Publication and Identification Biases in Measuring the Intertemporal Substitution of Labor Supply

The intertemporal substitution (Frisch) elasticity of labor supply governs the predictions of real business cycle models and models of taxation. We show that, for the extensive margin elasticity, two biases conspire to systematically produce large positive estimates when the elasticity is in fact zero. Among 723 estimates in 36 studies, the mean reported elasticity is 0.5. One half of that number is due to publication bias: larger estimates are reported preferentially. The other half is due to identification bias: studies with less exogenous time variation in wages report larger elasticities. Net of the biases, the literature implies a zero mean elasticity and, with 95% confidence, is inconsistent with calibrations above 0.25. To derive these results we collect 23 variables that reflect the context in which the elasticity was obtained, use nonlinear techniques to correct for publication bias, and employ Bayesian and frequentist model averaging to address model uncertainty.

Real Capital

Preshaped by the influence of Marx, Böhm-Bawerk and modern neoclassical economics, the general opinion is that the marginal product of capital must always be positive. With the help of the “period of production” T, we define a coefficient of intertemporal substitutionψ that is always non-negative. It can also be used when the real interest rate is negative. With the help of the concept of the “waiting period” Z, we can also define an always non-negative coefficient of intertemporal substitutionγ for the household side. The “loss formula” for deviations of the rate of interest from the growth rate is one application of ψ and γ. Ω = (ψT2 + γZ2)(r − g)2/2 provides a good approximation of the relative loss Ω. Overcomplexity of the system of production leads to negative marginal returns on capital. It can be empirically presumed that the OECD plus China region is on the cusp of overcomplexity. The hypothetical natural rate of interest in the eurozone is well into the minuses. To determine the value of the real capital of the private sector in the OECD plus China region, we use a framework of data taken from the World Inequality Database (WID.world). We have supplemented the data available there with data from other sources and adapted it to our theoretical objectives. According to our estimates, private wealth in the form of real capital in the OECD plus China region comes to approximately four times total annual consumption.

Böhm-Bawerk and Hicks modernized

The paper offers a modernized Böhm-Bawerkian approach to capital theory. The Wicksell effect turns out to be a measure for the degree of vertical distribution of labor. I show that a marginal rise in the rate of interest reduces the (modernized) period of production. A ‘generalized golden rule of accumulation’ is one result of our approach. Based on these results I define a coefficient of intertemporal substitution (CIS). As opposed to the traditional elasticity of substitution between labor and capital, the CIS is also well defined for negative real rates of interest. This is important in the twenty-first century, since we observe a strong overhang of private savings over private investments (secular stagnation).

Automatic Stabilizers in a Low-Rate Environment

In a world where monetary policy cannot assume responsibility for stabilization policy, there is a strong need for fiscal policy to address stabilization issues. In this context, we argue for “semi-automatic stabilizers,” aimed at reducing unemployment slumps rather than output recessions. We show that the hole left by the limits on monetary policy implies a large role for fiscal policy in general and for semi-automatic stabilizers in particular. Finally, we argue that the design of stabilizers, whether they focus on mechanisms that rely primarily on income or on intertemporal substitution effects, depends crucially on the general design of discretionary policy.