The purpose of this paper is to summarize a certain line of work on
the interpretation of unemployment in the analysis of male labour supply
behavior. Specifically, this work investigates whether the data support
the null hypothesis that individuals experiencing unemployment are on a
labour supply function, and if the data do not support this hypothesis,
how might a researcher proceed in empirical work. The motivation for
doing this is two fold. First, what unemployment represents is an
intrinsically interesting question, and may have implications beyond
labour supply analysis in terms of macroeconomic theory. Second, if
unemployed workers are constrained in the sense that they are off their
individual labour supply functions, standard labour supply estimation
may involve a fundamental misspecification of the equation. However, it
should be emphasized that the purpose of this paper is to survey one
possible approach to this problem; the paper does not attempt to provide
a general survey on labour supply estimation or on constraints in the
labour market.
labor supply
This paper uses longitudinal survey data to analyse the relationship between recent increases in individual
wage inequality, and individual and family earnings inequality. The analysis compares the implications
of a model of intertemporal family labor supply, to those of a model with no behavioral content. The
results imply that the fraction of family earnings variance attributable to permanent wage differences is
about 70 percent, and remained constant as the total variance of earnings increased during the 1980's.
The parameter estimates imply the intertemporal labor supply for males is zero, and for females is about
0.4. The net contribution of behavioral responses to increasing wage inequality reduced the level of
family earnings inequality by 14 percent.
Two approaches to estimation and testing of fixed effects models are
commonly found in the econometrics literature. The first involves variations on
instrumental variables. The second, a Minimum Chi-Square (MCS) procedure
introduced by Chamberlain, minimizes a quadratic form in the difference between
unrestricted regression coefficients and the restrictions implied by the fixed
effects model. This paper is concerned with the relationship between Three-Stage
Least Squares (3SLS) and MCS. A 3SLS equivalent of the MCS estimator is
presented and, in the usual case wherein the time varying error component has a
scalar covariance matrix, 3SLS is shown to simplify to the conventional
deviations from means estimator. Furthermore, the corresponding over-
identification test statistic is the degrees of freedom times the R2 from a
regression of residuals on all leads and lags of right hand side variables. The
relationship between MCS and some recently introduced efficient instrumental
variables procedures is also considered.
An empirical example from the literature on life-cycle labor supply is used
to illustrate properties of 3SLS procedures for panel data under alternative
assumptions regarding residual covariance. Estimated labor supply elasticities
and standard errors appear to be insensitive to these assumptions. In contrast,
the over-identification test statistics are found to be substantially smaller
when residuals are allowed to be intertemporally correlated and heteroscedastic.
At conventional levels of significance, however, even the smallest of the test
statistics leads to rejection of the over-identifying restrictions implicit in
the labor supply models.
Labor supply research has not yet produced a clear statement of the size of
the labor supply elasticity nor how it should be measured. Measurement error in
hourly wage data and the use of inappropriate identifying assumptions can account
for the poor performance of some empirical labor supply models. I propose here a
generalization of Wald's method of fitting straight lines that is robust to
measurement error, imposes mild testable identifying assumptions, and is useful
for the estimation of life-cycle labor supply models with panel data. A
convenient Two-Stage Least Squares (TSLS) equivalent of the generalized Wald
estimator is presented and a TSLS over-identification test statistic is shown to
be the test statistic for equality of alternative Wald estimates of the same
parameter. These results are applied to labor supply models using a sample of
continuously employed prime-age males. Labor supply elasticities from the two
best-fitting models that pass tests of over-identifying restrictions range from
0.6 to 0.8 . A test for measurement error based on the difference between
generalized Wald and Analysis of Covariance estimators is also proposed.
Application of the test indicates that measurement error can account for low or
negative Analysis of Covariance estimates of labor supply elasticities.
This paper investigates women's and men's labor supply to the firm
within a structural approach based on a dynamic model of new
monopsony. Using methods of survival analysis and a large linked
employer-employee dataset for Germany, we find that labor supply
elasticities are small (1.9-3.7) and that women's labor supply to the firm
is less elas~ic than men's (which is the reverse of gender differences in
labor supply usually found at the level of the market). Our results imply
that about one third of the gender pay gap might be wage discrimination
by profit-maximizing monopsonistic employers.
This study proposes and implements a specification test for the
hypothesis that unemployment represents intertemporal labour supply
behavior. The test allows for uncertainty and endogenous unemployment.
Given standard specifications of the intertemporal labour supply model, I
find strong evidence against this interpretation of unemployment. These
results indicate the need to turn to either 1) alternative models where
unemployed workers are off a supply function or ii) more complex models
of intertemporal substitution.
Throughout the late 1980s unemployment rates remained 2-3 percentage
points higher in Canada than the U.S. We use individual microdata from the
U.S. Current Population Survey and the Canadian Survey of Consumer Finances
to study the emerging unemployment gap between the two countries. For
women, we find that the relative rise in Canadian unemployment occurred
with relative increases in per capita weeks of work. The unemployment gap
for Canadian women was driven by a rise in the probability that nonworkers
are classified as "unemployed" as opposed to "out of the labor force". For
men, the increase in unemployment was accompanied by a relative decrease in
Canadian employment rates, and an increase in the probability that men with
no weeks of work are classified as "in the labor force". A comparison of
annual work patterns and income recipiency in the two countries suggests
that Canadians of both sexes have increasingly adjusted their labor supply
to the parameters of the Canadian Unemployment Insurance system.
This paper uses aggregate birth year/calendar year level data derived
from the Current Population Survey (CPS) to estimate the effect of Social
Security wealth on the labor supply of older men in the l970s and 1980s.
The analysis focuses on the 1977 amendments to the Social Security Act
which lead to a substantial, unanticipated differential in benefits for
otherwise identical individuals depending on whether they were born before
or after 1917. This differential has become known as the benefit notch.
There are two principal differences between the present analysis and the
previous literature. First, this paper uses time-series variations in
benefit levels to estimate the relationship between benefits and labor
supply in an era when real benefits were falling for new recipients.
Second, variation in benefit levels across cohorts is used to estimate the
relationship between benefits and labor supply. The results support a
conclusion that labor supply continued to decline for the "notch babies"
who received lower Social Security benefits than earlier cohorts.
This paper presents results from an experimental evaluation of an earnings supplement program offered
to long-term welfare recipients in two Canadian provinces. The program -- known as the Self-Sufficiency
Project - provides a supplement equal to one-half of the difference between an earnings target ($2,500 or
$3083 per month, Canadian dollars, depending on the province) and the individual's actual earnings. The
supplement is similar to a negative income tax with two important differences: (1) eligibility is limited to
long-term welfare recipients who find a full-time job (30 hours per week or more); and (2) the supplement
payment is based on individual earnings rather than family income. The evaluation is based on a
randomized design that will follow 6,000 individuals for five years. Early findings for a first cohort of
2,000 individuals observed over 18 months of program eligibility suggest that the financial incentives of
the Self-Sufficiency Program significantly increase labor market attachment and significantly reduce
welfare participation.