Labor Supply Response to Windfall Gains

Using a large survey of euro area consumers, we design an experiment in which respondents report how they would change the decision to participate in the labor market, the hours worked, and their search effort (if not employed) in response to randomly assigned windfall gain scenarios. Windfall gains reduce labor supply, but only if they are significant in size. At the extensive margin, we find no effect for gains below €25,000, and a decline in the probability of working of 3 percentage points for gains between €25,000 and €100,000. At the intensive margin, there is no effect for small gains, and a drop of roughly one weekly hour for gains above €50,000. Women and workers closer to retirement respond more strongly to windfall gains. Finally, the proportion of those who stop searching for a job or search less intensively falls by 1 percentage point for each €10,000 gain, and the effect is more pronounced for older individuals receiving the largest prize.