Alois Kneip, Monika Merz, Lidia Storjohann. Aggregation and Labor Supply Elasticities

Alois Kneip, Monika Merz, Lidia Storjohann. Aggregation and Labor  Supply Elasticities


The aggregate Frisch elasticity of labor supply has been at center stage in modern business cycle analysis for many years. It was rst introduced into the literature by Ragnar Frisch and continues to be of interest from a theoretical as well as from an empirical perspective. At any point in time, it measures the reaction of total hours worked to a small change in the mean wage when wealth is held constant. The exact size of this particular elasticity matters a lot when macroeconomists try to assess the quantitative implications of certain types of policies on employment and hours worked. For example, changes in monetary or scal policy parameters which directly or indirectly impact a worker's net wage rate typically lead to a change in total labor supply. In spite of its relevance, the size of this aggregate change cannot easily be determined when worker heterogeneity is taken seriously. That is because the reaction of total labor supply is a highly complex object whose various components need to be accounted for. This object not only depends on the distribution of wage rates across employed workers and that of reservation wage rates across non-employed workers. It also depends on the hours' adjustment of existing workers (intensive margin) as well as of those who move between employment and non-employment following a wage change (extensive margin). Lastly, the overall reaction depends on the exact implementation of the underlying policy change.



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Keywords: Economic Modelling

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