Gizem Kosar, NY Fed

"The Work-Leisure Tradeoff: Identifying the Heterogeneity "


In this paper, we identify individuals’ tradeoff for work and leisure as well as the underlying preference heterogeneity by designing a novel survey that was fielded as a special module of the NY Fed’s Survey of Consumer Expectations in December 2017. We present respondents with individually-tailored hypothetical scenarios, in which they are asked to choose between two job offers or the option of remaining unemployed. Job offers are characterized by hourly wages and hours. We validate the survey responses using several approaches. We next use this rich variation to estimate a canonical labor supply model to recover the unique preference parameters separately for different demographic groups, without imposing any parametric assumption on the underlying distribution of the heterogeneity in preferences. We estimate our model using Method of Simulated Moments and use the estimated model to simulate Marshallian and Frisch elasticities at the group level. The implied elasticities vary systematically across demographic groups. Our results also imply substantial heterogeneity in elasticities within each of the demographic groups. Moreover, we find that accounting for the heterogeneity in preferences often widens the across-group differences. In order to highlight the importance of this heterogeneity, we assess the impact of policy changes in the tax policy using the distribution of elasticities and compare the results with the response in hours computed using a single aggregate elasticity (as is done in the literature). Our results show that both the average hours response and the distributional impact to a change in the marginal tax rate are substantially biased if the underlying heterogeneity in preferences is not taken into account. This underscores the need for taking this heterogeneity seriously, and the power of our approach for uncovering it.

(with Aysegul Sahin and Basit Zafar)

Contact person: Patrick Moran