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Do Workers Work More When Wages Are High? Evidence from a Randomized Field Experiment

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  • Fehr, Ernst

    ()
    (University of Zurich)

  • Götte, Lorenz

    ()
    (University of Lausanne)

Abstract

Most previous studies on intertemporal labor supply found very small or insignificant substitution effects. It is not clear, however, whether these results are due to institutional constraints on workers’ labor supply choices or whether the behavioral assumptions of the standard life cycle model with time separable preferences are empirically invalid. We conducted a randomized field experiment in a setting in which workers were free to choose their working times and their efforts during working time. We document a large positive wage elasticity of overall labor supply and an even larger wage elasticity of labor hours, which implies that the wage elasticity of effort per hour is negative. While the standard life cycle model cannot explain the negative effort elasticity, we show that a modified neoclassical model with preference spillovers across periods and a model with reference dependent, loss averse preferences are consistent with the evidence. With the help of a further experiment we can show that only loss averse individuals exhibit a significantly negative effort response to the wage increase and that the degree of loss aversion predicts the size of the negative effort response.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1002.

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Length: 48 pages
Date of creation: Jan 2004
Date of revision:
Publication status: published in: American Economic Review, 2007, 97 (1), 298-317
Handle: RePEc:iza:izadps:dp1002

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Keywords: loss aversion; intertemporal substitution; labor supply;

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References

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  1. Harry J. Paarsch & Bruce S. Shearer, 1999. "The Response of Worker Effort to Piece Rates: Evidence from the British Columbia Tree-Planting Industry," Journal of Human Resources, University of Wisconsin Press, vol. 34(4), pages 643-667.
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Cited by:
  1. Marianne Bertrand & Dean S. Karlan & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," Working Papers, Economic Growth Center, Yale University 918, Economic Growth Center, Yale University.
  2. Charles Bellemare, 2007. "Gift exchange within a firm: Evidence from a field experiment," Natural Field Experiments, The Field Experiments Website 00215, The Field Experiments Website.
  3. Kuckulenz, Anja, 2006. "Wage and Productivity Effect of Continuing Training in Germany: A Sectoral Analysis," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 06-25, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Anja Kuckulenz, 2006. "Wage and Productivity Effect of Continuing Training in Germany : A Sectoral Analysis," Working Papers of the Research Group Heterogenous Labor, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim 06-06, Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim.
  5. Lorenz Goette & David Huffman & Ernst Fehr, . "Loss Aversion and Labor Supply," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 178, Institute for Empirical Research in Economics - University of Zurich.

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