Do Workers Work More If Wages are High? Evidence from a Randomized Field Experiment

IEW Working Paper No. 125

47 Pages Posted: 11 Dec 2002

See all articles by Ernst Fehr

Ernst Fehr

University of Zurich - Department of Economics

Lorenz Goette

University of Lausanne; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: September 2005

Abstract

Most previous studies on intertemporal labor supply found very small or insignificant substitution effects. It is not clear, however, whether these results are due to institutional constraints on workers' labor supply choices or whether the behavioral assumptions of the standard life cycle model with time separable preferences are empirically invalid. We conducted a randomized field experiment in a setting in which workers were free to choose their working times and their efforts during working time. We document a large positive wage elasticity of overall labor supply and an even larger wage elasticity of labor hours, which implies that the wage elasticity of effort per hour is negative.

While the standard life cycle model cannot explain the negative effort elasticity, we show that a modified neoclassical model with preference spillovers across periods and a model with reference dependent, loss averse preferences are consistent with the evidence. With the help of a further experiment we can show that only loss averse individuals exhibit a significantly negative effort response to the wage increase and that the degree of loss aversion predicts the size of the negative effort response.

Suggested Citation

Fehr, Ernst and Goette, Lorenz F., Do Workers Work More If Wages are High? Evidence from a Randomized Field Experiment (September 2005). IEW Working Paper No. 125. Available at SSRN: https://ssrn.com/abstract=326803 or http://dx.doi.org/10.2139/ssrn.326803

Ernst Fehr (Contact Author)

University of Zurich - Department of Economics ( email )

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Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

Lorenz F. Goette

University of Lausanne ( email )

Department of Economics
Batiment Internef
Lausanne, 1015
Switzerland
(021) 692'3496 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

HOME PAGE: http://www.iza.org

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