Finance and Economics Discussion Series (FEDS)
October 2012
Reconciling Micro and Macro Estimates of the Frisch Labor Supply Elasticity
Abstract:
There are large differences between the microeconometeric estimates of the Frisch labor supply elasticity (0-0.5) and the values used by macroeconomists to calibrate general equilibrium models (2-4). The microeconometric estimates of the Frisch are typically estimated by regressing changes in hours on changes in wages conditional on the individual being a married male head of household, working some minimum number of hours and being of prime working age. In contrast macroeconomic calibration values are typically set such that fluctuations in a general equilibrium model match the observed changes in the aggregate hours and wages from the whole population over time. This paper aims to explain the gap by estimating an aggregate Frisch elasticity which is consistent with the concept of macro calibration values using the microeconometric techniques. In order to estimate the Frisch consistent with the macro concept, this paper alters the typical microeconometric approach in order to incorporate fluctuations on the extensive margin and also broadens the scope of the sample to include single males, females, secondary earners, young individuals, and old individuals. This paper finds that estimates of the aggregate macro Frisch elasticity are in the middle of the range of macroeconomic calibration values (around 3.0). Furthermore, it finds that the key to explaining the difference are the fluctuations on the extensive margin of single males, females, secondary earners, older individuals, and younger individuals.
Full paper (Screen Reader Version)Keywords: Frisch labor supply elasticity, intensive margin, extensive margin, calibration
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