The Effects of Male and Female Labor Supply on Commodity Demands

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.We examine the effects of male and female labor supply on household demands and present a simple and robust test for the separability of commodity demands from labor supply. Using data on individual households from six years of the UK FES we estimate a demand system for seven goods which includes hours and participation dummies as conditioning variables. Allowance is made for the possible endogeneity of these conditioning labor supply variables. We find that separability is rejected. Furthermore, we present evidence that ignoring the effects of labor supply leads to bias in the parameter estimates.If hours of work do affect preferences between individual goods then demand systems that take no account of this dependence may give biased estimates. For example, suppose we are interested in the effects of children on demand. If we ignore the interactions between demands and labor supply then we may mistakenly impute some of the effects of, say, female labor supply on demand to the presence of young children since the two are highly correlated.Another area for which the relationship between commodity demands and labor supply is important is the optimal tax literature. Many results here require that preferences over goods be weakly separable from hours of work (see, for example, Atkinson and Stiglitz (1981, Chapter 4). We should note, however, that the need for weak separability in this context depends somewhat on the way similar problems are posed. Alternative formulations of the optimal tax problem lead one to other separability structures (see, for example, Deaton (1981b) or Besley and Jewitt (1987)). Often these alternative structures are neither necessary nor sufficient for weak separability and require different tests from those described below.Finally, we note that weak separability of goods from labor is a necessary condition for additivity between goods and labor supply. Since most dynamic models of labor supply or of the consumption function assume that preferences are additive between goods and leisure, this may lead to misspecification if goods are not separable. For example, if the price of some complement to labor supply (transport, say) is correlated with wages, then the estimate of the wage elasticity from a dynamic labor supply function that leaves out this price will be biased.2 This latter may also have a bearing on the question of the "excess sensitivity" of consumption to anticipated changes in income (see, for example, Campbell (1987)). As Blundell, Browning, and Meghir (1989) and Attanasio and Browning (1990) point out, if consumption is not additively separable from labor supply and the latter is correlated with income (as it surely is), then in a life-cycle model...

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