Do workers work more when earnings are high?
Studies of independent contractors suggest that workers' effort may be more responsive to wage incentives than previously thought
Tess M. Stafford
University of New South Wales, Australia
A fundamental question in economic policy is how labor supply responds to changes in remuneration. The responsiveness of labor supply determines the size of the employment impact and efficiency loss of progressive income taxation. It also affects predictions about the impacts of policies ranging from fiscal responses to business cycles to government transfer programs. The characteristics of jobs held by independent contractors provide an opportunity to overcome problems faced by earlier studies and help answer this fundamental question.
Studies of independent contractors' labor supply offer advantages over studies that focus on more traditional labor markets, because earnings variation occurs on a daily basis and because workers have the autonomy to choose when to work.
Studies of independent contractors' labor supply confirm a key prediction of standard economic theory: Workers with the flexibility to choose when to work choose to work more when earnings are temporarily high.
Although several studies document what appears to be "irrational" worker behavior, the majority of the evidence suggests that any irrational tendencies play a limited role in labor supply decisions.
Estimates of the response of labor supply to small and transitory variations in remuneration derived from more traditional labor markets may be erroneously small.
To correctly estimate labor supply responses, researchers must identify changes in labor supply that are caused by changes in earnings, and ensure that errors in measuring labor supply do not create a spurious negative relationship between observed earnings and labor supply.
When wages grow with work experience, relating wage variation with hours variation, as is done typically, will produce erroneously small estimates of the response of labor supply to transitory variations in remuneration.
Studies of independent contractors' labor supply confirm a key prediction of standard economic theory: workers work more (in fact, quite a bit more) when earnings are temporarily high. Failing to identify a causal relationship between earnings and hours worked and failing to address errors in measuring hours worked can produce erroneously small or even negative estimates of workers' responsiveness to higher earnings. These findings suggest that the efficiency costs of progressive labor income taxation are larger than previously thought.
labor supply, wage elasticity, substitution effect, reference dependence, returns to work experience
How responsive is the labor market to tax policy?
Richard Blundell
The importance and challenges of measuring work hours
Jay Stewart Harley Frazis
Performance-related pay and productivity
Claudio Lucifora Federica Origo
Should firms allow workers to choose their own wage?
Gary B. Charness
Relative pay, effort, and labor supply
Anat Bracha
Imai and Keane (2004)
Imai, S., Keane, M. P. "Intertemporal labor supply and human capital accumulation" International Economic Review 45:2 (2004): 601−641.
Koszegi and Rabin (2006)
Koszegi, B., Rabin, M. "A model of reference-dependent preferences" The Quarterly Journal of Economics 121:4 (2006): 1133−1165.
[1] Blundell and MaCurdy (1999)
[1]Blundell, R., MaCurdy, T. "Labor supply: A review of alternative approaches" Handbook of Labor Economics 3 (1999): 1559−1695.
[1]Current Population Survey (CPS), USA
[2]Family Expenditure Survey, UK
[3]German Socio-Economic Panel (GSOEP)
[4]Statistics Sweden
[1]Survey data (Micro data): Household data - Cross section
[3]Survey data (Micro data): Household data - Longitudinal or Panel
United States, United Kingdom, Germany, Sweden
[2] Camerer et al. (1997)
[2]Camerer, C., Babcock, L., Loewenstein, G., Thaler, R. "Labor supply of New York City cabdrivers: One day at a time" The Quarterly Journal of Economics 112:2 (1997): 407−441.
[1]New York City Taxi and Limousine Commission
[3] Chou (2002)
[3]Chou, Y. K. "Testing alternative models of labour supply: Evidence from taxi drivers in Singapore" The Singapore Economic Review 47:1 (2002): 17−47.
[1]Data set from Chou (2002)
[4] Farber (2015)
[4]Farber, H. S. "Why you can't find a taxi in the rain and other labor supply lessons from cab drivers" The Quarterly Journal of Economics 130:4 (2015): 1975−2026.
[5] Fehr and Goette (2007)
[5]Fehr, E., Goette, L. "Do workers work more if wages are high? Evidence from a randomized field experiment" The American Economic Review 97:1 (2007): 298−317.
[1]Data set from Fehr and Goette (2007)
[1]Experimental data (Micro data): Field experiments - Cross section
[6] Oettinger (1999)
[6]Oettinger, G. S. "An empirical analysis of the daily labor supply of stadium vendors" Journal of Political Economy 107:2 (1999): 360−392.
[1]Data set from Oettinger (1999)
[7] Stafford (2015)
[7]Stafford, T. M. "What do fishermen tell us that taxi drivers don't? An empirical investigation of labor supply" Journal of Labor Economics 33:3 (2015): 683−710.
[1]Data set from Stafford (2015)
[1]Administrative data (Micro data) - Cross section
[8] Gine et al. (2017)
[8]Gine, X., Martinez-Bravo, M., Vidal-Fernandez, M. "Are labor supply decisions consistent with neoclassical preferences? Evidence from Indian boat owners" Journal of Economic Behavior & Organization 142 (2017): 331−347.
[1]Data set from Gine et al. (2017)
[9] French and Stafford (2017)
[9]French, S., Stafford, T. M. Returns to Experience and the Elasticity of Labor Supply UNSW Business School Research Paper No.2017−15, 2017.
[1]Florida Fish and Wildlife Conservation Commission
[10] Borjas (1980)
[10]Borjas, G. J. "The relationship between wages and weekly hours of work: The role of division bias" The Journal of Human Resources 15:3 (1980): 409−423.
[1]NLS Older Men
[11] Farber (2008)
[11]Farber, H. S. "Reference-dependent preferences and labor supply: The case of New York City taxi drivers" The American Economic Review 98:3 (2008): 1069−1082.
[1]Data set from Farber (2008)
[12] Crawford and Meng (2011)
[12]Crawford, V. P., Meng, J. "New York City cab drivers' labor supply revisited: Reference-dependent preferences with rational-expectations targets for hours and income" The American Economic Review 101:5 (2011): 1912−1932.
Blundell, R., MaCurdy, T. "Labor supply: A review of alternative approaches" Handbook of Labor Economics 3 (1999): 1559−1695.
Camerer, C., Babcock, L., Loewenstein, G., Thaler, R. "Labor supply of New York City cabdrivers: One day at a time" The Quarterly Journal of Economics 112:2 (1997): 407−441.
Chou, Y. K. "Testing alternative models of labour supply: Evidence from taxi drivers in Singapore" The Singapore Economic Review 47:1 (2002): 17−47.
Farber, H. S. "Why you can't find a taxi in the rain and other labor supply lessons from cab drivers" The Quarterly Journal of Economics 130:4 (2015): 1975−2026.
Fehr, E., Goette, L. "Do workers work more if wages are high? Evidence from a randomized field experiment" The American Economic Review 97:1 (2007): 298−317.
Oettinger, G. S. "An empirical analysis of the daily labor supply of stadium vendors" Journal of Political Economy 107:2 (1999): 360−392.
Stafford, T. M. "What do fishermen tell us that taxi drivers don't? An empirical investigation of labor supply" Journal of Labor Economics 33:3 (2015): 683−710.
Gine, X., Martinez-Bravo, M., Vidal-Fernandez, M. "Are labor supply decisions consistent with neoclassical preferences? Evidence from Indian boat owners" Journal of Economic Behavior & Organization 142 (2017): 331−347.
French, S., Stafford, T. M. Returns to Experience and the Elasticity of Labor Supply UNSW Business School Research Paper No.2017−15, 2017.
Borjas, G. J. "The relationship between wages and weekly hours of work: The role of division bias" The Journal of Human Resources 15:3 (1980): 409−423.
Farber, H. S. "Reference-dependent preferences and labor supply: The case of New York City taxi drivers" The American Economic Review 98:3 (2008): 1069−1082.
Crawford, V. P., Meng, J. "New York City cab drivers' labor supply revisited: Reference-dependent preferences with rational-expectations targets for hours and income" The American Economic Review 101:5 (2011): 1912−1932.