Labour Supply, Commodity Demand and the Allocation of Time

Abstract

Predictions of the behavioural responses to income and commodity taxes and subsidies have become of increasing interest in recent years. On the one hand, these predictions are important for discussions of the ultimate size of money transfers that will result from the institution of various tax and subsidy proposals.' On the other hand, these predictions are important for discussions of the economic efficiency of income and commodity taxes and subsidies, regardless of whether one measures the deadweight loss of a tax or subsidy or whether one directly attempts to determine the optimum tax or subsidy.2 In each of these cases empirical estimates of the effects of wage and commodity taxes on the incomecompensated demands for all commodities and on the supply of labour are necessary. At the same time, the extensive empirical work on the estimation of systems of commodity demand functions has continued independently of the rebirth of interest in the empirical estimation of labour supply functions.3 This is especially surprising since the theoretical inspiration for both bodies of empirical work is the classical theory of consumer choice and since the important work by both Becker [7] and Mincer [32] has emphasized that the wage rate plays a role not only as income but as a price in the allocation of non-market time and the demand for commodities. Consequently, the purpose of this paper is to summarize the implications of the classical theory of choice as applied to the consumer-worker for the relationships among commodity demand and labour supply functions, and then to explore the usefulness of these implications in the estimation of a complete set of seven aggregate commodity demand functions and an aggregate labour supply (hours of work) function. In the first section of the paper we summarize the general implications of the integrated economic theory of the demand for commodities and the allocation of time. We also set out the conditions under which the labour supply decision and the allocation of income to expenditure on commodities may be separated, as is implicitly assumed in most empirical work on consumer demand.4 The second section of the paper is a discussion of the data used for the empirical work in the third section. The latter includes the estimation of commodity demand and labour supply functions based on explicit direct and indirect utility functions and some approximate tests of the usefulness of the general empirical implications of the theoretical framework, including a test for whether non-market time may be considered separable in utility from commodities. In view of the fact that our results can hardly be considered the last word on the subject we conclude with observations on their limitations and the further research that would be desirable.