Relative Wages and Labor Supply: Emulation, Incentives, or Reciprocity?

Abstract The relationship between inequality and labor supply has gained an increasing amount of attention in recent years. This is due, in no small part, to the rise in both work hours and inequality overtime within the U.S. and relative to other developed countries. This paper investigates the possibility of a causal relationship running from inequality to labor supply. After controlling for individual, industrial, and occupational characteristics it is found that inequality has an overall positive effect on work hours. This result changes along the income distribution with both high and low relative wages being associated with higher levels of labor supply, but wages in the middle being associated with less. Results are robust to alternative definitions of inequality as well as to changes in the specific sample of individuals.