An Alternative Approach to Labor Supply Modeling, Emphasizing Job-type as Choice Variable

Traditional labor supply analysis is based on the assumption that workers only have preferences over consumption and hours of work, and are able to choose consumption and hours freely within the budget constraint. Recently, a discrete choice version of the traditional approach (with discrete hours) has become popular, but the basic assumption above is still maintained. A serious shortcoming with the traditional approach is that agents’preferences over qualitative job-specific attributes is ruled out, and it is also ignored that agents face choice restrictions in the labor market in terms of restricted choice sets of job opportunities. In this paper we discuss a modeling framework that differs from the standard models of labor supply in that the notion of job choice is fundamental. Specifically, the worker is assumed to have preferences over a latent worker-specific choice set of jobs from which he chooses his preferred job. A job is characterized with fixed (job-specific) working hours and other non-pecuniary attributes. As a result, observed hours of work are interpreted as the job-specific (fixed) hours of work that is associated with the chosen job. The discussion focuses on interpretation, theoretical and practical advantages and comparison with other approaches. It is also demonstrated that an estimated empirical version of the model is able to produce satisfactory out-of-sample predictions