Work Costs and Nonconvex Preferences in the Estimation of Labor Supply Models

43 Pages Posted: 10 Jan 2003

See all articles by Bradley T. Heim

Bradley T. Heim

Duke University, Fuqua School of Business-Economics Group

Bruce D. Meyer

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies; National Bureau of Economic Research (NBER)

Date Written: January 2003

Abstract

We first critique the manner in which work costs have been introduced into labor supply estimation, and note the difficulty of incorporating a realistic rendering of the costs of work. We then show that, if work costs are not accounted for in the budget and time constraints in a structural labor supply model, they will be subsumed into the data generating preferences. We show that even if underlying preferences over consumption and leisure are convex, the presence of unobservable work costs can make these preferences appear nonconvex. Absent strong functional form assumptions, these work costs are not identified in data commonly used for labor supply estimation. However, we show that even if work costs cannot be separately identified, under plausible conditions, policy relevant calculations such as estimates of the effect of tax changes on labor supply and deadweight loss calculations, are not affected by the fact that estimated preferences incorporate work costs.

Suggested Citation

Heim, Bradley T. and Meyer, Bruce D., Work Costs and Nonconvex Preferences in the Estimation of Labor Supply Models (January 2003). NBER Working Paper No. w9429. Available at SSRN: https://ssrn.com/abstract=368185

Bradley T. Heim

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
305 Social Sciences Building
Durham, NC 27708-0097
United States

Bruce D. Meyer (Contact Author)

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies ( email )

1155 East 60th Street
Chicago, IL 60637
United States
(773) 702-2712 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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