Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jul, 1981, Volume 49, Issue 4

Fixed Costs and Labor Supply<945:FCALS>2.0.CO;2-O
p. 945-963

John F. Cogan

This paper presents a theoretical and empirical model of labor supply when there are fixed costs associated with entry into the labor market. An implication of the existence of fixed costs is that individuals will not be willing to work below some minimum number of hours, termed reservation hours. A maximum likelihood estimator that allows reservation hours to be nonzero and differ randomly among individuals is developed. The estimator is applied to data on married women to estimate their labor supply functions. The results indicate that fixed costs of work are of prime importance in determining the labor supply behavior of married women. The results also suggest that large own-wage elasticities found in earlier studies of married women's labor supply are, in part, due to ignoring the existence of fixed costs of labor market entry.

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