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Duality and the Slutsky income and substitution effects of increases in wage rate uncertainty

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  • Carmen F. Menezes
  • X. Henry Wang

Abstract

The labor supply decision under wage rate uncertainty has received considerable attention in the literature. While the literature has obtained the Slutsky decomposition for an increase in the expected wage rate under uncertainty, it has yet to provide a Slutsky decomposition for an increase in wage rate uncertainty. This paper uses duality to obtain such decomposition. Under plausible assumptions about preferences, the Slutsky income effect is positive while the Slutsky substitution effect is negative. This confirms the intuition in the literature that the total effect of an increase in wage uncertainty is the composite of opposing tendencies. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oep/gpi029
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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 57 (2005)
Issue (Month): 3 (July)
Pages: 545-557

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Handle: RePEc:oup:oxecpp:v:57:y:2005:i:3:p:545-557

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Cited by:
  1. Eftichios Sartzetakis & Panagiotis D. Tsigaris, 2007. "Uncertainty and the Double Dividend Hypothesis," Working Papers 2007.99, Fondazione Eni Enrico Mattei.
  2. Jacobs, Bas & Schindler, Dirk, 2012. "On the desirability of taxing capital income in optimal social insurance," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 853-868.
  3. Bas Jacobs & Dirk Schindler, 2009. "On the Desirability of Taxing Capital Income to Reduce Moral Hazard in Social Insurance," CESifo Working Paper Series 2806, CESifo Group Munich.
  4. Eichner, Thomas, 2011. "Portfolio selection and duality under mean variance preferences," Insurance: Mathematics and Economics, Elsevier, vol. 48(1), pages 146-152, January.

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