What Has Been Learned About Labor Supply in the Past Twenty Years

Abstract

The main advance in the study of labor supply in the past 20 years has come in recognizing and interpreting the variety of different labor supply functions that coexist in the empirical literature. A crucial theoretical distinction with important empirical payoff is that between labor supply choices at the extensive margin (i.e., labor-force participation and employment choices) and choices at the intensive margin (i.e., choices about hours of work or weeks of work for workers). Another important distinction is the one between a descriptive labor supply function and a structural supply function that can be the basis for out-of-sample policy investigations concerning responses to tax and welfare programs and evaluations of welfare losses. A full understanding of the participation-hours dichotomy leads to an appreciation of the importance of the problem of selection bias. What is the wage to impute to a nonworking person? These distinctions are a legacy of the research conducted on labor supply over the past 20 years. Many important empirical questions have been addressed. (i) How strong are the effects of taxes, welfare, and transfer programs on labor supply? (ii) How important is intertemporal substitution? Can life-cycle labor supply models explain business-cycle labor supply behavior? (iii) Has the consensus view of the 1960's of high labor supply elasticities for married women and low labor supply elasticities for married men held up? All of the empirical evidence assembled on labor supply must be called into question in the light of important research on the basic quality of the data conducted by analysts at the University of Michigan. I discuss this evidence in a concluding section. Except for my discussion of measurement issues I focus only on the major discoveries about which a general consensus has emerged.