Abstract: We build a heterogeneous life-cycle model which captures a large number of salient features of individual labor supply over the life cycle, by education, both along the intensive and extensive margins. The model provides an aggregation theory of individual labor supply, firmly grounded on individual-level micro evidence, and is used to study the aggregate labor supply responses to changes in the economic environment. We find that the aggregate labor supply elasticity to a transitory wage shock is 1.75, with the extensive margin accounting for 62% of the response. Furthermore, we find that the aggregate labor supply elasticity to a permanent-compensated wage change is 0.44.
Keywords: Aggregate labor supply, intensive margin, extensive margin, life cycle, fixed cost of work, non-linear earnings, precautionary savings, preference heterogeneity
JEL Classification: D9; E2; E13; E62; J22