Using Labor Supply Elasticities to Learn about Income Inequality: The Role of Productivities versus Preferences

Using a general labor supply model in which individuals choose how much to work conditional on productivities and preferences for consumption relative to leisure, we show that the mapping from earnings and hours worked to productivities and preferences can be expressed entirely in terms of reduced-form labor supply elasticities. We investigate the roles that productivities and preferences play in driving income inequality in the United States. Benchmark labor supply elasticity estimates from the literature imply that productivities drive most income inequality. Preferences become increasingly important relative to benchmark, with larger income effects or larger differences between earnings and hours-worked elasticities. (JEL J22, J24, D31, J31, H24, H31)

Measuring Labor Market Power Two Ways

We compute the “applications elasticity” as a proxy for firm-level labor supply elasticity by regressing the applications to a given job on the posted wage. The average applications elasticity in our data is 0.42. We then relate our elasticity estimates to concentration in labor markets defined by six-digit SOC occupations and commuting zone. We show a robust negative relationship between the two. Applications elasticity is near zero for all but the most densely populated labor markets, suggesting that 80 percent of the workforce works in labor markets where employers exercise significant monopsony power.

Labor Supply Elasticity in the Unconditional Basic Income System: Data Sources and Methodological Issues

This study deals with five sources of data that may help to answer the question of how labor supply would respond to the introduction of unconditional basic income. Research of lottery winners’ labor supply and the results of field experiments, in which the behavior of households who have received a regular unconditional income for a limited time period was observed and is then investigated and discussed. Results of the laboratory experiment, the estimates of microsimulation models, and the results of the opinion polls are also examined. The surveyed data sources show mainly a slight decline in labor supply. However, none of these data were collected in situations that would fully correspond with the expected conditions of decision-making that would occur with the basic income. Any results derived from them therefore need to be considered with caution.

Optimal pensions in aging economies

We derive the optimal replacement ratio of the pay-as-you-go public pension system for the US economy in a life-cycle model that 1) replicates the empirical wage heterogeneity and 2) endogenizes the individual’s labor supply decision. The optimal net pension replacement ratio is found to be in the range of 0%–43% depending on demographic parameters and, in particular, the Frisch labor supply elasticity. Reducing the pensions from the present to the optimal pension policies implies considerable welfare gains amounting to approximately 0.1%–4.1% of total consumption. The welfare increase is particularly pronounced for the greyer US population that is projected for the time after the demographic transition.

Do Employers Have More Monopsony Power in Slack Labor Markets?

This article confronts monopsony theory’s predictions regarding workers’ wages with observed wage patterns over the business cycle. Using German administrative data for the years 1985 to 2010 and an estimation framework based on duration models, the authors construct a time series of the labor supply elasticity to the firm and estimate its relationship to the unemployment rate. They find that firms possess more monopsony power during economic downturns. Half of this cyclicality stems from workers’ job separations being less wage driven when unemployment rises, and the other half mirrors that firms find it relatively easier to poach workers. Results show that the cyclicality is more pronounced in tight labor markets with low unemployment, and that the findings are robust to controlling for time-invariant unobserved worker or plant heterogeneity. The authors further document that cyclical changes in workers’ entry wages are of similar magnitude as those predicted under pure monopsonistic wage setting.

INVESTMENT AND FORWARD-LOOKING MONETARY POLICY: A WICKSELLIAN SOLUTION TO THE PROBLEM OF INDETERMINACY

Recent research has shown that forward-looking Taylor rules are subject to indeterminacy in New Keynesian models with capital and investment spending. This paper shows that adopting a forward-looking Wicksellian rule that responds to the price level, rather than to inflation, is one potential remedy for the indeterminacy problem. This result is shown to be robust to variations in both the labor supply elasticity and the degree of price stickiness, the inclusion of capital adjustments costs, and if output also enters into the interest-rate feedback rule. Finally, it is shown that the superiority of Wicksellian rules over Taylor rules is not only confined to forward-looking policy, but also extends to both backward-looking and contemporaneous-looking specifications of the monetary policy rule.