Labor Supply Estimation Biases from Disregarding Nonwage Benefits

27 Pages Posted: 14 May 2020

Date Written: April 2017


Labor supply models and research underpinned by labor supply decisions often assume that workers' choices are functions of wage and wage offers. However, the literature shows evidence that such decisions at least partly depend on nonwage benefits encompassed in jobs and occupations. In this paper, I develop and estimate a stochastic dynamic model of occupation and job choice, where nonwage benefits are directly incorporated into the decision alongside wages (a full model). Nested within the full model is a wage model, which represents the common practice in the literature of basing selection solely on wages and disregarding nonwage benefits. I separately estimate the full model and the nested wage model to compare the implications (biases) of omitting nonwage benefits. I compare the two models' estimates of elasticities and an inequality reduction intervention policy. I find that disregarding nonwage benefits generally causes biases. There are cases when the two models predict very similar outcomes and have close estimates, such as in occupation‐specific elasticities and job transition elasticities. But these special cases are products of canceling biases. In most cases, ignoring nonwage benefits will bias estimates by overestimating the importance of wage in the selection process and by disregarding changes in relative prices between wage and nonwage benefits.

JEL Classification: J20, J32, D91

Suggested Citation

Baird, Matthew, Labor Supply Estimation Biases from Disregarding Nonwage Benefits (April 2017). Economic Inquiry, Vol. 55, Issue 2, pp. 1064-1090, 2017, Available at SSRN: or

Matthew Baird (Contact Author)

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

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