Labour Supply and the Extensive Margin

Forty years ago the Europeans (here French and British) used to work more than the Americans. They now work less. The aim of this paper is to provide a coherent picture of these changes. To do so we split the overall level of work activity into the number of individuals in work and the intensity of work supplied by those in work. This reflects the distinction between whether to work and how much to work at the individual level and is referred to, respectively, as the extensive and intensive margin of labour supply. The difference between the extensive and intensive margins has been highlighted in recent research attempting to resolve differences between micro and macro responses of labour supply to tax reform. For example, Rogerson and Wallenius (2009), following the work of Prescott (2004), argue that the responsiveness of the extensive margin of labour supply to taxation plays a major role in explaining aggregate differences in total hours worked across countries. They show that an economy with fixed technology costs for firms and an inverted Ushape life-cycle productivity for workers can produce large aggregate extensive labour supply responses driven by movements in employment at either end of the working life. This, they argue, can reconcile the small micro-based elasticities of hours worked with the large responses required if taxes and social security are to explain crosscountry differences in total hours of work. The distinction between the extensive and intensive margin has long been recognised in microeconometric studies of labour supply, especially for women with children (James Heckman