Working Paper: NBER ID: w27314
Authors: Abhijit Banerjee; Dean Karlan; Hannah Trachtman; Christopher R. Udry
Abstract: The income elasticity of labor supply is a central parameter of many economic models. We test the response of labor supply and effort to exogenous changes in income using data from a randomized evaluation of a multi-faceted grant program in northern Ghana combined with a bag-making operation that we implemented. We find strong evidence of a positive “income effect” on labor supply. We argue that simple models with either labor or capital market frictions cannot explain the results, whereas a model that allows for positive physiological or psychological productivity effects from higher income fits with our findings.
Keywords: Labor Supply; Income Effects; Poverty; Psychological Productivity
JEL Codes: H31; J22; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased income (E25) | increased labor effort (J49) |
| higher unconditional cash transfers (H53) | increased productivity (O49) |
| income (E25) | psychological and physiological productivity effects (D29) |
| psychological and physiological productivity effects (D29) | increased labor supply (J20) |
| GUP program (H53) | increased participation in bag production (L67) |
| GUP program (H53) | increased earnings from bag production (E25) |
| increased income (E25) | no reduction in labor supply (J49) |
| income (E25) | overall labor supply (hours worked across all activities) (J22) |