Coordination of hours worked and the elasticity of labor supply to tax changes (Coordination of hours)

Abstract:

The traditional labor supply model assumes that workers face exogenous hourly wage rates independent of hours worked. Underlying this model is the assumption that each employer is indifferent to the number of hours worked by his employees. Alternatively, it needs to be the case that the range of job options that each worker faces is large enough for him to find the job that demands his optimal number of hours at the wage rate set by the market. Over the years numerous studies in the literature have questioned those assumptions (Lewis, 1969; Barzel, 1973, Rosen, 1978 and Siov, 1987). In this study we draw from this literature assuming that employers have, to different extents, interests in coordinating hours worked of employees possessing different skills. Specifically we intend to develop a simple labor supply model that accounts for the coordination of hours at the firm level. We then analyze how the coordination of hours worked affects the labor supply response to tax changes.