The Causal Effects of Wages on Labour Supply for Married Women -- Evidence from American Couples

Using individual-level panel data from PSID, we consistently estimate the causal effects of own wages on interior labour supply for married women who were between 17 and 55 years old in 2005 and surveyed every two years till 2015. We first discuss the representative married woman's utility maximisation choice subject to her budget constraint that connects her husband's wages and non-labour income to her labour supply decisions through the couple relationship. Suggested by the optimal hours of work equation and comparative statics, we start our empirical analysis with a pooled OLS, holding relevant factors constant. Then we take into account the endogeneity problem due to sample selection and alleviate this issue by adding the selection variable (the inverse Mill's ratio from probit selection regression) into the hours of work equation. Besides, we control for individual heterogeneity (such as the married women's preference for work, ability and family tradition) and simultaneity of labour supply and labour demand using panel data fixed effects 2SLS with demand shifters as instruments for endogenous variables in the labour supply equation. We find that: (1) The causal effects of wages on labour supply (the hours-wage elasticities) drop from 0.29 in the pooled OLS to 0.16 in the panel data fixed effects 2SLS model after we account for sample selection, individual heterogeneity, and simultaneous equations bias. (2) Holding other factors constant, a 1% increase in married women's wages raises their hours of work by 0.16% on average. (3) Part-time female workers are more responsive to wage changes than their full-time counterparts. (4) There is evidence of backwards-bending labour supply curves.