Does Indivisible Labor Explain the Difference Between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities

Raj Chetty, Adam Guren, Dayanand S. Manoli, Andrea Weber

NBER Working Paper No. 16729
Issued in January 2011
NBER Program(s):   EFG   LS   PE

Macroeconomic calibrations imply much larger labor supply elasticities than microeconometric studies. The most well known 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 meta-analysis of quasi-experimental estimates of extensive margin elasticities. We find 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 fluctuations 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.

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An online appendix is available for this publication.

This paper was revised on December 5, 2011

Acknowledgments

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