Structural Labor Supply Models and Wage Exogeneity

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Abstract. There is still considerable dispute about the magnitude of labor supply elasticities. While differences in micro and macro estimates are recently attributed to frictions and adjustment costs, we show that relatively low labor supply elasticities derived from microeconometric models can also be explained by modeling assumptions with respect to wages. Specifically, we estimate 3,456 structural labor supply models each representing a plausible combination of frequently made choices. While most model assumptions do not systematically affect labor supply elasticities, our analysis shows that the results are very sensitive to the treatment of wages. In particular, the often-made but highly restrictive independence assumption between preferences and wages is key. To overcome this restriction, we propose a flexible estimation strategy that nests commonly used models. We show that loosening the exogeneity assumption leads to labor supply elasticities that are much higher. Structural Labor SupplyJEL Classification: C25, C52, H31, J22

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“…Haan (2004), Beninger et al (2007), Kornstad and Thoresen (2007), Bloemen (2010), Breunig and Gong (2010), Blundell and Shephard (2012), Löffler et al (2013), Aaberge and Colombino (2013), Kabátek et al (2014) and Dagsvik et al (2014)). It is quite intuitive that labour decisions are constrained on the choices of jobs and working hours, and then we prefer a discrete rather than a continuous labour supply model.…”

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“…14 We also find similar patterns when looking separately at hour-wage elasticities (correlation of −.59 with observation years) and participation-wage elasticities (correlation of −.54) for married women. 15 Further potentially important factors are the treatment of wages in the estimation procedure (Löffler et al 2014) and the choice of the reference tax system for the benchmark. 16 Note that-like all meta-regressions-our analysis is not identifying causal effects since one can think of several potentially omitted variables.…”

“…17 Note that we cannot include all possible aspects of model specification in our paper since there are too many dimensions and to few observations. For example, Löffler et al (2014) investigate the role of the treatment of wages for the size of elasticities. In order to do this, the authors estimate 3500 elasticities using a discrete-choice framework with all possible permutations of model choices.…”

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“… See Löffler et al . () for details on the assumptions and variations of discrete‐choice models of household labour supply. Another type of structural model is based on Hausman's () design and assumes a linear labour supply function. …”