samlet årgang - Økonomisk Institut - Københavns Universitet

LABOR SUPPLY BEHAVIOR AND THE DESIGN OF TAX AND TRANSFER POLICY 327
Consumption
y1
y 0
A 2
l 1
(1-m)w
B 2
B 1
A 1
Labor
Figure 2. Intensive versus Extensive Responses with Fixed Costs of Working.
U 2
response involves a change in labor supply from zero hours to some small (infinitessimal)
number of hours. Hence, the type of participation response predicted by this
framework is a marginal one, just like the change in hours of work for those who are
working. This conflicts with the empirical evidence described above showing that
people do not enter the labor market at infinitesimal hours of work but that they do so
at, say, 30 or 40 hours. Therefore, to be able to capture participation behavior in a realistic
way, we need to adopt a framework incorporating some type of non-convexity
making very low hours of work non-optimal.
In the empirical literature, non-convexities are typically introduced by way of fixed
work costs, e.g. Cogan (1981); Blundell et al. (1987). In Cogan’s (1981) analysis, the
fixed costs may be monetary costs (say child care and transportation expenses) or they
may take the form of a loss of time (e.g., commuting time). In Figure 2, we extend the
analysis of labor supply choice along these lines. An individual who chooses to stay
outside the labor market receives non-labor income y 0 . If he decides to enter the labor
market, he looses y f in income and l f in leisure time upon entry, thereby creating a
discontinuity in the budget set. In the initial situation, it is still the case that individual
1 works relatively long hours (at point A 1 ), while individual 2 does not work at all
(at point A 2 ). Now, if we reduce the tax rate a little bit, individual 1 responds again
with a marginal change in working hours from A 1 to B 1 . By contrast, individual 2 now
U 1
U 2
U 1