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Estimates of the Frisch Elasticity of Labor Supply: A Review

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Abstract

This article assesses the literature on the responsiveness of the supply of labor in the case of a temporary change in after-tax compensation. In particular, it reviews the literature on the Frisch elasticity — the sum of the substitution elasticity and a measure of people’s willingness to trade work for consumption over time. The authors find that the estimates of the Frisch elasticity most relevant for fiscal policy analysis range from 0.27 to 0.53 (with a central estimate of 0.40). Using that range, they illustrate how different Frisch elasticities affect the responsiveness of labor supply to changes in fiscal policies. The illustration shows that estimation of the Frisch elasticity can have a significant influence on analyses of the economic effects of such policy changes.

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Notes

  1. McClelland and Mok [2012] assess the literature regarding those elasticities.

  2. For a technical discussion of how the Frisch elasticity (named for Norwegian economist Ragnar Frisch) relates to the substitution elasticity, see Chetty [2012] and Browning [2005].

  3. Although wages are only part of total compensation, most of the literature on the Frisch elasticity focuses on estimating the response of hours worked to temporary changes in after-tax wages.

  4. Keane [2011] emphasizes that estimating labor supply elasticities for women is in many ways more difficult than doing so for men (partly because, as mentioned above, a large fraction of women between the ages of 25 and 54 are not in the paid labor force).

  5. See Schorfheide [2011] for a discussion of challenges in estimating DSGE models.

  6. For a discussion of the differences between calibration and empirical estimation, see Hansen and Heckman [1996].

  7. That line of research highlights the fact that most life-cycle models used to estimate the Frisch elasticity with micro data do not currently account for the evolution of human capital over time.

  8. Chetty et al [2011] are critical of those results. They evaluate the assumptions made in macro models and conclude that it is not possible to reconcile a macro-based Frisch elasticity above 1.0 with existing micro-based estimates.

  9. For a discussion of how CBO arrived at that range, see Reichling and Whalen [2012].

  10. For more on CBO’s life-cycle model and its use in analyzing changes in fiscal policies, see CBO [2012; 2014].

  11. Given CBO’s modeling approach, a 2 percentage-point cut in the tax rate on all income would have effects on the labor supply that would be nearly identical in magnitude but of the opposite sign.

  12. The percentage change in the overall labor supply does not exactly equal the percentage change in the labor supply for the average person because of the variation in response among people, discussed above.

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Acknowledgements

The authors are principal analysts at the Congressional Budget Office; they wish to thank Ben Page, Jeffrey Kling, and Ed Gamber for helpful comments and suggestions.

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  1. Congressional Budget Office, Washington, 20515, DC, USA

    Charles Whalen & Felix Reichling

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  1. Charles Whalen
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  2. Felix Reichling
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Whalen, C., Reichling, F. Estimates of the Frisch Elasticity of Labor Supply: A Review. Eastern Econ J 43, 37–42 (2017). https://doi.org/10.1057/eej.2015.23

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