A Shred of Credible Evidence on the Long‐run Elasticity of Labour Supply

Abstract

All public policies regarding taxation and the redistribution of income rely on assumptions about the long‐run effect of wages rates on labour supply. The variation in existing estimates calls for a simple, natural experiment in which men can change their hours of work, and in which wages have been exogenously and permanently changed. We use a panel dataset of taxi drivers who choose their own hours, and who experienced two exogenous permanent fare increases, and estimate an elasticity of labour supply of −0.2, implying that income effects dominate substitution effects in the long‐run labour supply of males.