Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?

Miles Kimball and Matthew D. Shapiro

No 14208, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Labor supply is unresponsive to permanent changes in wage rates. Thus, income and substitution effects cancel, but are they both close to zero or both large? This paper develops a theory of labor supply where income and substitution effects cancel, taking into account optimization over time, fixed costs of going to work, and interactions of labor supply decisions within the household. The paper then applies this theory to survey evidence on the response of labor supply to a large wealth shock. The evidence implies that the constant marginal utility of wealth (Frisch) elasticity of labor supply is about one.

JEL-codes: C42 E24 J22 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-lab, nep-ltv and nep-mac
Note: EFG LS ME
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Citations: View citations in EconPapers (173)

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