Does Poverty Change Labor Supply? Evidence from Multiple Income Effects and 115,579 Bags

Abstract

The income elasticity of labor supply is a central parameter of many economic models. We test the response of labor supply to exogenous changes in income using data from a randomized evaluation of a multi-faceted grant program in northern Ghana combined with a researcher-implemented bag-making operation. We find a non-negative "income effect" on labor supply. We argue that simple models with either labor or capital market frictions cannot explain the results, whereas a model that allows for positive physiological or psychological productivity effects from higher income fits with our findings.

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