Student Faculty Macro Lunch - "The Aggregate Labor Supply Curve at the Extensive Margin: A Reservation Wedge Approach"

Presentation | November 5 | 12-1 p.m. | 597 Evans Hall

 Benjamin Schoefer, UCB

 Clausen Center

Abstract: We present a theoretically robust and empirically tractable representation of the aggregate labor supply curve at the extensive (employment) margin. The core concept we define is the individual-level reservation (labor) wedge: the tax-like gap between an individual's potential earnings and her marginal rate of substitution. This micro wedge is a sufficient statistic that collapses rich multi-dimensional heterogeneity in, e.g., tastes for leisure, marginal utilities of consumption, hours constraints, and worker-specific wages. The CDF of the wedges is the aggregate labor supply curve at the extensive margin. We then directly measure the wedge distribution in a survey representative of the U.S. population -- thereby mapping out the global empirical curve. For small deviations, the empirical curve exhibits locally large Frisch elasticities above 3 (consistent with business cycles evidence). Rather than constant, the empirical arc elasticities shrink towards 0.5 for larger, upward shifts (hence reconciling large local elasticities with the small elasticities suggested by recent quasi-experimental evidence). In a model meta-analysis, no existing labor supply block matches the empirical curve. We engineer one (representative-agent) model to do so, which implies relatively smooth labor wedges over U.S. business cycles. The paper is joint work of Preston Mui and Benjamin Schoefer.

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 krresovich@berkeley.edu