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LS08_handout - B3 Consider the following equation which...

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B3) Consider the following equation, which shows estimates from a model of the labour supply of 2825 married men in semi-skilled occupations in London and the South East. hours i = 29.977 – 0.012 Y i + 0.090 W i – 0.001 W i 2 (5.08) (3.68) (3.12) (2.04) + 7.801 K i + 10.281 Own i (3.82) (2.91) where numbers in brackets are (absolute) t-ratios and the following table gives details of the regression variables: Variable Name Description Mean value in Sample Hours Hours worked per week 33.00 Y Wife’s income (pounds per week) 120.44 W Wage (pounds per hour) 32.63 K Dummy variable = 1 if any children in household, 0 otherwise 0.58 Own Dummy variable = 1 if owner-occupier, 0 otherwise 0.72 a) Is there evidence of backward bending labour supply in this model? If so at what point does it occur? Suppose that you are told that the maximum wage in the sample is 40.05 £/week; would this affect your argument about whether there is evidence that at high wages hours decrease as the wage increases? b) What fraction of the sample have children? Construct a 95% confidence interval for the effect of children on hours worked. c) Can you reject the hypothesis that being an owner occupier has no effect on hours worked? d) Show that the elasticity of labour supply with respect to the wage depends on owner occupation in this empirical model. e) Write down the Slutsky equation and use it to calculate the substitution effect of a change in wages on hours worked for a home owner with no children at the sample means of wages and wife’s income. Does this satisfy the predictions of economic theory?
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