The theory of labour supply and commodity demand with an endogenous marginal wage rate

Abstract

The seventies have seen a burgeoning of an empirical literature on labour-leisure choice grounded in the work on the systems approach to the estimation of demand systems which flowered in the sixties. Working with the Klein-Rubin utility function, Betancourt (1973) extended Lluch’s ELES system (1970, 1973) to include the labour-leisure choice. Abbott and Ashenfelter (1976) analysed United States data on hours worked using both the Klein-Rubin and the indirect addilog utility functions (although, unlike Betancourt, they did not endogenize savings). Kiefer (1977) used a Bayesian approach to the estimation of a 7 commodity plus leisure system which imposed only classical restrictions on a Rotterdam model written in logarithmic differentials. He also explored the use of a quadratic indirect utility function as a second order Taylor approximation to an arbitrary nested indirect utility function in which Box/Cox transformations comprise the inner nests (Kiefer, 1975). Phlips (1978) has used an extended Klein-Rubin utility function, in which the real stock of money appears, to integrate the demand for commodities and leisure with the demand for money. Barnett (1979) has imbedded the commodity and leisure demand problem into a version of the Rotterdam model under relatively weak assumptions about preferences. Finally, recent empirical work using Betancourt’s TELES model on Australian data has been reported by Tulpulé (1978).