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Does Poverty Change Labor Supply? Evidence from Multiple Income Effects and 115,579 Bags

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  • Karlan, Dean
  • Banerjee, Abhijit
  • Trachtman, Hannah
  • Udry, Christopher

Abstract

The income elasticity of labor supply is a central parameter of many economic models. We test the response of labor supply and effort to exogenous changes in income using data from a randomized evaluation of a multi-faceted grant program in northern Ghana combined with a bagmaking operation that we implemented. We find strong evidence of a positive "income effect" on labor supply. We argue that simple models with either labor or capital market frictions cannot explain the results, whereas a model that allows for positive physiological or psychological productivity effects from higher income fits with our findings.

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  • Karlan, Dean & Banerjee, Abhijit & Trachtman, Hannah & Udry, Christopher, 2020. "Does Poverty Change Labor Supply? Evidence from Multiple Income Effects and 115,579 Bags," CEPR Discussion Papers 14812, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14812
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    Cited by:

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    2. Supreet Kaur & Sendhil Mullainathan & Suanna Oh & Frank Schilbach, 2025. "Do Financial Concerns Make Workers Less Productive?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 140(1), pages 635-689.
    3. Galego Mendes,Arthur & Miyamoto,Wataru & Nguyen,Thuy Lan & Pennings,Steven Michael & Feler,Leo, 2023. "The Macroeconomic Effects of Cash Transfers : Evidence from Brazil," Policy Research Working Paper Series 10652, The World Bank.
    4. Banerjee, Abhijit & Karlan, Dean & Osei, Robert & Trachtman, Hannah & Udry, Christopher, 2025. "Corrigendum to ‘Unpacking a multi-faceted program to build sustainable income for the very poor’ [J. Dev. Econ., 155 (2022) 102781]," Journal of Development Economics, Elsevier, vol. 172(C).
    5. Dmitriy Sergeyev & Chen Lian & Yuriy Gorodnichenko, 2023. "The Economics of Financial Stress," NBER Working Papers 31285, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Poverty; Labor supply; Income elasticity;
    All these keywords.

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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