The behavior of labor supply is critical for the analysis of many issues in economics, including the effects of tax and transfer programs on allocations and welfare, and business cycles. For the analysis of aggregate issues, the elasticity of aggregate labor supply is a critical parameter. For many years there has been substantial controversy over the magnitude of this elasticity. On the one hand, estimates from micro data have tended to yield small elasticities, while estimates from aggregate data often suggest much larger elasticities. Because this elasticity plays a key role in so many contexts, this apparent inconsistency is very problematic for obtaining reliable assessments for a wide range of policies, or for predicting how the economy responds to various shocks. This project seeks to resolve this apparent inconsistency by explicitly considering models that incorporate plausible technological features and in which one can both meaningfully recreate the standard micro estimation exercises and also consider the effects of aggregate changes to the economy. Preliminary work suggests that the disparate elasticity estimates can be reconciled within such a model.
Labor market outcomes have large and direct effects on the standard of living enjoyed by most individuals. Understanding what factors shape labor market outcomes and assessing the welfare costs of various policies and institutions will allow policy makers to make better decisions and led to better economic outcomes. This work provides a better foundation for aggregate economic policy evaluation.
