Labor Supply with a Minimum Hours Threshold


This paper considers the importance of minimum hours thresholds
for the interpretation of individual labor supply data. An analysis
of quarterly labor supply outcomes for prime-age males in the Survey
of Income and Program Participation suggests that such thresholds are
an important aspect of weekly hours choices. A simple contracting
model is presented that incorporates mobility costs and a non-
convexity in the relation between weekly hours and effective labor
input. This non-convexity gives rise to a two-part employment
schedule. In periods of low demand, some individuals are temporarily
laid off, while others work a minimum threshold level of hours. In
periods of higher demand all available workers are employed at hours
in excess of the threshold level. The model provides a simple
interpretation for the role of demand-side variables in explaining
annual labor supply outcomes. It can also explain the weak
correlations between annual hours and average hourly earnings that
have emerged in earlier studies. Under suitable assumptions on
preferences the intertemporal labor supply elasticity can be
recovered from the relationship between earnings and hours per week.
Estimation results for the SIPP panel yield elasticity estimates that
are similar to those in the literature based on annual data. If the
model is correct, however, annual labor supply is considerably more
sensitive to changes in productivity than these estimates suggest.

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Carnegie Rochester Conference on Public Policy, 33, 1990
Working Papers