Labor supply within the firm

Estimates of labor supply elasticities can be sensitive to the source of identifying variation. This paper’s model of production complementarities helps to interpret conflicting evidence. Complementarities attenuate working time adjustments to idiosyncratic, or individual-specific, variation in work incentives. Complementarities do not restrict, however, responses to firm-wide shocks; the latter is mediated by preference parameters. Estimating the model using matched firm-worker data, the paper disentangles production from preference parameters. The Frisch elasticity along the intensive margin is found to be around 0.5. A quasi-experimental approach, using idiosyncratic variation in work incentives, would find an elasticity less than half this.