Hours and Wages

We develop and estimate a static model of labor supply that can account for two robust features of the cross-sectional distribution of usual weekly hours and hourly wages. First, usual weekly hours are heavily concentrated around 40 hours, while at the same time a substantial share of total hours come from individuals who work more than 50 hours. Second, mean hourly wages are non-monotonic across the usual hours distribution, with a peak for those working 50 hours. The novel feature of the model is that earnings are non-linear in hours and the nature of the nonlinearity varies over the hours distribution. We estimate the model on a sample of older males for whom human capital considerations are plausibly not of first order importance. Our estimates imply that an individual who chooses to work either less than 40 hours or more than 40 hours faces a wage penalty. As a consequence, individuals working typically 40 hours are not very responsive to variation in productivity. This has significant implications for the role of labor supply as a mechanism for self-insurance in a standard heterogeneous agent-incomplete markets model and for strategies designed to estimate the intertemporal elasticity of substitution.