CPR Working Paper Series No. 51
Social Interaction in Labor Supply
Andrzej Grodner and Thomas J. Kniesner
October 2005
(Revised from March 2003/February 2004)
Our
research examines the effect of interdependence on estimation and
interpretation
of earnings/labor supply equations. We consider the cases of (1) a positive
spillover from
others’ labor supplied and (2) a need for conformity with others’ labor
supplied.
Qualitative and quantitative comparative statics results with a Stone-Geary
utility
function demonstrate how spillover effects increase labor supply uniformly.
Alternatively, conformity effects move labor supplied toward the mean of the
reference
group so that, in the limit, labor supply becomes perfectly inelastic at the
reference group
average. When there are un-modeled exogenous social interactions,
conventional wage
elasticities are still relatively well estimated although structural
parameters may not be.
Omitting endogenous social interactions may seriously misrepresent the labor
supply
effects of policy, however.
A revised version of the paper can be found at: Journal of the European Economic Association, 4(6), December 2006 with Andrew Grodner and Thomas J. Kniesner, titled "Social Interactions in Labor Supply."
