Academic journal article Economic Inquiry

Whose Preferences Are Revealed in Hours of Work?

Academic journal article Economic Inquiry

Whose Preferences Are Revealed in Hours of Work?

Article excerpt

I. THE SETTING

When observations on the hours worked by individuals in labor markets are related to observations on their hourly earnings, what is the appropriate interpretation of the fitted relationship? This paper asks this question of the research that measures this relationship. This research is best understood in the context of a conceptual framework and, for what follows, I outline this framework briefly. I shall not take issue with this framework but I do have concerns with the manner in which it has been applied. The theory I sketch is conventional and it is the simplest of many variants, some of which may be important in certain circumstances.

First, consider hours of work from the perspective of the consumer-worker who has well-behaved preferences over his consumption of commodities, Q, and his hours of market work, H: U= U(Q, H). He sells his hours to an employer and thereby becomes an employee. His choices are assumed to be constrained by a linear budget constraint: p x Q = w x H + y where p stands for the prices of commodities he consumes, w is take-home hourly earnings, and y is nonlabor income. In this simple model, p, w, and y are given to the consumer-worker. Selecting Q and H so that he does the best he can given his constraints results in commodity demand and labor supply equations, the latter being

(1) H =f (p, w, y).

This equation describes the employee's budget-constrained working hours choices. The effect of higher wages on the employee's choice of hours decomposes into opposite-signed substitution and income effects and empirical research aims to determine which of these two effects dominates. Higher nonlabor income is expected to reduce his preferred working hours.

Second, consider hours of work per worker, H, from the perspective of an owner-manager. Her demand for hours per worker (and her choice of the number of workers, N, and of other inputs, Z) results from her maximization of net revenues: [PI] = q x X (H, N, Z) - wHN - vN - rZ where q is the price of each unit of output X produced, r is the price per unit of Z, and v are the costs associated with employing each worker (such as the costs of hiring and training new workers) and are independent of H. (1) Assume the production function X(H, N, Z) is strictly concave and that q, w, v, and r are given to the owner-manager. The demand equation for hours per worker is

(2) H = g (q, w, v, r).

Under the conditions given, the demand for hours falls when w rises. (2)

When economists use observations on the working hours and hourly wages (and perhaps other variables) of individuals or groups, are they estimating Equation (1) or (2) or some mixture of the two? The exclusion restrictions should help to discriminate between the two equations: the demand for hours equation implies that increases in a worker's nonwage income do not depress hours of work; the supply of hours equation implies that increases in the price of the output that workers help to make do not increase work hours. The decision-makers in Equation (1) are workers while the decision-makers in Equation (2) are manager-owners.

This paper takes up this question of identification. (3) In so doing, I survey (very selectively) the research in economics over the previous 60 years on the hours that individuals devote to market work. Also, at some places below, I illustrate my points with the use of observations close at hand on hours and wages. Given the relevance of income tax revenue to finance government activities, the issue of hours of work is salient to many questions in public finance and, given the importance of working hours to workers and employers alike, the topic of hours of work is pertinent to economists concerned with production and distribution in a market economy. Research on this topic proceeds at such a pace that surveys (more thorough than this) are published every few years. (4)

II. …

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