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Non-Wage Benefits in a Simultaneous Model of Wages and Hours: Labor Supply Functions of Young Females

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  • Vella, Francis

Abstract

This paper examines the estimation of a simultaneous model of hours and wages. We argue the relationship between weekly hours worked and the hourly wage is due to increasing marginal tax rates. As the total wage increases, due to increasing hours, employers and employees avoid taxation by substituting wages with non-taxable non-wage benefits. This is attentuated by labor legislation entitling employees to employer provided benefits. We estimate a wage that is independent of any benefit effect and employ it in the labor supply functions. An estimator is presented for the wage/hours market locus and the structural labor supply function. An application to the data examined Moffitt (1984) supports the validity of the procedure. A second application reveals that a previous study which concluded that the labor supply function of young females is downward sloping is misleading.

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Handle: RePEc:ags:monebs:267067
DOI: 10.22004/ag.econ.267067
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