Asymmetric Labor-Supply Responses to Wage-Rate Changes - Evidence from a Field Experiment

47 Pages Posted: 9 Apr 2016

See all articles by Philipp Dörrenberg

Philipp Dörrenberg

University of Mannheim; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); ZEW – Leibniz Centre for European Economic Research

Denvil Duncan

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA); Institute for the Study of Labor (IZA)

Max Loeffler

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2016

Abstract

The standard labor-supply literature typically assumes that the labor supply response to wage increases is the same as that for equivalent wage decreases. However, evidence from the behavioral-economics literature suggests that people are loss averse and thus perceive losses differently than gains. This behavioral insight may imply that workers respond differently to wage increases than to wage decreases. We estimate the effect of wage increases and decreases on labor supply using a randomized field experiment with workers on Amazon's Mechanical Turk. The results provide evidence that wage increases have smaller effects than wage decreases, suggesting that the labor-supply response to wage changes is asymmetric. This finding is especially strong on the extensive margin where the elasticity for a wage decrease is twice that for a wage increase. These findings suggest that a reference-dependent utility function that incorporates loss aversion is the most appropriate way to model labor supply.

Keywords: Labor supply, loss aversion, labor supply elasticities w.r.t. wages

JEL Classification: J22, J31, D03

Suggested Citation

Dörrenberg, Philipp and Duncan, Denvil and Loeffler, Max, Asymmetric Labor-Supply Responses to Wage-Rate Changes - Evidence from a Field Experiment (January 15, 2016). ZEW - Centre for European Economic Research Discussion Paper No. 16-006, Indiana University, Bloomington School of Public & Environmental Affairs Research Paper, Available at SSRN: https://ssrn.com/abstract=2760286 or http://dx.doi.org/10.2139/ssrn.2760286

Philipp Dörrenberg (Contact Author)

University of Mannheim ( email )

L 7, 3-5
Mannheim, 68161
Germany

IZA Institute of Labor Economics ( email )

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

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Munich
Germany

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Denvil Duncan

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Institute for the Study of Labor (IZA) ( email )

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

Max Loeffler

affiliation not provided to SSRN

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