The Effects of Hours Constraints on Labor Supply Estimates

Abstract

Almost all labor supply models are estimated under the assumption that workers are free to choose their hours. However, theory, casual empiricism and survey data suggest that many workers are not free to vary the hours within a job. Consequently, labor supply estimates based on actual hours of work may be biased. Using Canadian data on desired hours of work, we find that using actual hours causes labor supply estimates to be biased upwards but the bias is small.