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The relative income effect and labor supply

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  • Zubrickas, Robertas

Abstract

In the presence of relative income concerns, labor supply response is predicted to be smaller for individual wage change than for global wage change. This difference arises from the relative income effect, which in the case of global wage change is offset by changes in income distribution. We relate the predicted difference in labor supply response to the controversy about differences in micro and macro labor supply elasticities. The relative income effect can also account for a variety of empirical patterns of labor supply elasticity that could not be previously addressed within a single framework.

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  • Zubrickas, Robertas, 2023. "The relative income effect and labor supply," Journal of Economic Behavior & Organization, Elsevier, vol. 209(C), pages 176-184.
    • Handle: RePEc:eee:jeborg:v:209:y:2023:i:c:p:176-184
    DOI: 10.1016/j.jebo.2023.02.025
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    1. Alexey Kushnir & Robertas Zubrickas, 2024. "Optimal labor income taxation with the dividend effect," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(4), pages 1169-1201, December.

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    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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