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Labor Supply Within the Firm

System Working Paper 20-07 | Published August 21, 2020

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Michele Battisti University of Glasgow
Ryan Michaels Federal Reserve Bank of Philadelphia
Choonsung Park Korea Institute of Finance
Labor Supply Within the Firm


There is substantial variation in working time even within employer-employee matches, and yet estimates of the Frisch elasticity of labor supply can be near zero. This paper proposes a tractable theory of earnings and working time to interpret these observations. Production complementarities attenuate the response of working time to idiosyncratic, or worker-specific, shocks, but firm-wide shocks are mediated by preference parameters. The model can be identified using firm-worker matched data, revealing a Frisch elasticity of around 0.5. A quasi-experimental approach that mimics the design of earlier studies by exploiting only idiosyncratic variation would find an elasticity less than half this.