Labor supply elasticities: Can micro be misleading for macro

In this paper we compare "micro " and "macro " labor supply elasticities in a MaCurdy equation derived from a life-cycle model with home produc-tion. Using PSID data, we estimate the micro elasticity using standard panel techniques and the macro elasticity from the time series generated by aggre-gating employed individuals every year. We find an individual elasticity of about 0.1, a low value in line with mainstream microeconometric studies, and a much larger aggregate elasticity of about 1.8. There is no conflict be-tween the two estimates. The discrepancy is due to the fact that the micro elasticity reflects the intensive margin only, i.e. the small variation in hours worked, while the macro elasticity reflects the extensive margin as well, i.e. the large variation in employment. An implication of this result is that mi-cro evidence is not always appropriate for calibrating an aggregate model economy