Template-Type: ReDIF-Paper 1.0

Author-Name: François Gourio
Author-X-Name-First: François 
Author-X-Name-Last: Gourio
Author-Email: fgourio@bu.edu
Author-Workplace-Name: Department of Economics, Boston University

Author-Name: Pierre-Alexandre Noual
Author-X-Name-First: Pierre-Alexandre
Author-X-Name-Last: Noual
Author-Email: noual@uchicago.edu
Author-Workplace-Name: University of Chicago.

Title: The Marginal Worker and
The Aggregate Elasticity of Labor Supply

Abstract: This paper attempts to reconcile the high apparent aggregate elasticity of labor supply
with small micro estimates. We elaborate on Rogerson’s seminal work (1988) and show that
his results rely neither on complete markets nor on lotteries, but rather on the indivisibility
of labor supply and the marginal homogeneity of the workforce. We derive two robust
implications of a setup with indivisible labor but without lotteries, using either a complete
markets model or an incomplete markets model. Implication (1) is that agents with reservation
wages far above or below the market wage are less responsive (in labor supply) to the
business cycle than agents whose reservation wage is around the market wage. Implication
(2) is that the aggregate elasticity is given by the marginal homogeneity of the workforce.
We test implication (1) using the PSID and find support for it. We build an incomplete
market model and calibrate it to cross-sectional moments of hours worked. We show that it
can reproduce the feature (1). This allows us to use the model to evaluate the importance of
feature (2), i.e. to estimate the aggregate elasticity of labor supply implied by the marginal
homogeneity.

Length: 37 pages
Creation-Date: 2006-03
Revision-Date: 
Publication-Status:
File-URL: http://people.bu.edu/fgourio/laborelastpaper.pdf
File-Format: Application/pdf
File-Function: 
Number: WP2006-009
Classification-JEL: 
Keywords: indivisible labor, reservation wage distribution, labor supply, business cycles.
Handle: RePEc:bos:wpaper:WP2006-009