A Shred of Credible Evidence on the Long Run Elasticity of Labor Supply

30 Pages Posted: 15 Mar 2010

See all articles by Orley Ashenfelter

Orley Ashenfelter

Princeton University - Industrial Relations Section; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Kirk Doran

University of Notre Dame

Bruce Schaller

affiliation not provided to SSRN

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Abstract

Virtually all public policies regarding taxation and the redistribution of income rely on explicit or implicit assumptions about the long run effect of wage rates on labor supply. The available estimates of the wage elasticity of male labor supply in the literature have varied between -0.2 and 0.2, implying that permanent wage increases have relatively small, poorly determined effects on labor supplied. The variation in existing estimates calls for a simple, natural experiment in which men can change their hours of work, and in which wages have been exogenously and permanently changed. We introduce a panel data set of taxi drivers who choose their own hours, and who experienced two exogenous permanent fare increases instituted by the New York City Taxi and Limousine Commission, and we use these data to fit a simple structural labor supply function. Our estimates suggest that the elasticity of labor supply is about -0.2, implying that income effects dominate substitution effects in the long run labor supply of males.

Keywords: labor supply

JEL Classification: J22

Suggested Citation

Ashenfelter, Orley C. and Doran, Kirk and Schaller, Bruce, A Shred of Credible Evidence on the Long Run Elasticity of Labor Supply. IZA Discussion Paper No. 4810. Available at SSRN: https://ssrn.com/abstract=1570428

Orley C. Ashenfelter (Contact Author)

Princeton University - Industrial Relations Section ( email )

Princeton, NJ 08544-2098
United States
609-258-4040 (Phone)
609-258-2907 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Kirk Doran

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Bruce Schaller

affiliation not provided to SSRN ( email )

No Address Available

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