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Labor Supply with a Minimum Hours Threshold

Author

Listed:
  • David Card

    (Princeton University)

Abstract

This paper considers the importance of minimum hours thresholds for the interpretation of individual labor supply data. An analysis of quarterly labor supply outcomes for prime-age males in the Survey of Income and Program Participation suggests that such thresholds are an important aspect of weekly hours choices. A simple contracting model is presented that incorporates mobility costs and a non- convexity in the relation between weekly hours and effective labor input. This non-convexity gives rise to a two-part employment schedule. In periods of low demand, some individuals are temporarily laid off, while others work a minimum threshold level of hours. In periods of higher demand all available workers are employed at hours in excess of the threshold level. The model provides a simple interpretation for the role of demand-side variables in explaining annual labor supply outcomes. It can also explain the weak correlations between annual hours and average hourly earnings that have emerged in earlier studies. Under suitable assumptions on preferences the intertemporal labor supply elasticity can be recovered from the relationship between earnings and hours per week. Estimation results for the SIPP panel yield elasticity estimates that are similar to those in the literature based on annual data. If the model is correct, however, annual labor supply is considerably more sensitive to changes in productivity than these estimates suggest.

Suggested Citation

  • David Card, 1990. "Labor Supply with a Minimum Hours Threshold," Working Papers 642, Princeton University, Department of Economics, Industrial Relations Section..
    • Handle: RePEc:pri:indrel:262
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    Cited by:

    1. Manning, Alan, 2001. "Labour supply, search and taxes," Journal of Public Economics, Elsevier, vol. 80(3), pages 409-434, June.
    2. Leora Friedberg, 2000. "The Labor Supply Effects of the Social Security Earnings Test," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 48-63, February.
    3. Leora Friedberg & Anthony Webb, 2006. "Persistence in Labor Supply and the Response to the Social Security Earnings Test," Working Papers, Center for Retirement Research at Boston College wp2006-27, Center for Retirement Research, revised Dec 2006.
    4. Senesky, Sarah, 2005. "Testing the intertemporal labor supply model: are jobs important?," Labour Economics, Elsevier, vol. 12(6), pages 749-772, December.
    5. Lucie Schmidt & Purvi Sevak, 2006. "Taxes, Wages, and the Labor Supply of Older Americans," Working Papers wp139, University of Michigan, Michigan Retirement Research Center.
    6. Kimmel, Jean & Kniesner, Thomas J., 1998. "New evidence on labor supply:: Employment versus hours elasticities by sex and marital status," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 289-301, July.
    7. Yamada, Ken, 2011. "Labor supply responses to the 1990s Japanese tax reforms," Labour Economics, Elsevier, vol. 18(4), pages 539-546, August.
    8. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2013. "Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 1-56.
    9. John C. Ham & Kevin T. Reilly, 2002. "Testing Intertemporal Substitution, Implicit Contracts, and Hours Restriction Models of the Labor Market Using Micro Data," American Economic Review, American Economic Association, vol. 92(4), pages 905-927, September.
    10. Victoria Osuna & Jose-Victor Rios-Rull, 2003. "Implementing the 35 Hour Workweek by Means of Overtime Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 179-206, January.
    11. David Card, 1990. "Intertemporal Labor Supply: An Assessment," Working Papers 649, Princeton University, Department of Economics, Industrial Relations Section..
    12. Engelhardt, Gary V. & Kumar, Anil, 2009. "The repeal of the retirement earnings test and the labor supply of older men," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(4), pages 429-450, October.
    13. Mark L. Bryan, 2007. "Free to choose? Differences in the hours determination of constrained and unconstrained workers," Oxford Economic Papers, Oxford University Press, vol. 59(2), pages 226-252, April.
    14. Murphy, Daniel, 2017. "Excess capacity in a fixed-cost economy," European Economic Review, Elsevier, vol. 91(C), pages 245-260.
    15. Bryan, Mark L., 2006. "Paid holiday entitlements, weekly working hours and earnings in the UK," ISER Working Paper Series 2006-52, Institute for Social and Economic Research.

    More about this item

    Keywords

    labor supply; intertemporal substitution; employment contracts;

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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