Labor Supply Model Research Articles

Consumption inequality across heterogeneous families

What does preference heterogeneity imply for consumption inequality? This paper studies the link from wage to consumption inequality within a lifecycle model of consumption and family labor supply. Its distinctive feature is that households have general heterogeneous preferences over consumption and labor supply. The paper shows identification of the joint distribution of unobserved household preferences separately from the observed distributions of incomes and outcomes. Estimation on data from the Panel Study of Income Dynamics in the US reveals substantial unexplained heterogeneity in consumption preferences but little unexplained heterogeneity in labor supply preferences. Preference heterogeneity accounts for about a third of consumption inequality in recent years and implies, on average, lower partial insurance of wage shocks compared to recent studies in the literature.

Predicting the path of labor supply responses when state dependence matters

The standard labor supply model ignores possible inertia originating from individuals’ previous labor supply decisions and assumes immediate adjustments to policy reforms. In this study we develop a model where past labor market status have effects on present decisions: first, there is habit dependence in the taste for leisure; second, labor market opportunities reflect experiences of the previous period; and third, there is a disutility of deviating from the choice of last period (status quo). All these three components induce state dependence in labor supply behavior and gradual rather than immediate responses to tax and benefit reforms. The model is estimated with data of Norwegian females over the period 2003 - 2009. Simulation results from a tax rate change suggest that state dependence bring down the short-term (first-year) responses to one-third of the full effect, and the full effect is reached after about five years. Our results also suggest that the disutility of deviating from status quo, modeled as a fixed cost of switching, is the dominant driving force of sluggishness in labor supply responses.

Understanding women's wage growth using indirect inference with importance sampling

SummaryThe goal of this work is to investigate the effects of time out of the labor market for childcare on women's lifecycle wage growth. We develop a dynamic lifecycle model of human capital, fertility, and labor supply for women. We estimate by indirect inference using importance sampling and formalize the use of this procedure. The results indicate a modest effect of fertility‐induced non‐employment spells on human capital accumulation. The difference in human capital among prime‐age women would be approximately 2.4% higher at its peak if the relationship between fertility and working were eliminated, and 4.7% higher if the relationship between marriage and fertility was also eliminated.

Labor Market Frictions and Moving Costs of the Employed and Unemployed

This paper examines the role of labor market frictions and moving costs in explaining the migration behavior of US workers by employment status. Using data on low-skilled workers from the Survey of Income and Program Participation (SIPP), I estimate a dynamic model of individual labor supply and migration decisions. The model incorporates a reduced-form search model and allows for migration for non-market reasons. My estimates show that moving costs are substantial and that labor market frictions primarily inhibit migration of the employed. I use the model to study migration responses to local labor market shocks and to a moving subsidy. Workers' preferences for non-market amenities, coupled with substantial moving costs and employment frictions, grant market power to incumbent employers. Large moving costs also likely affect employers' recruiting behavior.

Who wins, who loses? Identification of conditional causal effects, and the welfare impact of changing wages

The incidence of tax and other policy changes depends on their impact on equilibrium wages. In a standard model of labor supply, the impact of wage changes on a worker’s welfare equals current labor supply times the induced wage change. Worker heterogeneity implies that wage changes vary across workers. In this context, in order to identify welfare effects one needs to identify the causal effect of policy changes on wages conditional on baseline labor supply and wages.This paper characterizes identification of such outcome-conditioned causal effects for general vectors of endogenous outcomes. Even with exogenous policy variation, outcome-conditioned causal effects are only partially identified for outcome vectors of dimension larger than one. We provide assumptions restricting heterogeneity of effects just enough for point-identification and propose corresponding estimators.This paper then applies the proposed approach to analyze the distributional welfare impact (i) of the expansion of the Earned Income Tax Credit (EITC) in the 1990s, using variation in state supplements in order to identify causal effects, and (ii) of historical changes of the wage distribution in the US in the 1990s. For the EITC, we find negative welfare effects of depressed wages as a consequence of increased labor supply, in particular for individuals earning around $20,000 per year. Looking at historical changes, we find modest welfare gains rising linearly with earnings.

Offending Frequency and Responses to Illegal Monetary Incentives

We examine how responsive offenders are to illegal monetary incentives. We draw from rational choice theory, prospect theory, and models of labor supply to develop expectations regarding the relationship between criminal efficiency, which is the average earnings per offense, and frequency of offending. We use OLS, fixed effects, and first-difference estimators to analyze data from 152 incarcerated male inmates from Quebec, Canada to study within individual monthly changes in criminal efficiency and offending frequency. There is an inverse relationship between criminal efficiency and frequency of offending, net of individual fixed effects, for market crimes, but not property crimes. We also find that the supply of crime is inelastic, meaning it is not highly sensitive to illegal wage changes. In the months that offenders have an average bigger pay-off per crime, they offended less frequently. We conjecture that this negative relationship could be explained by two mechanisms: an income effect and/or through reference dependence. However, we are not able to disentangle between the two mechanisms. Moreover, we note that criminal efficiency is likely endogenous and should be treated as such in future scholarship.

Estimating Time Preferences for Leisure

We study time preferences by means of a longitudinal lab experiment involving both monetary and non-monetary rewards (leisure). Our novel design allows to measure whether participants prefer to anticipate or delay gratification, without imposing any structural assumption on the instantaneous utility, intertemporal utility or the discounting functions. We find that most people prefer to anticipate monetary rewards (positive time preferences for money), but they delay non-monetary rewards (negative time preferences for leisure). These results cannot be explained by personal timetables and heterogeneous preferences only. They invite to reconsider the psychological interpretation of the discount factor, and suggest that the assumption that discounting is consistent across domains can lead to non-negligible prediction errors in models involving non-monetary decisions, such as labor supply models.

Banking Access and Racial Inequality: Wealth and Human Capital Accumulation of Young Men

There are large racial differences in access to the financial system among young adults. Lack of access to savings and investment opportunities results in low financial returns on savings. Low returns, in turn, reduce ex-ante incentives to save, work, and invest in human capital. Using a structural model of schooling, labor supply, and savings with unequal financial access and endogenous borrowing constraints, I quantify the effects of racial differences in financial access and labor market discrimination on the observed racial wealth gap. Counterfactual policy experiments suggest that a financial inclusion policy that provides full access increases African American youths’ median net worth level and reduces racial wealth inequality. In comparison, a college tuition reduction policy is less effective in reducing wealth inequality.

Revisiting Retirement and Social Security Claiming Decisions

Why do individuals retire and claim their Social Security benefits at the age they do? Understanding the key drivers of these decisions has been an important topic of research as it can help guide policy discussions on the impact of potential reforms to the Social Security program. We revisit this crucial question by exploring new sources of heterogeneity in these decisions as well as novel mechanisms governing these trade-offs. Using data from the Health and Retirement Study and the Understanding America Survey, we first document (1) important heterogeneities in social security claiming behavior of men by their education and marital status, (2) strong correlations between health, labor supply and benefit claiming decisions and (3) significant misinformation related to Social Security program knowledge and survival chances at older ages. We then build a life-cycle model of consumption, savings, labor supply, and Social Security application decisions as well as heterogeneity in education, marital status and SS program knowledge. The model includes uncertainty in health, subjective survival, wages, and job separation as well as rich details of the U.S. Social Security program to understand why a majority of individuals claim Social Security benefits prior to their normal retirement age, despite large penalties associated with these early benefit claims. We show that the estimated model can closely match the claiming behavior as seen in the data and also produce differences in SS claims along the dimensions of heterogeneity considered. Counterfactual experiments indicate that precautionary motives, misinformation, and preferences governing future discounting as well as altruism, together, go a long way in explaining overall claiming behavior. Together, these forces can explain a third of the overall early benefit claims and two-thirds of age 62 claims– with varying intensities across education and marital groups.

The Drivers of the Nursing Workforce Gap: A Theoretical Framework

This paper presents a new model of nursing labour supply that reconciles key features of the current state of nursing in the NHS: a large, persistent and potentially growing workforce gap; staff surveys that show that nurses gain great satisfaction from the job they do, but feel they don’t have enough colleagues to enable them to do it well; a large fraction of nurses working paid and unpaid overtime; nurses leaving citing as significant factors both workload and an inability to deliver the quality of care that they would like to give. The paper examines both the intensive and extensive margins of nurse labour supply by extending the standard model of labour supply to include the intrinsic value nurses attach to providing care, which depends on the time a nurse can spend with each patient. This leads nurses to overworking in a well-defined sense. Choosing to work as a nurse involves balancing off: relative pay; the disutility from overworking as a nurse; the intrinsic benefit derived from nursing. For given levels of demand and a given relative wage for nursing, there may be multiple “equilibrium” levels of the workforce gap, some of which are unstable. However calibrating the model to recent data for the UK shows that this can be characterised as a unique stable equilibrium, and that a pay increase for nurses is a very effective means of reducing the gap.

Structural Change in Labor Supply and Cross-Country Differences in Hours Worked

This paper studies how structural change in labor supply along the development spectrum shapes cross-country differences in hours worked. We emphasize two main forces: sectoral reallocation from self-employment to wage work, and declining fixed costs of wage work. We show that these forces are crucial for understanding how the extensive margin (the employment rate) and intensive margin (hours per worker) of aggregate hours worked vary with income per capita. To do so we build and estimate a quantitative model of labor supply featuring a traditional self-employment sector and a modern wage-employment sector. When estimated to match cross-country data, the model predicts that sectoral reallocation explains more than half of the total hours decrease at lower levels of development. Declining fixed costs drive the rise in employment rates at higher levels of income per capita, and imply higher hours in the future, in contrast to the lower hours resulting from income effects and expansions in tax-and-transfer systems. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Delay the Pension Age or Adjust the Pension Benefit? Implications for Labor Supply and Individual Welfare in China

We develop and calibrate a life-cycle model of labor supply and consumption to quantify the implications of alternative pension reforms on labor supply, individual welfare, and government budget for China’s basic old-age insurance program. We focus on urban males and distinguish low-skilled and high-skilled individuals, who differ in their preferences, health and labor income dynamics, and medical expense processes. We use the calibrated model to evaluate three potential pension reforms: (i) increasing the pension eligibility age from 60 to 65, but keeping the current pension benefit rule unchanged; (ii) keeping the pension eligibility age at 60, but proportionally lowering pension benefits so that the pension program’s budget is the same as under Reform (i); and (iii) increasing the pension eligibility age to 65 and simultaneously increasing the pension benefits so that individuals of both skill types attain the same individual welfare levels as in the status quo. We find that relative to the baseline, both Reforms (i) and (ii) can substantially improve the budgets of the pension system, but at the cost of substantial individual welfare loss for both skill types. In contrast, we find that Reform (iii) can modestly improve the budget of the pension system while ensuring that both skill types are as well off as in the status quo. We find that Reforms (i) and (ii) slightly increases, but Reform (iii) slightly decreases, the overall labor supply.

A Study on the Elasticity of Labor Supply of Chinese Taxi Drivers

The theory of labor supply consists of two major theories: neoclassical theory and reference dependence theory. However, the theories are both interoperable and contradictory. Through the literature review of the development of labor supply theories and combined with the study on current development status of China’s taxi industry, this paper made a study on the elasticity of labor supply of Chinese taxi drivers. The theories and models of labor supply are sorted out and analyzed by taking the Chinese taxi industry as an example to be the basis for a further empirical research.

Kinks as Goals: Accelerating Commissions and the Performance of Sales Teams

We study the performance of small retail sales teams facing an incentive scheme that includes both a lump sum bonus and multiple accelerators (kinks where the piece rate jumps upward). Consistent with standard labor supply models, we find that the presence of an attainable bonus or kink on a work-day raises mean sales, and that sales are highly bunched at the bonus; inconsistent with those models we find that teams bunch at the kinks instead of avoiding them. Teams' responses to the kinks are consistent with models in which the kinks are perceived as symbolic rewards, and inconsistent with reference point models where kinks induce loss aversion.

Kinks as Goals: Accelerating Commissions and the Performance of Sales Teams

We study the performance of small retail sales teams facing an incentive scheme that includes both a lump sum bonus and multiple accelerators (kinks where the piece rate jumps upward). Consistent with standard labor supply models, we find that the presence of an attainable bonus or kink on a work-day raises mean sales, and that sales are highly bunched at the bonus; inconsistent with those models we find that teams bunch at the kinks instead of avoiding them. Teams’ responses to the kinks are consistent with models in which the kinks are perceived as symbolic rewards, and inconsistent with reference point models where kinks induce loss aversion.

Do Disability Benefits Hinder Work Resumption After Recovery?

While a large share of Disability Insurance recipients are expected to recover, outflow rates from temporary disability schemes are typically negligible. We estimate the disincentive effects of disability benefits on the response to a (mental) health improvement using administrative data on all Dutch disability benefit applicants. We compare those below the DI eligibility threshold with those above and find that disincentives significantly reduce work resumption after health improves. Approximately half of the response to recovery is offset by benefits. Structural labor supply model estimates suggest disincentive effects are substantially larger when the workers’ earnings capacity is fully restored.

Non‐Pecuniary Rewards, Multiple Job‐Holding and the Labour Supply of Creative Workers: The Case of Book Authors*

Non‐pecuniary rewards to work, or psychic income, are a pervasive phenomenon in several labour markets, yet they have been little investigated either theoretically or empirically. Creative industries are a particular case where non‐monetary incentives are widely observed. These are also industries where moonlighting commonly occurs because artistic or creative activity is generally low paid, such that workers have to balance their chosen pursuit with another job to make ends meet. In this paper we propose a labour supply model that accounts for the psychic income derived from creative work, monetary remuneration and heterogeneity between occupations in a multiple job‐holding context. The model is estimated using three‐stage least squares, allowing us to control for simultaneity bias due to the constraint of time and the tendency for multiple job‐holdings. We estimate the model using data from a survey of Australian book authors. The use of a proxy for psychic income, measured as the disparity between an author’s monetary compensation and a shadow price of labour, enables us to gauge the effects of non‐pecuniary benefits on the labour supply decisions of this type of creative worker.

Effects of taxes and safety net pensions on life-cycle labor supply, savings and human capital: The case of Australia

We structurally estimate a life-cycle model of consumption, labor supply and retirement, using data from the Australian HILDA panel. We use the model to evaluate effects of Australia’s Age Pension system and income tax policy on labor supply, consumption and retirement. Our model accounts for human capital, savings, uninsurable wage risk and credit constraints. We account for “bunching” of hours by assuming a discrete set of hours levels, and we investigate labor supply on both the intensive and extensive margins. Our model allows us to quantify the effects of anticipated and unanticipated tax and pension policy changes at different points of the life-cycle. Our results imply that Australia’s Age Pension system as currently designed is poorly targeted. Our simulations suggest that a doubling of taper rates, combined with a 5.9% reduction of income tax rates, would be budget neutral and Pareto improving.

The allocation of time in public administrations subject to bribery in developing countries: The basic model of labour supplu revisited

Abstract. The purpose of this article is to revisit the basic model of labour supply taking into account the existence of corruption in public administrations in developing countries. The worker-consumer programme modified by the integration of bribery shows that at equilibrium, the optimal solution leads to a Marginal Rate of Substitution of leisure consumption equal to the real contractual wage rate plus the actual bribe rate. Because of the latter, the reserve wage is no longer an essential determinant for participating in the labour market. Corruption seems to amplify the substitution and income effects. Keywords. Time allocation, Bribery-Marginal rate of consumption, Leisure substitution, Reserve wage, Substitution effect, Income effect. JEL. G11, G17, C53, C58.

Reservation Wages and Workers’ Valuation of Job Flexibility: Evidence from a Natural Field Experiment

Recent changes in labor arrangements have increased interest in estimating and understanding the value of job flexibility. We leverage a large natural i¬ eld experiment at Uber to create exogenous variation in expected market wages across individuals and over time. Combining this experiment with high frequency panel data on wages and individual work decisions, we document how labor supply responds to exogenous changes in expected market wages in a setting with virtually no restrictions on driver labor allocation. We find that there is i) systematic heterogeneity in labor supply responses both across drivers and within a driver over time, ii) significant fixed costs of beginning a shift, and iii) high rider demand when it is costly for drivers to work. These three findings motivate a model of labor supply with heterogenous preferences over work schedules, adjustment costs, and statistical dependence between market wages and the costs of driving. We recover the labor supply elasticities and reservation wages of this dynamic labor supply model via a combination of experimental estimates and other data moments. We then perform counterfactual analyses that allow us to examine how preference heterogeneity and adjustment costs influence the responses of workers’ to wage incentives as well as infer drivers’ willingness to pay for the ability to customize and adjust their work schedule. We also show that a static approach to the driver’s dynamic problem delivers materially different estimates of workers’ labor supply elasticities and their value of job flexibility.