Greater Wage Inequality Reduces Average Hours of Work

Abstract

I argue that rising inequality in offered wages lowers average working hours. If labour supply is concave in wages, a decrease in the working hours of low‐paid workers is greater than an increase in working hours of high‐paid workers. Furthermore, due to low market opportunities, some low‐paid workers may leave the labour force. Using CPS‐MORG data for prime‐age men, I find evidence in support of this explanation. I establish empirically the concavity of the labour supply and find evidence that after controlling for the average wage, wage inequality has a negative effect on labour supply.