Labor Supply with Social Interactions: Econometric Estimates and Their Tax Policy Implications

Syracuse University Center for Policy Research Working Paper No. 69

41 Pages Posted: 19 Apr 2011

See all articles by Andrew Grodner

Andrew Grodner

East Carolina University - Department of Economics

Thomas J. Kniesner

Claremont Graduate University - Department of Economic Sciences; Syracuse University - Department of Economics; IZA

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2006

Abstract

Our research fleshes out econometric details of examining possible social interactions in labor supply. We look for a response of a person's hours worked to hours worked in the labor market reference group, which includes those with similar age, family structure, and location. We identify endogenous spillovers by instrumenting average hours worked in the reference group with hours worked in neighboring reference groups. Estimates of the canonical labor supply model indicate positive economically important spillovers for adult men. The estimated total wage elasticity of labor supply is 0.22, where 0.08 is the exogenous wage change effect and 0.14 is the social interactions effect. We demonstrate how ignoring or incorrectly considering social interactions can mis-estimate the labor supply response of tax reform by as much as 60 percent.

JEL Classification: J22, Z13

Suggested Citation

Grodner, Andrew and Kniesner, Thomas J., Labor Supply with Social Interactions: Econometric Estimates and Their Tax Policy Implications (September 1, 2006). Syracuse University Center for Policy Research Working Paper No. 69. Available at SSRN: https://ssrn.com/abstract=1813999 or http://dx.doi.org/10.2139/ssrn.1813999

Andrew Grodner

East Carolina University - Department of Economics ( email )

A423 Brewster Building
Greenville, NC 27858
United States
2523286742 (Phone)

Thomas J. Kniesner (Contact Author)

Claremont Graduate University - Department of Economic Sciences ( email )

Claremont, CA 91711
United States

Syracuse University - Department of Economics ( email )

Syracuse, NY 13244-1020
United States

IZA

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

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