Empirical Analysis of Chinese Labor Supply Decisions from a Dynamic Perspective: Evidence from Hangzhou Cabdrivers

Abstract

According to the life-cycle theory of labor supply, labor supply of workers responds positively to short-term wage volatility. However, many researches find the elasticity of foreign cabdrivers' labor supply to wages is negative. How about Chinese cabdrivers? This paper uses GPS trip information of Hangzhou cabs to investigate the endotaxy-based and extensionality-based labor supply of drivers. To address the endophytism problem caused by measurement error and peer effect, it uses the number of fares with long trips the drivers encounter that very day as the instrument variable for earnings per hour to analyze the influence of earnings per hour on drivers' labor supply. It argues that the elasticity of endotaxy-based and extensionality-based labor supply of Hangzhou cabdrivers to wages is significantly positive, showing that government policies such as the increase in oil subsidies are actually effective incentives to raise cabdrivers' labor supply. Meanwhile, it also implies that the release from the price regulation of taxi market can help drivers to optimize their work decisions better according to the market demands.