Local Price Variation and Labor Supply Behavior

Federal Reserve Bank of St. Louis Working Paper No. 2008-016A

19 Pages Posted: 18 Jun 2008

See all articles by Dan Black

Dan Black

University of Chicago - Harris School of Public Policy

Natalia Kolesnikova

Federal Reserve Bank of St. Louis

Lowell J. Taylor

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Date Written: June, 2008

Abstract

In standard economic theory, labor supply decisions depend on the complete set of prices: the wage and the prices of relevant consumption goods. Nonetheless, most of theoretical and empirical work ignores prices other than wages when studying labor supply. The question we address in this paper is whether the common practice of ignoring local price variation in labor supply studies is as innocuous as has generally been assumed. We describe a simple model to demonstrate that the effects of wage and non-labor income on labor supply will typically differ by location. We show, in particular, the derivative of the labor supply with respect to non-labor income will be independent of price only when labor supply takes a form based on an implausible separability condition. Empirical evidence demonstrates that the effect of price on labor supply is not a simple "up-or down shift" that would be required to meet the separability condition in our key proposition.

Keywords: labor supply, local labor markets, local prices

JEL Classification: J01, J21, R23

Suggested Citation

Black, Dan and Kolesnikova, Natalia and Taylor, Lowell J., Local Price Variation and Labor Supply Behavior (June, 2008). Federal Reserve Bank of St. Louis Working Paper No. 2008-016A. Available at SSRN: https://ssrn.com/abstract=1147175 or http://dx.doi.org/10.2139/ssrn.1147175

Dan Black

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Natalia Kolesnikova (Contact Author)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Lowell J. Taylor

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States
412-268-3278 (Phone)
412-268-7036 (Fax)

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