University of Zurich
Zurich Open Repository and Archive
Winterthurerstr. 190
CH-8057 Zurich
http://www.zora.uzh.ch
Year: 2007
Do workers work more if wages are high? Evidence from a
randomized field experiment
Fehr, E; Goette, L
Fehr, E; Goette, L (2007). Do workers work more if wages are high? Evidence from a randomized field experiment.
American Economic Review, 97(1):298-317.
Postprint available at:
http://www.zora.uzh.ch
Posted at the Zurich Open Repository and Archive, University of Zurich.
http://www.zora.uzh.ch
Originally published at:
American Economic Review 2007, 97(1):298-317.
Fehr, E; Goette, L (2007). Do workers work more if wages are high? Evidence from a randomized field experiment.
American Economic Review, 97(1):298-317.
Postprint available at:
http://www.zora.uzh.ch
Posted at the Zurich Open Repository and Archive, University of Zurich.
http://www.zora.uzh.ch
Originally published at:
American Economic Review 2007, 97(1):298-317.
Do workers work more if wages are high? Evidence from a
randomized field experiment
Abstract
Most previous studies on intertemporal labor supply found very small or insignificant substitution
effects. It is possible that these results are due to constraints on workers' labor supply choices. We
conducted a field experiment in a setting in which workers were free to choose hours worked and effort
per hour. We document a large positive elasticity of overall labor supply and an even larger elasticity of
hours, which implies that the elasticity of effort per hour is negative. We examine two candidate models
to explain these findings: a modified neoclassical model with preference spillovers across periods, and a
model with reference dependent, loss-averse preferences. With the help of a further experiment, we can
show that only loss-averse individuals exhibit a negative effort response to the wage increase.
Do Workers Work More if Wages Are High? Evidence from a
Randomized Field Experiment
By ERNST FEHR AND LORENZ GOETTE*
Most previous studies on intertemporal labor supply found very small or insignif-
icant substitution effects. It is possible that these results are due to constraints on
workers’ labor supply choices. We conducted a field experiment in a setting in which
workers were free to choose hours worked and effort per hour. We document a large
positive elasticity of overall labor supply and an even larger elasticity of hours,
which implies that the elasticity of effort per hour is negative. We examine two
candidate models to explain these findings: a modified neoclassical model with
preference spillovers across periods, and a model with reference dependent, loss-
averse preferences. With the help of a further experiment, we can show that only
loss-averse individuals exhibit a negative effort response to the wage increase. (JEL
J22, J31)
The intertemporal substitution of labor sup-
ply has far-reaching implications for the inter-
pretation of important phenomena. If, for
example, the intertemporal substitution of labor
supply is high, one may interpret the large vari-
ations in employment during business cycles as
voluntary choices by the workers rather than
involuntary layoffs. Intertemporal substitution
also plays a crucial role in the propagation of
shocks across periods (David Romer 1996;
Robert G. King and Sergio Rebelo 1999). Pre-
vious studies have found little evidence for in-
tertemporal substitution of labor. The estimated
elasticities are often small and statistically in-
significant, and sometimes even negative (see,
e.g., N. Gregory Mankiw, Julio Rotemberg, and
Lawrence Summers 1985; John Pencavel 1986;
Joseph Altonji 1986; Richard Blundell 1994;
David Card 1994; Blundell and Thomas E. Ma-
Curdy 1999).
1
The low estimates of intertemporal substitu-
tion are difficult to interpret, however, because
of serious limitations in the available data. The
life-cycle model of labor supply predicts inter-
temporal substitution with regard to transitory
wage changes or wage changes the workers
anticipate. Yet, the typical wage changes are
not transitory; hence, they are associated with
significant income effects. In addition, it seems
almost impossible to infer reliably from existing
data whether the workers anticipated the wage
change. Furthermore, serious endogeneity prob-
lems arise, as both supply and demand condi-
tions determine wages.
2
Thus, the typically
available data require many auxiliary assump-
tions when testing the life-cycle model of labor
supply.
Another issue arises if labor markets are char-
acterized by a significant amount of job rationing
* Fehr: University of Zurich, Institute for Empirical Eco-
nomic Research, Blu¨mlisalpstrasse 10, CH-8006 Zurich
(e-mail: efehr@iew.unizh.ch); Goette: University of Zurich,
Institute for Empirical Economic Research, Blu¨mlisalp-
strasse 10, CH-8006 Zurich (e-mail: lorenz@iew.unizh.ch).
This paper is part of the research priority program on the
foundations of human social behavior funded by the Uni-
versity of Zurich. The authors also acknowledge support
from the Swiss National Science Foundation under project
number 101312–103898/1. This paper greatly benefited
from the comments of two excellent referees. In addition,
we thank George Akerlof, Henry Farber, David Huffman,
Reto Jegen, Rafael Lalive, George Loewenstein, Jennifer
Lerner, Stephan Meier, Matthew Rabin, Jason Riis, Alois
Stutzer, Richard Thaler, and George Wu for their helpful
comments.
1
After reviewing a sizeable part of the literature, Card
(1994) concludes, for instance, that the “very small magni-
tude of the estimated intertemporal substitution elasticities”
can account for only a tiny fraction of the large person-
specific, year-to-year changes in labor supply.
2
Gerald Oettinger (1999) shows that if one neglects the
endogeneity of wage changes, estimates of labor supply
elasticities are severely downward-biased.
298
or other constraints on workers’ labor supply. In
fact, there is strong evidence suggesting that
workers are not free to set their working hours
(John C. Ham 1982; Shulamit Kahn and Kevin
Lang 1991; William T. Dickens and Shelly
Lundberg 1993), rendering the identification of
the source of small intertemporal substitution
effects difficult, even if the problems mentioned
above could be solved. A small intertemporal
substitution effect could be due to these con-
straints, or it could be that the behavioral as-
sumptions behind the life-cycle model are
wrong. Indeed, Colin F. Camerer et al. (1997)
put forward the view that New York City cab
drivers’ daily labor supply is driven by non-
standard, reference dependent preferences that
exhibit loss aversion around a target income
level. This view has recently been called into
question by Henry S. Farber (2004, 2005).
In this paper, we use an ideal dataset to study
workers’ responses to transitory wage changes.
We conducted a randomized field experiment
at a bicycle messenger service in Zurich, Swit-
zerland. The bicycle messengers receive no
fixed-pay component and are paid solely on
commission. We have precise information for
all the workers on the number of shifts they
work and the revenues they generate per shift. A
shift always comprises five hours, and workers
in our sample worked at most one shift per day.
A key feature of our experiment is the imple-
mentation of an exogenous and transitory in-
crease of 25 percent in the commission rate.
Therefore, we can be sure that unobserved sup-
ply or demand variations did not induce the
change in the commission rate (i.e., the “wage”
change). Each participant in the experiment
knew ex ante the precise duration and size of the
wage increase. Since the wage was increased
only during four weeks, its impact on the work-
ers’ lifetime wealth is negligible.
In the firm under study, the messengers can
freely choose how many shifts (hours) they
work and how much effort they exert (to gen-
erate revenues). This means that our setting also
provides an ideal environment for studying the
behavioral foundations of labor supply. In our
context, the absence of intertemporal substitu-
tion effects cannot be attributed to institutional
constraints on labor supply. The exogenous
change in the commission rate raises the returns
from both the number of shifts and effort per
shift. In contrast to earlier studies (Oettinger
1999; Camerer et al. 1997; Yuan K. Chou
2002), we have the unique opportunity of study-
ing how hours and effort respond to the wage
increase and how overall labor supply (i.e., the
number of hours times the effort per hour) is
affected.
Our experimental results show that the wage
increase caused a large increase in overall labor
supply. Our estimate of the intertemporal elas-
ticity of substitution with regard to overall labor
supply is between 1.12 and 1.25. This large
effect is exclusively driven by the increase in
the number of hours worked. In fact, the elas-
ticity of hours worked with regard to the wage
is higher than the elasticity of overall labor
supply. The elasticity of hours is between 1.34
and 1.50, considerably higher than that found in
previous studies. For example, Oettinger (1999)
investigates how stadium vendors adjust their
labor supply to changes in expected wages. He
uses a set of ex ante predictors of game atten-
dance, which are strongly related to the hourly
wages of stadium vendors. His estimated elas-
ticities range from 0.53 to 0.64.
The fact that the elasticity of hours (shifts)
worked is larger than the overall labor supply
elasticity suggests that the effort per hour de-
creased in response to the wage increase. And
indeed, a detailed analysis indicates that effort
per shift decreased by roughly 6 percent in
response to the wage increase, which implies a
wage elasticity of effort per shift of ⫺0.24.
These results confirm the nonexperimental evi-
dence in previous studies of intertemporal labor
substitution based on samples where workers
were largely unconstrained in choosing hours
and effort. Camerer et al. (1997) and Chou
(2002) examined how cabdrivers, after having
decided to work on a given day, vary their daily
working time (which is a good proxy for daily
effort) in response to wage variations. Both
studies report that workers work fewer hours
(provide less effort) on high-wage days, indi-
cating a negative effort elasticity. Interpreting
this evidence is difficult, however, as pointed
out by Goette, David Huffman, and Fehr (2004)
and Farber (2004, 2005). One problem is that
the source of the variation in cabdrivers’ wages
is not completely clear. If, for example, there
are common supply-side shocks (e.g., most
drivers prefer not working on the Fourth of
299VOL. 97 NO. 1 FEHR AND GOETTE: DO WORKERS WORK MORE IF WAGES ARE HIGH?
July), then the supply of cabdriver hours will be
small on these days and the ensuing wage will
be high. As a result, there will be a negative
correlation between wages and hours, although
all individuals have neoclassical time-separable
preferences. A second concern is a possible
selection effect: higher wages may induce cab-
drivers to work a few hours on days when they
otherwise would not have worked. Such an ef-
fect may generate a negative correlation be-
tween daily wages and daily hours, even though
all individuals behave exactly as the standard
model predicts. Our results, however, are im-
mune to both criticisms; that is, the reduction in
effort observed in our data questions the stan-
dard neoclassical model with time-separable
preferences. After all, the rise in the commis-
sion rate provides strong economic incentives
for working more hours and for working harder
during those hours.
We provide two reasonable extensions of the
standard model that can, in principle, explain a
negative effort elasticity. In the theory part of
our paper, we show that a neoclassical model, in
which last period’s effort raises this period’s
marginal disutility of effort, is consistent with
our evidence—workers who work in more pe-
riods may rationally decide to reduce effort per
period. We also show that a rational choice
model, with reference dependent preferences
exhibiting loss aversion around the reference
point (Goette, Huffman, and Fehr 2004), is also
able to explain the evidence. The intuition be-
hind this model is that workers with loss-averse
preferences have a daily reference income
level.
3
Daily incomes below the reference level
are experienced as a “loss” and the marginal
utility of income is large in the loss domain. In
contrast, the marginal utility of income at and
above the reference level decreases discontinu-
ously to a lower level. Workers who tempo-
rarily earn higher wages are more likely to
exceed the reference income level, hence, re-
ducing their marginal utility of income and ul-
timately inducing them to provide less effort per
shift. At the same time, however, workers with
higher wages have a higher overall utility from
working a shift, so that they can more easily
cover the fixed costs of getting to work. Hence,
they are likely to work more shifts.
There are thus two competing theories which
are consistent with the facts. In order to discrim-
inate between the two theories, we conducted
another experiment based on the idea that loss
aversion is a personality trait which affects be-
havior across several domains (Daniel Kahne-
man and Amos Tversky 2000; Simon Gaechter,
Andreas Herrmann, and Eric Johnson 2005). In
this experiment, we measured the individual
worker’s loss aversion in lottery choices. We
then used these measures to examine whether
the negative response of effort per shift is due to
the existence of loss-averse workers. We indeed
find that the degree of a worker’s loss aversion
contributes significantly to the negative effort
elasticity. Moreover, it turns out that workers
who do not show loss aversion in the lottery
choices also do not have a significantly negative
elasticity. Only workers with loss aversion re-
duce effort per shift significantly when paid a
high wage.
Thus, the result of our second experiment
favors the model with reference dependent pref-
erences over the neoclassical model with “dis-
utility spillovers” across periods. Of course, the
evidence from the second experiment is not the
ultimate arbitrator, but it suggests that future
work should not disregard the loss aversion
model because it could contribute to a deeper
understanding of effort choices. At the same
time, we should also point out that one-third of
the workers in our sample did not exhibit loss
aversion and a negative effort elasticity. Thus,
future work should take the possibility of het-
erogeneous preferences more seriously. In ad-
dition, the results of our first experiment
unambiguously show that whatever behavioral
forces worked against the intertemporal substi-
tution of labor, they were apparently not capa-
ble of generating a negative elasticity of the
overall labor supply. The behavioral forces that
worked in favor of intertemporal substitution
outweighed any opposing forces.
The remainder of this paper is structured as
follows. Section I describes the institutional en-
vironment and the details of the field experi-
ment. Section II discusses the implications of
different models of labor supply. Section III
reports the results from the field experiment.
3
Chip Heath, Richard Larrick, and George Wu (1999)
provide evidence that goals often serve the function of a
reference point.
300 THE AMERICAN ECONOMIC REVIEW MARCH 2007
