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Henry Farber
NBER Working Paper No. 9706
Issued in May 2003
NBER Program(s): LS
---- Abstract -----
I model the labor supply of taxi drivers as the result of optimization based on an inter-temporal utility function. Since income effects in response to temporary fluctuations in daily earnings opportunities are likely to be small, cumulative hours will be much more important than cumulative income in the decision to stop work on a given day. However, if these income effects are large due to very high discount and interest rates, then labor supply functions could be backward bending, and, in the extreme case where the wage elasticity of daily labor supply is minus one, drivers could be target earners. Indeed, Camerer, Babcock, Lowenstein, and Thaler (1997) and Chou (2000) find that the daily wage elasticity of labor supply of New York City cab drivers is substantially negative and conclude that it is likely that cab drivers are target earners. I conclude from my empirical analysis, based on new data, of the stopping behavior of New York City cab drivers that, when accounting for earnings opportunities in a reduced form with measures of clock hours, day of the week, weather, and geographic location, cumulative hours worked on the shift is a primary determinant of the likelihood of stopping work while cumulative income earned on the shift is weakly related, at best, to the likelihood of stopping work. This is consistent with there being inter-temporal substitution and inconsistent with the hypothesis that taxi drivers are target earners.
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