Intertemporal Labor Supply and Human Capital Accumulation*

Abstract

We solve and estimate a dynamic model that allows agents to optimally choose their labor hours and consumption and that allows for both human capital accumulation and savings. Estimation results and simulation exercises indicate that the intertemporal elasticity of substitution is much higher than the conventional estimates and the downward bias comes from the omission of the human capital accumulation effect. The human capital accumulation effect renders the life-cycle path of the shadow wage relatively flat, even though wages increase with age. Hence, a rather flat life-cycle labor supply path can be reconciled with a high intertemporal elasticity of substitution.

Life Cycle Labor Supply and Panel Data: A Survey

“…By contrast, Shaw (1989) and Imai and Keane (2004) relax that assumption, i.e. they allow for nonseparability in the budget constraint (but not in the preferences).…”

“…When working today increases future wages, this leads individuals to work more as predicted by timewise separable models. 16 Imai and Keane (2004) provide a further contribution along these lines. Shaw specifies U it to be translog (as in HKS).…”

“…The results do not differ much from MaCurdy's. See also Imai and Keane (2004) for a different treatment of the problem of errors in variables.…”

Short-run fiscal policy: Welfare, redistribution and aggregate effects in the short and long-run

“…More recent estimates of the elasticity center around unity, including the study by Domeij and Floden (2006) and as surveyed in Browning, Hansen, and Heckman (1999). Imai and Keane (2004) estimate a model with human capital accumulation in a life-cycle model and estimate the elasticity at 3.8 using the National Longitudinal Youth Survey of 1979.…”

Labor Supply Elasticities: Can Micro Be Misleading for Macro?

“…More recent studies that generate a wedge between individual and aggregate labor elasticities range from heterogeneous reservation wages Kim, 2005, 2006) to the omission of such di¤erent variables as wealth (Ziliak and Kniesner, 1999), liquidity constraints (Domeji and Floden, 2006) and human capital accumulation (Imai and Keane, 2004), to nonlinearities in the relation between labor services and hours of work (Rogerson and Wallenius, 2007). A large aggregate elasticity is also required to explain the di¤erence in patterns of work in Europe and the US on the basis of di¤erent tax rates (Prescott, 2004).…”