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

By Raj Chetty, Adam M. Guren, Dayanand Manoli, Andrea Weber. NBER macroeconomics annual, 2013

137 citations recorded by the source corpus.

Macroeconomic calibrations imply much larger labor supply elasticities than microeconometric studies. One prominent 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.

Subfields: Economics and Econometrics, Gender Studies

View Paper: https://www.semanticscholar.org/paper/405b14c1eee919289b88cd62d96f9000cf180c5c

Citations in the corpus

• Sign Restrictions, Structural Vector Autoregressions, and Useful Prior Information ∗ (2015, unknown): “Chetty et al. (2013) reviewed 15 different quasi-experimental studies all of which implied Frisch elasticities below 0.5.”
• The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States (2013, unknown): “Figure 6 depicts the impact on GDP of one percentage point cuts in the APITR and ACITR when 14In terms of economic theory, however, whether displacements in tax rates are perceived by agents as permanent or transitory does matter importantly, see for instance Chetty et al. (2011).”
• The Allocation of Talent and U.S. Economic Growth (2019, unknown): “The meta analysis in Chetty et al. (2012) suggests an extensive margin labor supply elasticity of about 0.”
• How Do Hours Worked Vary with Income? Cross-Country Evidence and Implications (2018, unknown): “Chetty et al. (2013), produce even larger welfare differences, as do higher values of the subsistence consumption requirement.”