Labor Supply Elasticities: Can Micro Be Misleading for Macro?

In this paper we compare “micro” and “macro” labor supply elasticities in a MaCurdy-type equation. Using PSID data, we obtain the micro elasticity from standard panel techniques, and the macro elasticity from the time series generated by aggregating individuals every year. This procedure relies on the exact aggregation of first-order conditions in a life-cycle model with home production. We find an individual elasticity of about 0.1, a low value in line with mainstream microeconometric studies, and an aggregate elasticity of about 1, a much larger value often assumed in calibration studies. This discrepancy is not due to aggregation bias: it is due to the fact that individual and total hours are different variables, with the extensive margin that empirically dominates. A broader implication of our result is that micro evidence is not always appropriate for calibrating an aggregate model economy