Journal Article

Local price variation and labor supply behavior

Abstract: In standard economic theory, labor supply decisions depend on the complete set of prices: wages and the prices of relevant consumption goods. Nonetheless, most theoretical and empirical work in labor supply studies ignores prices other than wages. We address the question of whether the common practice of ignoring local price variation in labor supply studies is as innocuous as generally assumed. We describe a simple model to demonstrate that the effects of wage and nonlabor income on labor supply typically differ by location. In particular, we show that the derivative of the labor supply with respect to nonlabor income is independent of price only when labor supply takes a form based on an implausible separability condition. Empirical evidence demonstrates that the effect of price on labor supply is not a simple \\"up-or-down shift\\" that would be required to meet the separability condition in our key proposition.

Keywords: Labor supply; Prices;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Regional Economic Development

Publication Date: 2008

Issue: Oct

Pages: 2-14