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What is the difference between intensive margin and extensive margin in labor economics, or general RBC model, where we talk about labor-hours supplied changing with extensive margin or intensive margin?

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3 Answers 3

In Labor Economics, "Extensive margin" refers to "how many people work". "Intensive margin" refers to "how much a given number of people work, on average". To copy from a freely available recent study by Blundell, Bozio and Laroque 2011,

"...we split the overall level of work activity into the number of individuals in work and the intensity of work supplied by those in work. This reflects the distinction between whether to work and how much to work at the individual level and is referred to, respectively, as the extensive and intensive margin of labour supply. At the aggregate level the former is typically measured by the number of individuals in paid employment and the later by the average number of working hours."

Evidently, it is an important distinction, especially when one wants to analyze changes in employment, measured say in total number of hours worked: Say, did they increase? Why? Because more people work, or because the same number of people work more? And if the answer is "both", then what portion is attributable to a change in the intensive margin, and what portion to a change in the extensive margin? (this is why the word "margin" is used).

Of course "intensity" as a word has a more general meaning, as for example the one mentioned in another answer here -it may be the case that people work "faster" and so in the same time interval, they produce more. Such changes are usually put under the concept of "changes in efficiency" (for example in Growth theory this is how they are called). In Labor Economics the terms have the meaning given above.

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Consider the following example with a Cobb-Douglas production function having total factor productivity $A_t$, labor $L_t$, capital $K_t$, and effort $e_t$:

$$ Y_t = A_t K_t^{\alpha} (e_tL_t)^{(1-\alpha)}$$

The intensive margin regards the level of effort $e_t$ (think intensity), and the extensive margin the quantity of labor supplied $L_t$.

In a less abstract sense, think about output and hours worked. You can work for 2 hours at a normal pace and create one widget. Or, if you try very hard, you could make one widget in one hour. How do you get the same output from the same worker with different values of $L$? The intensive margin is the answer.

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From an individual perpective :

  • The intensive margin: Number of hours of work (or intensity of work) of participating workers
  • The extensive margin: Participation decision, independently of how many hours are chosen

For information, in a recent meta article Chetty 2012 you have the following hisckian elasticities :

  • Intensive margin: 0.33
  • Extensive margin: 0.25

Along with your examples, they are also used in taxation economics, as most of the modern optimal taxation problems (a la la Mirrlees 1971) results from a trade-off between:

  • Equity: Redistributing to the least skilled workers
  • Efficiency :Providing high skilled workers with incentives to work, which directly depend on those margins
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