Topic 1 - Empirical and policy

aspects of labour supply

Professor Christine Greenhalgh
P Cahuc and A Zylberberg (2004) Labor Economics,
Chapter 1 Labor Supply, part 2.
D Bosworth, P Dawkins and T Stromback (1996)
The Economics of the Labour Market Chapter 5
A Manning (2003) Monopsony in Motion, Chapter 4:
The Elasticity of the Labor Supply Curve to an
Individual Firm.
T Boeri and J van Ours (2008) The Economics of
Imperfect Labour Markets, Chapter 5: Regulation
of Working Hours; Chapter 7: Family Policies.
 Estimating aggregate labour
supply elasticities – why useful?
• Future planning/projection of employment
and unemployment under changing policy
• Responses to fiscal policy affecting net pay
– Will a more progressive income tax affect
average hours of work?
– Does income support for lone parents affect
decisions to participate in work?
• Policies towards working hours, retirement
– Should we relax mandatory retirement?
Trends in Male and Female
Participation (US)
 Patterns of work in G5 countries
Source: Boeri and van Ours Table 5.2

1955 2005 % Weekly Weeks

Annual Annual Change hours (2002)
France 2040 1434 - 12.1 36.2 40.5
Germany 2265 1437 - 16.6 36.5 40.6
Japan 2081 1775 - 6.1
UK 2156 1624 - 10.6 38.2 40.5
US 2030 1790 - 4.8
Weekly working hours of women
and men aged 18-64 in Britain
Source: G Paull in Economic Journal Feb 2008

No Pre- Sch Post

Kids Sch Age Kids
W M W M W M W M

Hours
per 38 43 25 47 28 47 33 47
week
% FT
(>31h) 85 91 34 96 41 97 58 96
 Basic labour supply theory
Supply of work responds to the hourly wage but sign
of this effect is ambiguous because
– Substitution effect is positive (higher wage
leads to more work)
– Income effect is negative (higher income leads
to less work and more leisure)
– So may observe ‘backward-bending’ supply
curve if plotting Wage v Hours Worked
– Or ‘hump-shape’ if plotting Hours Worked v
Wage (Cahuc and Zylberberg)
 Econometrics - Issues with Data
and Estimation
Necessary variables:
hours of work, h
the individual’s hourly wage, w
income other than the wage, R
vector of personal characteristics, θ
(e.g. married, children)
Estimate:
ln h = αw ln w + αR ln R + x.θ + ε
 Tricky bits in relation to
the wage elasticity of hours
• Hours and wages are not observed for those
choosing zero hours of work
• Observed ε is a random error but without a fully
observed distribution (observe all positive
elements but not larger negative ones)
• If estimate by OLS this gives biased estimate as
violates basic assumption of statistical model
• Can use estimation techniques that deal with these
‘truncation biases’
• Can estimate jointly a model of decision to
participate and hours worked
• Then have to estimate a potential wage for all
those who chose not to work (based on their θ)
 Tricky bits in relation to
the ‘other income’ elasticity
• Other income R is f(wealth) so depends on the
age/ stage of life cycle of person, past job history
and savings, not all exogenous
• Again OLS model relies on lack of correlation
between RHS variables and the error term ε, so
more biases
– Use a more complex inter-temporal model
– Replace R with an estimate of MU of wealth
– Take first differences of equation (panel data)
 Tricky bits in relation to the tax
structure
• Both the net wage received and the level of
income other than the wage are affected by
taxes and benefits
• Replace w with w(1- t) and R with R+S
• Those with high w.h will have a high t and a
low S and vice versa
• Problem for estimation is that each person
has chosen where on these schedules to put
themselves by working more or less hours
 Priors about relative wage
elasticity for men v. women?
• Suppose labour supply is backward bending
(hump–shaped in hours v wages)
• Know that men tend to earn more than
women per hour due to more continuous
work experience
• Expect men to be on the flat part of curve
(i.e. zero wage elasticity?)
• Expect women to be on the upward sloping
part (i.e. positive wage elasticity?)
 Aggregate supply elasticities for
married women and men
Source: Cahuc and Zylberberg Tables 1.1 & 1.2

MW MW MM MM
wage Income wage income
US 0.97 to - 0.12 to 0.0 to 0.0 to
0.99 - 0.33 0.05 - 1.03
UK 0.09 to - 0.2 to 0.02 - 0.29
2.03 - 0.4
EU 0.05 to -0.2 to 0.08 to - 0.01 to
(miscel) 1.00 - 0.3 0.12 - 0.04
 Uncompensated and
compensated wage elasticity
Source: Bosworth, Dawkins & Strombach Tables 5.1, 5.2

Women Women Women Men Men Men

Wage Pure Income Wage Pure Income

Subn Subn
Ist 0.2 to 0.1 to - 0.1 to 0.0 to 0.0 to 0.0 to
Gen 0.9 2.0 - 0.2 - 0.4 0.4 - 0.2
2nd 0.6 to 0.7 to - 0.1 to - 0.2 to 0.1 to - 0.1 to
Gen 1.1 1.2 - 0.2 - 0.5 0.2 - 0.4
 Interpretation of trends using
wage and income elasticities
• Over time men’s and women’s wages have
increased with productivity growth
• Women’s wages have increased relative to
those of men in advanced countries
• At the same time average non-wage income
from assets has tended to increase (more
home owners and more saving for
retirement)
• Prediction using sum of wage and income
elasticities is that men will work less and
women will work more – fits the facts
Implications for income taxation
• Most countries use progressive rather than
proportional taxation
• Larger wage elasticities for women suggest
higher proportional responses in female
labour supply (absolute responses similar,
as noted in Bosworth et. al)
• Estimates (Sweden) of effect of existing
taxes - % decrease in hours worked - cp.
with: Proportional No tax Lump Sum
Males -6.2 -13.4 -13.6
Females -9.3 -23.0 -23.3
 Implications for income support
• Many countries support incomes of the low paid
e.g. supplementary income payments or tax
benefits for families with children
• Historical problem of disincentive to work or to
increase hours if working
• UK has moved strongly to Welfare to Work
approach to avoid trade-offs in participation
• System makes benefits higher if in work rather
than non-participant
• Lower marginal rates of withdrawal of benefits
as weekly earnings rise
Estimating labour supply to firms
What are the issues?
• Competition v Monopsony – which model
fits labour supply to firms?
• If firm has no monopsony power then it
pays going wage – elasticity of labour
supply is infinite to the firm
• General presumption is that men are mobile
between firms, but women are less so
• If true, this reverses above estimates, with
higher labour supply elasticity to firms for
men
• Need to know for estimating effects of
minimum wages and union bargaining
 Monopsony evidence?
• Employer size wage effect – consistent
empirical evidence that larger firms pay
higher wages
• Competitive labour market => firms
employing more or fewer workers should pay
same wage
• Other features can explain size-wage effect
- Higher labour quality in large firm
- Compensation for disamenity of size
- Rent sharing by larger profitable firm
 Manning’s estimates of labour
supply elasticity to firms
• Regressions of employer size on wages
• Controls for personal characteristics,
education, region, industry and occupation
• In US 1.0 to 1.6; in UK 1.9 to 2.7
(Manning Table 4.5 col. 3)
• More complex estimation using model of
separations into other jobs and non-
employment
• In US 0.7 to 1.4; in UK 0.8
(Manning Table 4.10 row 3)
 Implications of these supply
elasticities
Under monopsony:
Wage = [1/(1+e)] . MPL
e = 1/ αw
where αw is supply elasticity to firm
(Perfectly comp. αw infinite and wage = MPL)
UK most elastic case is αw = 2.7
Wage is only 73% of MRP
Lower values of αw give worse ratios
Even Manning thinks these αw are too low!
Firm Supply Elasticity Differences
between Women and Men?
• Heterogeneous preferences for ‘leisure’? In
truth much leisure is spent in home work
• Women have greater compar. advantage in
home work? Combining home care and
work leads to constraints on job mobility
• Travel-to-work times are lower for women
than men and lowest for women with kids
• Motivation for work differs – men place
higher value on monetary reward; women
more influenced by non-pecuniary factors
 Policy aspects (1)
Regulation of Working Hours
European Working Time Directive:
• limit of average 48 hours a week which a worker can be
required to work (can voluntarily work more if want to)
• limit of an average of eight hours’ work in 24 which
nightworkers can be required to work
• right to at least one day off each week
• right to a rest break if working day is longer than six
hours
• right to 11 hours of rest per day
• right to four weeks of paid leave per year
NB Table 5.1 of Boeri and van Ours is out of date re UK
 Policy aspects (2)
Work-Life Balance in Families
• Should there be more opportunities for
parents to work shorter hours?
• Are women happy to work part-time?
• Are men happy to work part-time?
• What jobs are available to part-timers?
• What can legislation do to change what is
on offer?
 Part-time Employment in G5
Source: Boeri and van Ours Table 5.3

% PT % PT Invol. PT %
M W M W
France 5 23 53 39
Germany 7 39 18 13
Japan 14 42 19 4
UK 10 39 24 10
US 8 18 7 8