Labor Supply Elasticity in a Search Friction Model.

This article addresses the estimation of labor supply elasticity by incorporating search friction in the labor market, which introduces stochastic noise that biases traditional estimates toward zero. Using data from the 1997 cohort of the U.S. National Longitudinal Surveys, the author develops a new structural estimation method that isolates this stochastic disturbance, revealing a true Frisch labor supply elasticity of 0.46—over five times larger than the spurious elasticity (0.09) estimated by the benchmark neoclassical model. The findings indicate that workers typically change jobs about 3.3 times before reaching an optimal job package and require a wage premium to accept jobs with undesired working hours, with greater premiums demanded as the mismatch between actual and desired hours increases. The study highlights the importance of structural modeling with search friction to accurately capture labor supply responsiveness and suggests future research to extend the approach to heterogeneous populations.