Estimating leisure goods models on time series of cross sections

Abstract

This paper analyses the joint modelling of labour supply and consumer expenditure in a utility maximizing framework. A recent demand system (AIDS) is augmented to include labour supply and incorporate time series/cross section wage rate variation and, then, estimated on pooled F.E.S. data [Family Expenditure Surveys]. A method of non linear FIML is applied. The paper questions the near unanimous ‘evidence’ on backward bending labour supply in previous studies and, using counter evidence, argues that such a bend could have been partly due to the restrictive utility forms usually employed. In addition, hypotheses relating to effects of price/wage movements on composition of ‘full income’ are tested, and the welfare implications of the estimated parameter estimates worked out.