Towards a Micro-Founded Theory of Aggregate Labour Supply Articles uri icon

publication date

  • July 2016

start page

  • 1001

end page

  • 1039

issue

  • 3

volume

  • 83

International Standard Serial Number (ISSN)

  • 0034-6527

Electronic International Standard Serial Number (EISSN)

  • 1467-937X

abstract

  • We build a heterogeneous agents life cycle model that captures a large number of salient features of individual male labour supply over the life cycle, by education, both along the intensive and extensive margins. The model provides an aggregation theory of individual labour supply, firmly grounded on individual-level micro-evidence, and is used to study the aggregate labour supply responses to changes in the economic environment. We find that the aggregate labour supply elasticity to a transitory wage shock is 1.75, with the extensive margin accounting for 62% of the response. Furthermore, we find that the aggregate labour supply elasticity to a permanent-compensated wage change is 0.44.

keywords

  • aggregate labour supply; intensive margin; extensive margin; life cycle; fixed cost of work; non-linear earnings; precautionary savings; preference heterogeneity; life-cycle model