Abstract
DAN BLACK, NATALIA KOLESNIKOVA, AND LOWELL TAYLORAbstract. In standard economic theory, labor supply decisions depend on the completeset of prices: the wage and the prices of relevant consumption goods. Nonetheless, mostof theoretical and empirical work ignores prices other than wages when studying laborsupply. The question we address in this paper is whether the common practice of ignoringlocal price variation in labor supply studies is as innocuous as has generally been assumed.We describe a simple model to demonstrate that the efiects of wage and non-labor incomeon labor supply will typically difier by location. We show, in particular, the derivativeof the labor supply with respect to non-labor income will be independent of price onlywhen labor supply takes a form based on an implausible separability condition. Empiricalevidence demonstrates that the efiect of price on labor supply is not a simple \up-or-downshift that would be required to meet the separability condition in our key proposition.JEL: J01, J21, R23.Keywords: labor supply, local labor markets, local prices.
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