https://macropaperwarehouse.com/authors/tess-m.-stafford/Tess M. StaffordHugo -- gohugo.ioen-usThu, 01 Jan 2026 00:00:00 +0000https://macropaperwarehouse.com/papers/returns-to-experience-and-the-elasticity-of-labor-supply/Thu, 01 Jan 2026 00:00:00 +0000https://macropaperwarehouse.com/papers/returns-to-experience-and-the-elasticity-of-labor-supply/<p>Research question and motivation: A large empirical literature uses micro data to estimate the intertemporal elasticity of substitution (IES) of labor supply, a parameter crucial for understanding business-cycle fluctuations in hours and labor-supply responses to tax policy. Standard micro studies, which regress log hours on log wages, typically obtain small estimates (in the range of 0-0.4), leading much of the profession to conclude labor-supply elasticities are small. These studies assume wages evolve exogenously. The authors argue that when wages rise with work experience (learning-by-doing, LBD), the marginal return to an hour of work exceeds the wage because it also includes the discounted increase in all future earnings from added experience. Because the wage is only one component of total remuneration, a given percentage wage increase raises the total marginal return by a smaller percentage, so regressing hours on wages produces a downward-biased estimate of the IES. Critically, the omitted variable (the ratio of total remuneration to the wage) is mechanically related to the wage, so the bias cannot be corrected by instrumental variables or natural experiments.</p>