FROM INDIVIDUAL TO AGGREGATE LABOR SUPPLY: A QUANTITATIVE ANALYSIS BASED ON A HETEROGENEOUS AGENT MACROECONOMY*

At the aggregate level, the labor‐supply elasticity depends on the reservation‐wage distribution. We present a model economy where workforce heterogeneity stems from idiosyncratic productivity shocks. The model economy exhibits the cross‐sectional earnings and wealth distributions that are comparable to those in the micro data. We find that the aggregate labor‐supply elasticity of such an economy is around 1, greater than a typical micro estimate.