamin Schoefer, University of California-Berkeley

Labor Supply in the Past, Present, and Future: The Post-War United States

Timo Boppart
,
IIES Stockholm
Per Krusell
,
IIES Stockholm
Jonna Olsson
,
IIES Stockholm

Abstract

As productivity has been rising, hours worked have on average been falling systematically over time. A noticeable exception is the post-war U.S. which shows overall rather stable hours per working age population. Can a neoclassical theory of labor supply explain this phenomenon? With the unprecedented steep rise in female labor force participation, the U.S. post-war experience asks for a theory with household heterogeneity and both margins of labor supply. We provide a tractable such framework of neoclassical labor supply with rich household heterogeneity where the aggregate response of hours worked depends on the joint distribution of wealth, wages and disutility from working. We calibrate the model to the data and emphasize the different predictions between a complete and incomplete market framework. Armed with our quantitative theory we then make predictions into the future. Under the assumptions that productivity will keep growing over the 21th century but relative disutility of labor will remain constant, our theory predicts that groups that joined the labor force last, especially young women with children, will first start again withdrawing from the labor force.

The Aggregate Labor Supply Curve at the Extensive Margin: A Reservation Wedge Approach

Preston Mui
,
University of California-Berkeley
Benjamin Schoefer
,
University of California-Berkeley

Abstract

We present a theoretically robust and empirically tractable representation of the aggregate labor supply curve at the extensive (employment) margin. The core concept we define is the household-level reservation (labor) wedge: the tax-like gap between an individual’s potential earnings and her marginal rate of substitution. This micro wedge is a sufficient statistic encoding and collapsing rich multi-dimensional heterogeneity in, e.g., tastes for leisure, marginal utilities of consumption, hours constraints, and worker-specific wages. The CDF of the reservation wedges is the aggregate labor supply curve. In a meta study, we demonstrate how the reservation wedge serves as a bridge between diverse models where the aggregate labor supply curve is otherwise difficult to characterize and interrelate. The wedges are also empirically tractable: we measure them in a customized household survey for a representative sample of the U.S. population – and thereby map out the complete empirical aggregate labor supply curve at the extensive margin for the U.S. – a potential calibration target for labor supply blocks of macro models. The empirical curve implies large heterogeneity, yet locally implies a Frisch elasticity of around 3. Finally, we study micro covariates of the wedges vis-à-vis theoretical drivers.

Living Arrangements and Labor Market Volatility of Young Workers

Sebastian Dyrda
,
University of Toronto
Greg Kaplan
,
University of Chicago
José-Víctor Ríos-Rull
,
University of Pennsylvania

Abstract

We provide new evidence on the cyclical behavior of the household size and labor market outcomes of young people conditional on their living arrangements in the United States from 1979 to 2015. Household size is countercyclical, which is mostly driven by young people moving into or delaying departure from the parental home. We document that young people living with the old work and earn less, and their hours and wages are more volatile relative to their peers living alone. We argue that living arrangements induce larger disparities in the labor market outcomes than age does. Motivated by these observations we provide a joint theory of household formation and labor market engagement including the business cycle. We lay down a theory where young individuals decide where to live depending on their relative wage rate, disutility of living with old and implicit transfers received from the old. We show differences in volatilities across age groups can be accounted for by incorporating household formation channel in to the real business cycle model, while restricting the labor elasticity of the old to be within the range measured by microeconomists. We use our model to infer the implied labor supply elasticities of the young and conclude young living together with the old have it 63.8% times larger. Through the lens of the model we measure the size of the implicit transfers concluding they account for at least 50.2% percent of the market consumption of the young living with the old. The inclusion of people living in unstable households yields an implied aggregate, or macro, Frisch elasticity that is at least around 62.7% larger than the assumed micro elasticity.

The Wages of Nonemployment

Michael Elsby
,
University of Edinburgh
Ryan Michaels
,
Federal Reserve Board
David Ratner
,
Federal Reserve Board
Matthew Shapiro
,
University of Michigan

Abstract

Male joblessness in the United States has risen significantly over the last half century, driven by an increase in the incidence of very long jobless spells and concentrated among the low-skilled. Motivated by this, we document the means by which those chronically out of work get by, how these means have evolved over time, and whether changes in the availability and generosity of nonwork benefits plausibly might have contributed to the rise of male joblessness. We find that the large rise in male nonemployment is challenging for canonical models of labor supply to explain given the empirical relationship between income and weeks work that we document. We explore the ability of refinements and extensions of canonical models to resolve this puzzle.
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • J2 - Demand and Supply of Labor