Reservation Raises: The Aggregate Labor Supply Curve at the Extensive Margin
We measure extensive-margin labor supply (employment) preferences in two representative surveys of the U.S. and German populations. We elicit reservation raises: the percent wage change that renders a given individual indifferent between employment and nonemployment. It is equal to her reservation wage divided by her actual, or potential, wage. The reservation raise distribution is the nonparametric aggregate labor supply curve. Locally, the curve exhibits large short-run elasticities above 3, consistent with business cycle evidence. For larger upward shifts, arc elasticities shrink towards 0.5, consistent with quasi-experimental evidence from tax holidays. Existing models fail to match this nonconstant, asymmetric curve.
A 2019 version of this paper was circulated under the title “The Aggregate Labor Supply Curve at the Extensive Margin: A Reservation Wedge Approach.” We thank referees of the previous version for constructive feedback, which has greatly improved the paper. We thank Chaoran Yu for excellent research assistance. We thank Mark Aguiar, Mark Bils, Gabriel Chodorow-Reich, Shigeru Fujita, Adam Guren, Greg Kaplan, Loukas Karabarbounis, Marios Karabarbounis, David Lagakos, Ellen McGrattan, Monika Merz, Luigi Pistaferri, Richard Rogerson, Ayşegül Şahin, Sergio Salgado, and Gianluca Violante for useful comments. We thank seminar participants at Amsterdam/Tinbergen, Bonn, the Central Bank of Chile, Edinburgh, the Federal Reserve Bank of Philadelphia, New York University, Princeton, Stanford/SIEPR, the Virtual Australian Macroeconomics Seminar, UC Berkeley, UC San Diego, and VATT. We thank conference audiences at the Bank of Italy-CEPR Labour workshop, the ifo Conference on Macroeconomics and Survey Data, the NBER Dynamic Equilibrium Models meeting, the NBER Summer Institute Micro Data and Macro Models meeting, the NBER Summer Institute Impulse and Propagation Mechanisms meeting, the Society of Economic Dynamics Annual Meeting, and the West Coast Matching Workshop (Federal Reserve Bank of San Francisco). For financial support of our custom survey, we thank the Clausen Center and the Institute for Research on Labor and Employment at UC Berkeley, and SIEPR at Stanford. We thank the survey design teams of NORC at UChicago, and GSOEP/Kantar. The survey received IRB approval from UC Berkeley (protocol number 2019-02-11815). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.