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

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.