Labor Supply Elasticity in a Search Friction Model

Search friction induces stochastic noise that contributes to the eruptive property of the estimated labor supply elasticity and drives it toward zero. The author proposes a new estimation method that removes the stochastic disturbance and reveals the true structural elasticity, which is substantially larger than the spurious elasticity estimated using the benchmark neoclassical model. Results suggest that workers will change their jobs 3.3 times before they obtain the optimal job package predicted by the neoclassical model. Findings also show that a sufficient wage premium is required by workers to take up a job with undesired working hours.