The Frisch Elasticity in the Mercosur Countries: A Pseudo‐Panel Approach

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.