Labor Supply Elasticity in Economic Models
Summary
Labor supply elasticity measures the responsiveness of individuals’ working hours to changes in wages, non-labour income or policy parameters. Economic models distinguish between the intensive margin (adjustments in hours worked by those already employed) and the extensive margin (decisions to enter or exit the labour force). Elasticities arise from the interplay of substitution effects, which encourage more labour when wages rise, and income effects, which may lead to reduced labour supply as households achieve desired living standards. Modern frameworks incorporate heterogeneous agents, life-cycle considerations and indivisible labour to reconcile micro-level estimates with observed macroeconomic fluctuations. Empirical estimation confronts challenges in separating frictions, preference heterogeneity and measurement biases, while ensuring consistency between short-run behaviour and long-run aggregate outcomes. Understanding labour supply elasticities is crucial for assessing the impact of taxation, social transfers and technological change on employment, welfare and growth across diverse economies.
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Labor Supply Elasticity in Economic Models publication trend
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Technical terms
Labour supply elasticity: A measure of how much working hours change in response to variations in wages or non-labour income.
Intensive margin: Adjustments in the number of hours worked by individuals already participating in the labour force.
Extensive margin: Changes in employment status, reflecting labour force entry or exit decisions.
Frisch elasticity: The elasticity of labour supply with respect to the wage rate, holding constant marginal utility of wealth, often used in macro models.
Intertemporal elasticity of substitution for leisure: The responsiveness of leisure-work choices over time to changes in relative rewards for leisure, capturing dynamics of labour supply across periods.
References
- Why Labor Supply Matters for Macroeconomics. Journal of Economic Perspectives (2024).
- Human capital and the intertemporal substitution for leisure: empirical evidence for Spain. Portuguese Economic Journal (2022).
- Labor supply when productivity keeps growing. Review of Economic Dynamics (2023).
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