Core Readings

Battalio, R., L. Green and H. Kagel, "Income-Leisure Tradeoffs of Animal Workers" American Economic Review 71 (4) (September 1981): 621-632.

Studies the effects of higher wages and higher unearned income in a sample of pigeons who have learned to work (peck) for food. Provides strong evidence that leisure is a normal good: pigeons work less when they get more free food. These income effects are strong enough to generate a backward-bending labor supply curve: once the pay per peck rises above a certain level, increasing the pigeons’ work incentives reduces the amount of work they do.

Costa, Dora L. “The Wage and the Length of the Work Day: From the 1890s to 1991” Journal of Labor Economics18. 1 (Jan 2000): 156-181.

Shows that across wage deciles, within wage deciles, and within industry and occupation groups, the most highly paid worked fewer hours than the lowest paid in the 1890s but that by 1973 differences in hours worked were small and by 1991 the highest paid worked the longest day. Argues that this is explained by income effects: as real wages rose, workers rationally decided to benefit from these higher wages by working less, while still taking home more pay.

Imbens, G. W., Rubin, D. B., & Sacerdote, B. I. (2001). “Estimating the Effect of Unearned Income on Labor Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players”. American Economic Review, 91(4), 778-794

Uses an original survey of Massachusetts lottery players to analyze the effects of lottery prizes on economic behavior. Finds that higher lottery winnings reduce labor earnings, with a marginal propensity to consume leisure of approximately 11 percent.

Cesarini, David, Erik Lindqvist, Matthew J. Notowidigdo and Robert Östling. 2015. “The Effect of Wealth on Individual and Household Labor Supply: Evidence from Swedish Lotteries” NBER working paper no. 21762.

Studies the effect of wealth on labor supply using the randomized assignment of monetary prizes in a large sample of Swedish lottery players. Finds that winning a lottery prize modestly reduces labor earnings, with the reduction being immediate, persistent, and similar by age, education, and sex.

Golosov, Mikhail, Michael Graber, Magne Mogstad, and David Novgorodsky (2021) How Americans Respond to Idiosyncratic and Exogenous Changes in Household Wealth and Unearned Income, unpublished manuscript, University of Chicago.

The authors study how Americans work behavior responds to winning the lottery. On average, an extra dollar of lottery winnings in a given period reduces pre-tax labor earnings by about 50 cents. These reductions are even greater among higher-income households. These large, negative income effects on labor supply are very different from the small ones found by Cesarini et al. in Sweden.

Newer Resources

Bick, Alexander, Nicola Fuchs-Schündeln, David Lagakos and Hitoshi Tsujiyama (2020) Why Are Average Hours Worked Lower in Richer Countries? IZA discussion paper no. 13156

We consider two natural explanations for this phenomenon: income effects versus progressive tax systems, which are more prevalent in richer countries. Calibrating a simple labor supply model to match international data, the model predicts that income effects are the main driving force behind the decline of average hours worked with GDP per capita.

Banerjee, Abhijit, Dean Karlan, Hannah Trachtman, and Christopher R. Udry (2020) Does Poverty Change Labor Supply? Evidence from Multiple Income Effects and 115,579 Bags NBER working paper no. 27314.

The authors measure how labor supply and effort in northern Ghana respond to exogenous changes in income and wages using a randomized evaluation of a multi-faceted grant program combined with a bag-making operation. Contrary to most other estimates of income effects, they find that recipients of the grant program increase, rather than reduce, their supply of labor. They argue that these results are best explained by a model that allows for a positive psychological productivity effect from higher income.

Boppart, Timo and Per Krusell, "Labor Supply in the Past, Present, and Future: A Balanced-Growth Perspective," Journal of Political Economy 128, no. 1 (January 2020): 118-157.

Across countries and over a span of 170 years, this paper shows that average hours worked per worker have been falling steadily by a little below 0.5% per year. It argues that the best explanation of this trend is a negative income effect of real wages on labor supply, which is large enough to more than counterbalance the positive incentive effects of growing real wages.

Böheim, René and Michael Topf. 2021 Unearned Income and Labor Supply: Evidence from Survivor Pensions in Austria CESifo Working Paper No. 8851.

The authors study the effects of a 34 percent reduction in the survivor pensions earned by newly-widowed men in Austria. Pension reductions caused a 3.5 to 5.4 increase in survivors’ employment rates in the long run, corresponding to an extensive-margin labor supply elasticity of about –0.9 to –1.3.

Kaur, Supreet, Sendhil Mullainathan,Suanna Oh, and Frank Schilbach. 2021. Do Financial Concerns Make Workers Less Productive? NBER working paper no 28338.

Does having more cash on hand make workers lazy and reduce labor supply? By randomizing the timing of Indian manufacturing workers’ pay, the authors show that average productivity is 6.2 percent higher on cash-rich days, especially among poorer workers. The authors argue that the effect is likely psychological: Concerns about money can create mental burdens such as worry, stress, or sadness thaty can interfere with the ability to work effectively.

Banerjee, Abhijit, Dean Karlan, Hannah Trachtman, and Christopher R. Udry 2020. Does Poverty Change Labor Supply? Evidence from Multiple Income Effects and 115,579 Bags NBER working paper no. 27314

The authors estimate whether receiving additional ‘free’ income raises or reduces labor supply in a Ghanaian bag-making operation. They find that recipients of unconditional cash grants increase, rather than reduce, their supply of labor, and argue that this result is best explained by a positive psychological productivity effect.

Balboni, Clare Oriana Bandiera, Robin Burgess, Maitreesh Ghatak and Anton Heil. 2022 Why Do People Stay Poor? Quarterly Journal of Economics, forthcoming

While income effects on the supply of effort suggest that receiving a lump-sum transfer should reduce effort, the poverty traps hypothesis argues that one-time, lump sum transfers can break the cycle of poverty by allowing people to make high-return investments. To test between these two views, the authors conduct a large-scale, randomized asset transfer and an 11-year panel of 6,000 households who begin in extreme poverty. The setting is rural Bangladesh and the assets are cows. For households with a sufficiently high initial level of assets, receiving a free cow allows a household to start accumulating assets, take on better occupations, and grow out of poverty.

Fehr, Dietmar, Günther Fink, and B. Kelsey Jack 2022 Poor and Rational: Decision-Making under Scarcity Journal of Political Economy, volume 130, number 11, November 2022

The authors gave farmers in Zambia the opportunity to exchange randomly assigned household items for alternative items of similar value. Analyzing a total of 5,842 trading decisions and leveraging multiple sources of variation in financial constraints, they show that the farmers made fewer irrational decisions when they were more financially constrained. Thus, in addition to consuming more leisure and other goods they value, people may respond to additional, ‘free’ income by not having to think as hard about the economic decisions they make.