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Labor Supply with Social Interactions: Econometric Estimates and Their Tax Policy Implications

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Abstract

Our research fleshes out econometric details of examining possible social interactions in labor supply. We look for a response of a person's hours worked to hours worked in the labor market reference group, which includes those with similar age, family structure, and location. We identify endogenous spillovers by instrumenting average hours worked in the reference group with hours worked in neighboring reference groups. Estimates of the canonical labor supply model indicate positive economically important spillovers for adult men. The estimated total wage elasticity of labor supply is 0.22, where 0.08 is the exogenous wage change effect and 0.14 is the social interactions effect. We demonstrate how ignoring or incorrectly considering social interactions can mis-etimate the labor supply response of tax reform by as much as 60 percent. Paper originally published in 2005, revised in 2006.

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Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 69.

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Length: 41 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:max:cprwps:69

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Cited by:
  1. Fabrice Etilé, 2007. "Social norms, ideal body weight and food attitudes," Health Economics, John Wiley & Sons, Ltd., vol. 16(9), pages 945-966.
  2. Grodner, Andrew & Kniesner, Thomas J. & Bishop, John A., 2011. "Social Interactions in the Labor Market," IZA Discussion Papers 5934, Institute for the Study of Labor (IZA).
  3. Maurin, Eric & Moschion, Julie, 2006. "The Social Multiplier and Labour Market Participation of Mothers," IZA Discussion Papers 2513, Institute for the Study of Labor (IZA).
  4. Bruce A. Weinberg, 2007. "Social Interactions with Endogenous Associations," NBER Working Papers 13038, National Bureau of Economic Research, Inc.

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