Working Paper

Local price variation and labor supply behavior

Abstract: In standard economic theory, labor supply decisions depend on the complete set of prices: the wage and the prices of relevant consumption goods. Nonetheless, most of theoretical and empirical work ignores prices other than wages when studying labor supply. The question we address in this paper is whether the common practice of ignoring local price variation in labor supply studies is as innocuous as has generally been assumed. We describe a simple model to demonstrate that the effects of wage and non-labor income on labor supply will typically differ by location. We show, in particular, the derivative of the labor supply with respect to non-labor income will be 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; Price levels;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2008

Number: 2008-016