A Quantitative Theory of Labor Supply with Heterogeneous Agents: From Individual to Macro Elasticities

Then, we build a theory of labor supply with heterogeneous agents consistent with these empirical facts. The key features of the model are life-cycle, incomplete markets, nonlinear wage schedules, an intensive and extensive margin in labor supply, and a social security system. We calibrate the model economy without explicitly targeting the facts on hours worked. First, we find that this heterogeneous agent model, with the above mentioned features, exhibits patterns in the behavior of labor supply that are quantitatively similar to those observed in the data. Second, we use the developed framework to show that in the calibrated model economy there is a disconnect between the theoretical elasticity of labor supply and the one that is recovered from model data using standard econometric techniques. Further, in an experiment which eliminates the social security system, we find that the changes in the aggregate labor supply are unrelated to the individual labor supply elasticity.