Assets, Subsistence, and The Supply Curve of Labor

Abstract

The supply curve of labor is now accepted as a matter of course by most economists. It has no doubt been perplexing to observe that the most commonly employed types of utility functions do not yield such curves under the usual textbook analysis of the problem.1 Particular preference maps have been found that generate backward bending curves;2 however, they are nonparametric, leading to difficulties of estimation, and upon closer examination seem to imply counter-intuitive results. We will show that taking into account the wealth position of an individual on the one hand and survival consideration on the other greatly expands the variety of shapes that can be derived for the supply curve from some simple utility functions. The use of a specific simple utility function also implies some severe restrictions on the form the supply curve can take, rendering it testable. Empirical evidence is shown to support the conclusion that the supply curve is monotonic. We will also show that the notion that the aggregate supply curve of labor slopes down rests, in part, on an error of aggregation, and that the empirical evidence usually cited in support of the negative slope, when correctly interpreted, cannot be so construed.

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