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Labor supply response to windfall gains

Author

Listed:
  • Georgarakos, Dimitris
  • Jappelli, Tullio
  • Kenny, Geoff
  • Pistaferri, Luigi

Abstract

Using a large survey of euro area consumers, we conduct an experiment in which respondents report how they would adjust their labor market participation, hours worked, and job search effort (if not employed) in response to randomly assigned windfall gain scenarios. Windfall gains reduce labor supply, but only when the gains are substantial. At the extensive margin, gains of €25,000 or less have no effects, while gains between €50,000 and €100,000 reduce the probability of working by 1.5 to 3.5 percentage points. At the intensive margin, small gains produce no impact, while gains above €50,000 lead to a reduction of approximately one hour of work per week. The effects among women and workers near retirement are stronger. The share of non-employed respondents who stop or reduce job search intensity declines by 1 percentage point for each €10,000 in windfall gain, with the strongest effects observed among older individuals receiving €100,000. JEL Classification: E24, D10, J22, J68

Suggested Citation

  • Georgarakos, Dimitris & Jappelli, Tullio & Kenny, Geoff & Pistaferri, Luigi, 2025. "Labor supply response to windfall gains," Working Paper Series 3154, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253154
    Note: 483508
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D10 - Microeconomics - - Household Behavior - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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