Fixed Costs and Labor Supply

This paper presents a theoretical and empirical model of labor supply when there are fixed costs associated with entry into the labor market. An implication of the existence of fixed costs is that individuals will not be willing to work below some minimum number of hours, termed reservation hours. A...

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Bibliographic Details
Published in:Econometrica 1981-07, Vol.49 (4), p.945-963
Main Author: Cogan, John F.
Format: Article
Language:English
Subjects:
Cost efficiency
Cost estimates
Cost estimation models
Cost functions
Cost of entry
Costs
Estimates
Expenditures
Fixed costs
Labor costs
Labor force
Labor market
Labor markets
Labor supply
Leisure
Market entry
Shadow prices
Wages
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Summary:This paper presents a theoretical and empirical model of labor supply when there are fixed costs associated with entry into the labor market. An implication of the existence of fixed costs is that individuals will not be willing to work below some minimum number of hours, termed reservation hours. A maximum likelihood estimator that allows reservation hours to be nonzero and differ randomly among individuals is developed. The estimator is applied to data on married women to estimate their labor supply functions. The results indicate that fixed costs of work are of prime importance in determining the labor supply behavior of married women. The results also suggest that large own-wage elasticities found in earlier studies of married women's labor supply are, in part, due to ignoring the existence of fixed costs of labor market entry.
ISSN:0012-9682
1468-0262
DOI:10.2307/1912512