The Evolution of the Wage Elasticity of Labor Supply Over Time

The Evolution of the Wage Elasticity of Labor Supply Over Time

Authors: Todd E. Elder, Steven Haider, Cody Orr

Abstract: The uncompensated wage elasticity of labor supply is a fundamental parameter in economics. Despite its central role, few papers have studied directly how it has changed over time. We examine the evolution of this elasticity over the last four decades. We find robust evidence that the elasticity weakly increased between 2000 and 2020, representing a striking reversal from the sizable declines for single and married women between 1979 and 2000. We additionally find that these changes mostly arose on the extensive margin. Using our model, we conduct a series of counterfactual simulations to identify the factors responsible for these trends.

Seminar Notes

Venue

CES Brownbag 2022

Objective

To understand how elasticity of labor supply change over time 2000s and 2010s and how the estimates change with different methodologies

Importance

There is only limited research on how elasticity has changed over time, and mostly those are meta-analysis, not original estimation with consistent methodology and data

Background

Previous literature found female labor supply elasticity decreasing over the 1980s, 1990s, and early 2000s. No consistent patterns found for men in previous research

Data & Key Variables

CPS ASEC 1979-2018 Age 26-55, head/spouse, not attending school, disabled, retired, no farm or business income, hourly wage between $4-$150, not self-employed

Urban Institute benefit simulator - TRIM

Methodology

Structural labor supply model - calculate elasticities for each year using estimated utility parameters. Translog utility

Leisure=112-work hours (per week)

Results

Single men - roughly constant elasticities over time, with small increase in late 2010s

Single women - fall in elasticity in 90s, flat in 2000s, and small increase in 2010s

Key Table/Figure