Low Intertemporal and Hicksian Labor Supply Elasticities
RCTReview
Macroeconomic tax policies and business cycle models rely on calibrated labor supply elasticities to predict worker reactions to wage changes, yet empirical micro-estimates often diverge significantly from macro-level assumptions. Determining precise income effect parameters is necessary to isolate compensated and intertemporal elasticity values.
Picture this
Imagine a worker who gets a small annual cash gift. Even if the worker can freely trade working time for personal leisure, the worker barely changes work schedules because daily consumption goals and career routines are strongly established, like an athlete who keeps training nearly the same number of hours every week even after receiving an allowance.
What the evidence says
The calibrated model yields an uncompensated (Marshallian) labor supply elasticity of 0.010, a compensated (Hicksian) elasticity of 0.096, and an intertemporal (Frisch) elasticity of 0.150; lifetime marginal propensity to earn ranges from -0.169 at age 20 to -0.036 at age 60.
- Who was studied
- N = 244,826 observations across Swedish lottery winners aged 21 to 64.
- How
- Simulated minimum-distance estimation of a dynamic life-cycle labor supply model with Stone-Geary preferences, binding retirement age at 65, and a 2% discount rate fitted to 10-year after-tax earnings responses.
What to do
Calibrate macroeconomic tax revenue and welfare models using a Frisch elasticity between 0.10 and 0.15 rather than higher macroeconomic benchmark values exceeding 0.50.
From the source
"The individual-level compensated (Hicksian) elasticity is 0.1, and the intertemporal (Frisch) elasticity is 0.15."
f8929526-9215-4a78-95ce-8377460687e7-The Effect of Wealth on Individual and Household Labor Supply- Evidence from Swedish Lotteries..pdf