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The Frisch Elasticity in the Mercosur Countries: A Pseudo‐Panel Approach
Author(s) -
González Roberto,
Sala Hector
Publication year - 2015
Publication title -
development policy review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.671
H-Index - 61
eISSN - 1467-7679
pISSN - 0950-6764
DOI - 10.1111/dpr.12094
Subject(s) - economics , elasticity of substitution , elasticity (physics) , macro , welfare , marginal utility , liquidity constraint , panel data , convergence (economics) , context (archaeology) , business cycle , liberalization , econometrics , market liquidity , macroeconomics , microeconomics , market economy , paleontology , materials science , production (economics) , biology , computer science , composite material , programming language
In estimating the Frisch elasticity – i.e., the elasticity of substitution between worked hours and real wages, holding constant the marginal utility of wealth – for the Mercosur countries, this article finds a strong heterogeneity. It argues that severe liquidity constraints are the main reason for the negative estimates and that the heterogeneity is the outcome of differences in many relevant economic dimensions – ranging from sectorial specialisation to welfare‐state provisions and labour‐market specificities. The diversity of Frisch elasticities calls for the development of a cross‐country (rather than a within‐country) policy approach, since they crucially affect the dynamics of the business cycle, the synchronisation of which is a step prior to the design of macro‐convergence policies in the Mercosur context.