Working Paper: NBER ID: w29099
Authors: Alexander Bick; Nicola Fuchs-Schundeln; David Lagakos; Hitoshi Tsujiyama
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.
Keywords: labor supply; hours worked; cross-country differences; structural change
JEL Codes: E0; E24; O11; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sectoral reallocation from self-employment to wage work (J29) | aggregate hours worked (J22) |
| declining fixed costs of wage work (J39) | labor supply along the extensive margin (J29) |
| declining fixed costs of wage work (J39) | employment rates in richer countries (F66) |
| sectoral reallocation (J69) | decrease in employment rates as workers transition to wage work (F66) |
| sectoral reallocation (J69) | hours per worker (J29) |