A COMPLETE CHARACTERIZATION OF THE INVERTED S‐SHAPED LABOR SUPPLY CURVE

Tamotsu Nakamura and Yu Murayama

Metroeconomica, 2010, vol. 61, issue 4, 665-675

Abstract: Empirical evidence suggests that labor supply curves are downward sloping at low wage levels, i.e. ‘forward‐falling labor supply’. In contrast, the supply curve is only downward sloping at high wage levels in the canonical labor supply model, i.e. ‘backward‐bending’. This paper derives a labor supply curve with both forward‐falling and backward‐bending segments, or an ‘inverted S‐shape’ by incorporating two elements into a standard utility function: a subsistence level of consumption and a decreasing elasticity of substitution. It is also shown that the subsistence level of consumption plays a key role in determining the shape of the labor supply curve.

Date: 2010
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