HOW ARE WORKING HOURS AND WAGE EARNINGS DETERMINED? A THEORETICAL AND EMPIRICAL STUDY

Abstract

Incorporating both supply and demand functions of working hours, we constructed a model of working hours. The model demonstrates that (1) working hours and wage earnings are determined jointly at an equilibrium point on a contract curve where the demand and supply of workers are equal, and (2) the contract curve passes through the intersection of the supply and demand curves of working hours. These results imply that (1) it is impossible to estimate the supply curve of working hours because equilibrium points are not usually located on a supply curve of working hours, and (2) a contract curve of working hours should be estimated to measure the wage elasticity of working hours. For the estimation of contract curves, geometric mean regression (GMR) was selected for three reasons. First, both variables in the contract curve equations are measured with errors. Second, the GMR estimator is the maximum likelihood estimator. Third, the coefficient of determination (R2) of both variables is equal in the GMR. Applying GMR, the contract curves of working hours and their wage elasticity were estimated. The estimated wage elasticity of working hours was between -0.13 and -0.23.