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BK Blog Post
Posted by Jared Bernstein.
From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.
Noam Scheiber has an interesting piece up at the NYT on choices made by Uber drivers as to how many hours they work (Scheiber’s stuff on the evolving workplace is must-read journalism, IMHO). Apparently, some drivers work more when fares are low and less when they’re high (Uber boosts fares in periods of high demand). That choice drew this commentary (my bold):
“In one camp is a group of so-called behavioral economists who have found evidence that many taxi drivers work longer hours on days when business is slow and shorter hours when business is brisk — the opposite of what economic rationality, to say nothing of common sense, would seem to dictate.”
I don’t get is why this is such a theoretical or common-sense puzzle, i.e. why isn’t this simply a case of the “income effect” dominating the “substitution effect?” Microecon 101 posits that there are two countervailing forces affecting labor supply when your (after-tax) wage goes up. One, the substitution effect, says work more as the opportunity cost of not working just went up (i.e. the cost of an hour of chilling = your hourly wage). The other, the income effect, says work less because you can now afford to chill more without lowering your income.
In fact, the article does suggest that this latter effect is in play as drivers appear to be roughly hitting their income targets sooner when fares are up (though there’s also something in there about how more experienced Uber drivers don’t drive less at peak fares).
At any rate [sic], I may be missing something and it’s a small point, but I wonder if what’s going on here is emblematic of a more serious problem I’ve noticed in the tax debate: income effects are heavily discounted, if not ignored. And this makes supply-side tax cuts look more pro-work than they probably are.
To be fair, the empirical literature supports the view that the substitution effect dominates—when they simulate labor supply responses to tax changes, the CBO uses a substitution elasticity that is multiples of that for the income effect: 0.24 versus -0.05 (see Table 4 here). Moreover, the assumption that most workers can freely set their hours as they see fit belies most workers’ reality, which is one reason why the Uber drivers and other gig economy workers are a cool group to study in this space, as they’ve inherently got more flexibility.
But we shouldn’t be at all surprised if those who can do so work less when their pay goes up. For many, it’s an unquestionably rational choice!
On other matters, a few links to pieces you may have missed and might enjoy.
My (pretty long) Labor Day piece over at WaPo. Yes, we need more unionization, a critical yet diminished balancing force. But is such a revival plausible? That’s where centralized bargaining comes in.
Also at WaPo, a plea to the Fed to do what jazz musicians do when they get lost in the tune: when in doubt, lay out!
Finally, Arthur Levitt asks me many topical questions and gives me some time to answer them!