A Semiparametric Life Cycle Labor Supply Model with Non-Additive Fixed Effects

This paper estimates the Frisch elasticity of labor supply, which represents the intertemporal elasticity of substitution. Estimation of this elasticity has previously required assuming that utility is either separable between consumption and leisure or quasi-homothetic with respect to leisure. These restrictions are required to generate hours equations in which individual effects, representing the marginal utility of wealth, enter additively and can be differenced out. Using PSID data, I relax this assumption for a sample of prime-age men. I estimate a semiparametric labor supply equation, using a control function to control for the individual effects. This strategy allows fixed effects to be both non-additive and correlated with the regressors. The average structural function and average partial effects of wages on hours are identified and estimated. In addition, variation in the elasticity over different points in the data is explored. JEL Classification: J22, C14