The Effect of Changes in Wages, GDP Growth, Worker's Demographic Characteristics on Working Hours

23/10/2007 |  Brender Adi, Gallo Lior
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Welfare Policy and Labor Market
Adi Brender and Lior Gallo
Abstract
Changes in employees' working hours are a key component in the response of labor input to macroeconomic developments and policy measures. The elasticity of working hours with respect to wages is important in analyzing the effectiveness of wage changes as a mechanism for closing demand and supply gaps in the labor market and for evaluating the impact of tax rate changes on labor supply. The elasticity with respect to GDP growth indicates the extent to which changes in working hours contribute to curbing inflationary pressures over the business cycle. Additionally, the differences in elasticities between various populations can highlight the effects of growth and wage changes on income distribution; they can also identify potential "bottlenecks" in the labor market's response to changes in economic activity that may result in inflationary pressures. In the current study we use the repeated sampling of workers in Israeli Labor Force Surveys, a feature that facilitates identification of employees at more than one point in time. Using these data we estimate the effect of changes in the potential wage -affected by macroeconomic developments - on the individual's working hours, accounting for changes in the personal circumstances of the worker (family composition, beginning and ending of academic studies, entering the legal pension age, spousal income and employment). The sample facilitates an examination of differences in the elasticities between various groups differing in their demographic characteristics, education, employment in the initial period and family income. We find that the effect of wage changes on working hours is minor, and is virtually zero for full-time employees. In contrast, the elasticity with respect to GDP growth is significant: among men it is twice as large as the extensive (entry) elasticity, except for man from low-income families. Among women we find a positive elasticity of hours with respect to GDP growth only among those at the entry and close-to-retirement ages, and those employed at low-wage occupations. Nevertheless, in these groups - which account for about one third of all working women - the elasticity is twice that found for men.
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