Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?

65 Pages Posted: 4 Aug 2008 Last revised: 28 Aug 2008

See all articles by Miles S. Kimball

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2008

Abstract

Labor supply is unresponsive to permanent changes in wage rates. Thus, income and substitution effects cancel, but are they both close to zero or both large? This paper develops a theory of labor supply where income and substitution effects cancel, taking into account optimization over time, fixed costs of going to work, and interactions of labor supply decisions within the household. The paper then applies this theory to survey evidence on the response of labor supply to a large wealth shock. The evidence implies that the constant marginal utility of wealth (Frisch) elasticity of labor supply is about one.

Suggested Citation

Kimball, Miles S. and Shapiro, Matthew D., Labor Supply: Are the Income and Substitution Effects Both Large or Both Small? (July 2008). NBER Working Paper No. w14208. Available at SSRN: https://ssrn.com/abstract=1190357

Miles S. Kimball (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics ( email )

and Survey Research Center
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Ann Arbor, MI 48109-1220
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313-764-2769 (Fax)

National Bureau of Economic Research (NBER) ( email )

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313-764-2769 (Fax)

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