Working Paper: NBER ID: w14208
Authors: Miles S. Kimball; Matthew D. Shapiro
Abstract: Labor supply is unresponsive to permanent changes in wage rates. Thus, income and substitution effects cancel, but are they both close to zero or both large? This paper develops a theory of labor supply where income and substitution effects cancel, taking into account optimization over time, fixed costs of going to work, and interactions of labor supply decisions within the household. The paper then applies this theory to survey evidence on the response of labor supply to a large wealth shock. The evidence implies that the constant marginal utility of wealth (Frisch) elasticity of labor supply is about one.
Keywords: Labor Supply; Income Effect; Substitution Effect; Wealth Shock; Elasticity
JEL Codes: C42; E24; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income effect (D12) | labor supply (J20) |
| substitution effect (D11) | labor supply (J20) |
| income effect + substitution effect (D11) | labor supply (J20) |
| real wage fluctuations (J31) | labor supply (J20) |
| family structure (J12) | labor supply elasticity (J20) |
| age (J14) | labor supply elasticity (J20) |
| income (E25) | labor supply elasticity (J20) |
| wealth shocks (G51) | labor supply elasticity (J20) |
| sweepstakes win (H27) | labor supply decisions (J22) |