Structural Change in Labor Supply and Cross-Country Differences in Hours Worked

60 Pages Posted: 2 Aug 2021 Last revised: 3 Jun 2022

See all articles by Alexander Bick

Alexander Bick

Arizona State University (ASU) - Economics Department

Nicola Fuchs-Schündeln

Goethe University Frankfurt

David Lagakos

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

Hitoshi Tsujiyama

Goethe University Frankfurt

Date Written: July 2021

Abstract

This paper studies how structural change in labor supply along the development spectrum shapes cross-country differences in hours worked. We emphasize two main forces: sectoral reallocation from self-employment to wage work, and declining fixed costs of wage work. We show that these forces are crucial for understanding how the extensive margin (the employment rate) and intensive margin (hours per worker) of aggregate hours worked vary with income per capita. To do so we build and estimate a quantitative model of labor supply featuring a traditional self-employment sector and a modern wage-employment sector. When estimated to match cross-country data, the model predicts that sectoral reallocation explains more than half of the total hours decrease at lower levels of development. Declining fixed costs drive the rise in employment rates at higher levels of income per capita, and imply higher hours in the future, in contrast to the lower hours resulting from income effects and expansions in tax-and-transfer systems.

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Suggested Citation

Bick, Alexander and Fuchs-Schündeln, Nicola and Lagakos, David and Tsujiyama, Hitoshi, Structural Change in Labor Supply and Cross-Country Differences in Hours Worked (July 2021). NBER Working Paper No. w29099, Available at SSRN: https://ssrn.com/abstract=3897535

Alexander Bick (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Nicola Fuchs-Schündeln

Goethe University Frankfurt ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

David Lagakos

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hitoshi Tsujiyama

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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