American Economic Association

Assets, Subsistence, and The Supply Curve of Labor

Author(s): Yoram Barzel and Richard J. McDonald
Source: The American Economic Review, Vol. 63, No. 4 (Sep., 1973), pp. 621-633
Published by: American Economic Association
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Assets,

and

Subsistence,
Curve
By

The

Supply

Labor

of

YORAM BARZEL AND RICHARD J. MCDONALD*

I. The Supply Curve of the Individual

A curious method is commonly em-

ployed to derive the accepted shape of the

supply curve of labor. The typical text
first points out (following Lionel Robbins)
that a wage change results in an income as
well as a substitution effect and, noting the
importance of leisure in the individual
budget, concludes reasonably enough that
the supply curve may, in some of its range,
have a negative slope. But then the discussion proceeds without further analysis to
suggest something about a turning point
in the curve-that the curve will turn back
only after an initial positive slope. In
Milton Friedman's words, ". . . beyond
some point the income effect dominates
the substitution effect" (1966, p. 204,
italics added) and the change in sign is
explained by the statement that ". . . in a
primitive society, the initial low wage rate
at which the income effect becomes dominant reflects a lack of familiarity with
market goods and a limited range of tastes.
As tastes develop and knowledge spreads,
the point at which the income effect dominates tends to rise." The sign change seems
to apply only to a primitive society, the
value at which this occurs seems to shift
around, and its explanation is rather lame.
Although Friedman is only one of many
economists to accept uncritically the backward bending shape of the supply curve,3
his argument is singled out precisely because of his usual astuteness and the advanced nature of the text.4

* University of Washington. Some of the work on

this paper was done while Barzel was visiting University
College, London, supported by a Ford Foundation
Fellowship.
I For example, a Cobb-Douglas utility function
yields a perfectly inelastic supply curve.
2 See, for example, Giora Hanoch.

3 J. R. Hicks apparently was the first to introduce the

backward bend, but he failed to offer any satisfactory
explanation.
I To cite one more example, Paul Samuelson in his
elementary text also subscribes to the backward bending shape of the supply curve.

The "backward bending" supply curve

of labor is now accepted as a matter of
course by most economists. It has no
doubt been perplexing to observe that the
most commonly employed types of utility
functions do not yield such curves under
the usual textbook analysis of the problem.1 Particular preference maps have been
found that generate backward bending
curves;2 however, they are nonparametric,
leading to difficulties of estimation, and
upon closer examination seem to imply
counter-intuitive results. We will show
that taking into account the wealth position of an individual on the one hand and
survival consideration on the other greatly
expands the variety of shapes that can be
derived for the supply curve from some
simple utility functions. The use of a
specific simple utility function also implies
some severe restrictions on the form the
supply curve can take, rendering it testable. Empirical evidence is shown to support the conclusion that the supply curve
is monotonic. We will also show that the
notion that the aggregate supply curve of
labor slopes down rests, in part, on an error
of aggregation, and that the empirical
evidence usually cited in support of the
negative slope, when correctly interpreted,
cannot be so construed.

621

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622

THE AMERICAN ECONOMIC REVIEW

Consider now a point on the supply

curve of labor and observe what happens
to the income change due to successive
wage increases. The effect of the first wage
increase is independent of whether the
supply curve at that point has a positive
or a negative slope, not those of the second and subsequent wage changes. If the
supply curve has a positive slope, the
number of hours affected by subsequent
wage changes is larger and, other things
equal, the income effect tends to grow
stronger and stronger.5 The converse will
occur if the income effect dominates in the
first place, rendering the slope of the supply curve negative. These "self-correcting" tendencies give some basis for expecting the supply curve to eventually become
vertical.
The asset holdings of the individual play
an important (and thus far largely neglected) role in determining the shape of
the supply curve of labor.6 If we consider
an extremely wealthy individual, it seems
intuitively clear that as long as work itself
is not a commodity, no labor will be offered
at the lowest range of wages; assuming
continuity of preferences and the absence
of indivisibilities, an infinitesimal amount
will be supplied at the point of entry into
the labor market. From there, at least for
awhile, the curve has.to slope upwards.
On the other hand, for an individual
with no wealth whatsoever and no income
source other than his own work, the very
lowest wage will be insufficient for survival.
As wages increase, a point will be reached
where survival becomes possible if he supplies the highest physically possible amount
of labor. For such an individual, as the
I Of course, it is possible that as
wages rise the rate
of change of labor supply, with respect to a change in
income, may change sufficiently to negate this tendency.
6 Kenneth Boulding notes the role of assets but does
not proceed to examine it fully (pp. 800-01). He, too,
draws a backward bending supply curve of labor even
though his illustrations (pp. 210-11) demonstrate only
a negative slope and not a turning point.

SEPTEMBER 1973

wage rate continues to rise, the amount of

labor supplied cannot increase; given that
leisure is a commodity, the supply curve
has to have a negative slope right from its
very beginning. It will be suggested in the
following analysis that we predominantly
observe just such an initially negatively
sloped curve eventually tending to become perfectly inelastic.
To proceed with the formal analysis, we
consider an individual who derives satisfaction from the consumption of two
goods: market purchased commodities,
denoted by C, and leisure, denoted by R.
Assume that the preferences of the individual can be characterized by a functionf(C', R'), which at a point (C', R') in
the commodity space indicates the individual's marginal rate of substitution
between the two commodities at that
point.
That is,
dC'
R = - f(C', R')
for small movements leaving the consumer
as well off as he was before. The accepted
range of this function is for C', R' >. But
it should be recognized that unless some
positive level of consumption of C is
reached, survival is not possible, and so for
some positive values of C a preference
map cannot be said to exist. Similarly,
survival considerations may dictate a certain minimal level of leisure (or rest) time.
Notice that the roles played by the two
survival requirements are not symmetric
since all individuals are endowed with
more time than is needed for survival but
not all have sufficient assets for survival.
Denote by S the minimal required consumption of goods per day, and by T the
minimal required leisure time and define

C and R as C=C'-S

and R= R'-T. We

now assume that the arguments in the

marginal rate of substitution are C and R
so that

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BARZEL AND McDONALD: SUPPLY CURVE OF LABOR

VOL. 63 NO. 4

dC
R

-f(C,

R)

along an indifference curve, for C, R >0.

This transformation, while innocuous as
long as f is not further specified, is a substantive one once specific properties are
assumed for the preference map, as we
shall do below. We also assume that
f(C, R) is positive, differentiable, and that
preferences are characterized by a diminishing marginal rate of substitution. Thus
d2C

(2)

- = f(C, R)f1(C, R)
dR2

f2(C, R) > 0

for movements along an indifference curve,

and for all C, R >0, where fi and f2 are,
respectively, the partial derivatives of f
with respect to C and R.
The individual is subject to constraints
on time and expenditures. The time constraint is R+T+L=D=24,
where D is
the length of the day and L is labor hours.7
Given the notion of required rest time, it
is more convenient to write the constraint
as
(3)

R + L = D-T

= D'

where D' is the fixed number of hours

whose composition can be allocated to
leisure or labor.
The expenditure constraint is Y=WL
+PA =PC', where Y is money income, W
is the money wage rate (or the shadow
wage if the individual is self-employed), P
is the price of market commodities, and A
is per day nonwage income in units of
consumption goods. By rearranging and
substituting from (3) for L, we get
(4)

C +wR = wD'+

where w=W/P.

A-S

Equation (4) has as its

No substantive change is involved

analysis in terms of some other time
week or a year. More importantly,
equally relevant to market-employed
ployed individuals.
7

if we carry the
unit, such as a
our analysis is
as to self-em-

623

variables C and R, the two arguments in

the marginal rate of substitution. Notice
that if wD'<S-A,
then even if the individual works the physically maximum
number of hours, he will not earn enough
to survive. In other words, unless the condition
S-Ad
D'

(5)

is satisfied, C and R cannot both be positive, and the functionf is not defined.
We assume that the individual chooses
the most preferred combination that he
can attain, given that he is able to survive.8 Necessary and sufficient conditions
for this to be the bundle (Co, R0), given
(5), are that COand Ro satisfy the equations (2) and (4), together with
f(Co, Ro) = w

(6)

This last condition is independent of the

transformation previously imposed on the
origin of the functionf.
Comparative statics results can be obtained by differentiating conditions (4)
and (6) partially, first with respect to A
and then with respect to w. The resulting
slopes of the demands for consumption and
leisure with respect to the wage rate are
(7)

--

(8)

--=

aw

f/(ffl-f2)

(D'

R)-

AA
dlR

d9R

(9w

-1/(ffl

-f2)

(D'

R)

(9:AA

Now we want to concentrate on the

effects of wage changes on the quantity of
labor supplied. Because of equation (3)
we can write
AL

(9)

= 1/(ffl
aw

-f2)-

(D' - R)-

AR
dA

The first term of the right-hand side of

8 If wD'= (S-A),
the consumer will thus choose
C = 0, L = D' rather than to work less and starve.

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THE AMERICAN ECONOMIC REVIEW

624

(9) is the pure substitution effect and is

necessarily positive, due to the convexity
of the preference map. The second term,
assuming that leisure is not an inferior
commodity, is also positive but is preceded
by a minus sign. It is clear from this
formulation that without further specification of the consumer's preferences, it is
impossible to say which of the two effects
will dominate.9 Notice, however, that if we
are in a region where the income effect
dominates, as w increases the term (D'- R')
is declining, tending to diminish the
strength of the entire income term. The
converse is true if the substitution effect
dominates.
We now introduce a more specific form
of the consumer's preference. This will
allow more definite and more readily
refutable empirical implications. The more
detailed specifications will be introduced
in two steps. First, the function f(C, R)
will be restricted to be homothetic. In this
case the marginal rate of substitution between (net) consumption and leisure is a
function only of the ratio in which the two
goods are consumed. Equation (9) can
now be rewritten as
1

wv

(C+ 7R)

AL

(10) -

c)w

[C(o--1)+(A -S)]

where o-is the elasticity of substitution between net consumption and net leisure.10
So the slope of the supply curve depends
on the signs of (u-1) and of (A-S).11 In
the special case o-=1, where the preferences imply a Cobb-Douglas type of utility
function, the sign of the slope of the supply
curve hinges entirely on the sign of
I

If consumption C is assumed to be a normal good,

then the demand for it (with respect to w) must be
positively sloped, due to the restriction that the individual can consume no more than D' hours of leisure.
'0 See the Appendix.
11 The terms in the square brackets in (10) are
grouped differently than is conventional. Since A-S
-C= -wL, these terms represent the income effect,
while Ca- represents the substitution effect.

SEPTEMBER

1973

(A -S). In general o- need not be constant

but will vary with the ratio CIR. Letting
x= CIR, it can be shown that
1

3T

dw
where

=-(1
x

-as)

(itself a function of x) is defined by

E =

h"(x) *x
h' (x)

and h(x) is the marginal rate of substitution as defined in the Appendix. Then,
using the definition of T, we have

dw

and since our assumptions about the preference map impose no restrictions on the
sign or magnitude of E, nothing a priori
can be said about the direction of change
of o- as wages vary. Thus, if we do not
restrict a- to a constant value, the supply
curve can assume virtually any shape and
therefore will have no testable implications.
The second step in specifying preferences, then, is to constrain a- to a constant
value. This will also further simplify matters and allow for easy graphical interpretation. The marginal rate of substitution
takes the particular form
(11)

f(C, R) =

1/a

/1 -\SC\

_) ()

where O<a< 1.12 The above assumptions

12 Equation (11) would follow
from any monotonically
increasing function of the CES utility function.

V(C, R) = [aC-, + (1 - a)R-$]-1"f

V(C, R) = CaRlfor 3

for d
=

defined for O<a < l and -1 <d < oo. The elasticity of
substitution is then equal to 1/(l-+F). This specification is a generalization of the class of utility functions
generating the so-called linear expenditure system of
demand equations introduced by Laurence Klein and
Herman Rubin, and more recently adopted by Richard
Stone.

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VOL. 63 NO. 4

BARZEL AND McDONALD: SUPPLY CURVE OF LABOR

a cC1Ya

625
a >1

=1

www
(A-

_ f;

>

A-S)1/e;

---4

--X

D'

D'

oD'

D'

,,;D'

D'

D'

L'

www
(A-S)0

IVVI

D'
w

jw

v|::

(A - S) ' O

DL

L
cKD'

D'
FIGURE1

may appear to be highly restrictive; nevertheless, depending on the signs of (o- 1)

and (A -S), we get the textbook characterizations of the supply curve as well
as some novel ones.
The nine panels in Figure 1 are drawn
for cases where o- < 1 in combination with
(A -S)
00. This set of diagrams gives us a
whole gamut of possible results monotonically rising and falling, perfectly inelastic, and both backward and forward
bending. So the assumptions made regarding the form of the preference map do not
turn out to be as restrictive as might first

appear.'3 Notice that in the three figures

with (A -S) <0 the supply curve is not
defined for wage rates below (S-A)/D'.
The second row of panels (IV-VI) where
A - S =0 corresponds to the conventional
treatment of the supply of labor where
both A and S are implicitly assumed equal
to zero. It is easy to see, by comparing the
second row with the first and with the
third, the crucial importance of these two
13 One important restriction is the linearity of the
Engel curves. See Samuelson (1948). Given our subsistence requirements, the Engel curves do not necessarily go through the origin.

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626

SEPTEMBER

THE AMERICAN ECONOMIC REVIEW

factors.14 If assets are large enough, the

supply curve will always have an initialregion with a positive slope (and will be
monotonic for o>1). If assets alone are
insufficient to provide for survival, the
supply curve will always slope negatively
initially (and will be monotonic for
O< 1).15 Consider an individual possessing
no income source other than his own labor.
If we do not explicitly take into account
survival considerations, then the second
row will appear pertinent. An individual
with a utility function leading to of> 1
would, at the lower wage range, then prefer
to die from starvation rather than to earn
enough for survival. This absurd result
points to the reasonableness of transforming the preference function as we did.
There is no a priori reason to accept any
one of these cases. It is important to note,
however, that since few individuals, even
in Western countries, start their working
career with asset holdings sufficient for
survival, the third row of diagrams represents the wealth conditions of most individuals. For some individuals, however,
A >S; for those, we should observe, at
least in part of the range, a positive relation between wages and hours, and in such
cases the vertical intercept itself will rise
with the level of asset holdings. It will be
shown that empirical evidence conforms
closely to the C-D case illustrated in
Panel VIII.
II. The Negative Income Tax
and the Supply of Labor
The preceding analysis can easily be
14 In analyzing
the labor-leisure problem many
authors implicitly assume that labor is the only source
of income. As can be seen by comparing the second with
the first (and third) row of diagrams, this may result in
a serious error.
15 An important omission in our analysis is the possibility that an individual may be able to forestall
starvation by consuming part of his stock of wealth in
addition to the flow of income resulting from it. This is,
of course, only a short-run solution. A fuller treatment of this problem would require bringing time considerations explicitly into the analysis.

1973

adapted to determine the effects on the

supply of labor of a variety of tax and
transfer schemes. Of current interest are
those tagged as "guaranteed annual income" or "negative income tax." Under
most of these the individual whose income
exceeds some "break-even" level, denoted
here by Yb, is being taxed and the individual whose income falls short of that
level is being subsidized. For simplicity
let us assume that the marginal rate of
tax does not vary with income, that is, the
rate of tax (which is also the rate of subsidy) is constant. If we denote this rate by
t, the floor on income is tyb.
The disposable income available to the
individual, denoted by Yd, is given then by
Y,1= Y + t( Yb -

(12)

Y)

The budget constraint

where Y=wL+A.
now becomes, after manipulations similar
to those used to derive (4),

(13) C + (1 - t)WR = (1 - t)(wvD'+ A)

+ t Yb- S
(13')

(1t- t)wD' + (A -S)

+

A)

t(Yb-

The condition for an interior maximum is

now

(14)

f(C, R)

(1- t)7v

Again, assume the preference map to be

homothetic, then the same comparative
static techniques used to derive (10) give
us
(15)

1
R
aL
- 1)= w [C + (1-t)wR]
9w
+ [(1-t)A

-(S-tYb)1}

This result is essentially the same as (10),

with the wage rate deflated by the tax
(and subsidy) rate, and with the term in
the square brackets corresponding to
[A-S] in (10). The term (1-t)A is netof-tax nonwage income, and (S-tYB) is
the portion of subsistence not covered by

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VOL. 63 NO. 4

BARZEL AND MCDONALD: SUPPLY CURVE OF LABOR

the guaranteed minimum income. As before, the sign of the term in the outer
brackets determines the sign of d&LI&w.
For the case where o-= 1, the supply curve
is positively sloped if net nonlabor income
exceeds the "net" subsistence term. It is
not possible to determine a priori the effect
of the tax plan on this final term, since the
tax lowers net nonlabor income while the
existence of the income floor weakens the
force of the survival requirements.
Given, however, the notion of a minimum survival requirement, it would seem
that if a guaranteed income has any meaning at all, it has to at least suffice for survival. We want, then, to examine the case
where I Yb > S. The terms in square
brackets in equation (15) must then be positive. The possible cases then reduce to
those in the first row of Figure 1 (with trivial modifications in interpretation of the
terms). The supply curve will always
slope upwards initially, and may slope upwards throughout. Only when o- is sufficiently less than one is it possible for the
labor supply to turn into a negatively
sloping curve.
To understand the effects of the plan
more completely, it is helpful to find the
effect of a change in the tax rate on the
supply of labor. This can be done by differentiating equations (13) and (14) partially with respect to the tax rate t. The
result of these operations is shown in
equation (16).

(16)

- = R[C(1-v) + (S-_Yb)]
At
(I1-t) [C + (1- t)wR]

raL

Again the effect on the labor supply cannot be determined a priori, and it would
take another series of nine figures to depict
all of the possibilities. Notice that it is
the break-even level of income, and not the
floor (tY&) on income, that is opposed to
survival consumption S. Since the breakeven level Yb must be greater than the floor
tYb, and the floor in turn must exceed sub-

627

sistence (see preceding paragraph), it is

plausible that the break-even level will
exceed subsistence. If this is the case,
the effect of an increase in the tax (and
subsidy) rate will be to decrease the labor
supply (unless o-is sufficiently smaller than
unity). Note also that at Y= Yb the tax is
zero; consequently, for Y= Yb a change in
the tax rate leads to a substitution effect
but not to an income effect. As a final result, the partial effect of changes in the
level of break-even income on labor supply
can be found to be
(17)

a(Yb

AL
-

-tR
[C + (1-t)wR]

which is negative, given that 0 < t < 1.

III. The Aggregate Supply Curve
The individual's demand for leisure is
derived under the assumption that (in
competition) the wage rate is an exogenously determined parameter; a change in
the wage rate will lead to an income or
wealth effect, in addition to the substitution effect. The central interest in this
paper is with the uncompensated demand
curve. So the demand for leisure in (8)
and subsequently contains both a substitution and an income effect. It is well
known that when considering the aggregate demand for a commodity, price is
an endogenously determined parameter
and, more importantly, that the net
wealth effect will tend to zero. This recognition is one of the major contributions of
general equilibrium analysis. Milton Friedman (1949) and subsequently Martin
Bailey, in identically titled articles, "The
Marshallian Demand Curve," both stress
that in the aggregate, at a point in time,
wealth effects tend to wash out due to the
constraint imposed by the resource endowment of the economy. And in the absence of wealth effects, no Giffen goods are
possible, and the aggregate demand curve
for leisure, as for any other good, has to

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628

THE AMERICAN ECONOMIC REVIEW

slope down throughout.'6 But elsewhere in

their writings, when drawing the supply
curve of labor, both Friedman and Bailey
allow for a negatively sloped portion of the
curve. Friedman (1966) does not specify
the level of aggregation, but Bailey (1962)
clearly discusses the economy-wide supply
curve of labor.
A possible explanation for such inconsistency is that empirical evidence strongly
indicates a negative relation between the
wage rate and the supply of labor. To the
extent that this relation is observed in
cross-sections, it is usually obtained for
subgroups in truly partial equilibrium
settings, and the evidence is not pertinent
in determining the shape of the aggregate
relation. As for time-series, the ceteris
paribus is clearly violated. Comparisons
are made between points in time for which
the total productive capacity of the economy is not held constant. In other words,
over time we observe not only the substitution due to an increase in real wages
but also the effects of a net increase in real
wealth. The wealth increase is not the result of the change in wage; if anything, it
is the cause of the change in wage. Under
these conditions, a negative relation between the quantity of labor supplied and
the wage rate is easily understood, but this
does not reflect on the slope of the supply
curve at a point in time where wealth is
constant.
This is not to imply that the aggregate
supply curve of labor can never slope
downwards or that (in the aggregate)
Giffen goods can never be observed. These
phenomena are not ruled out on a priori
grounds, but may occur only under much
more stringent conditions than usually
specified. Suppose that the proceeds of a
tax imposed on capital are used to subsidize labor. The relative price of labor will
16 By the same token, it is not surprising that Stigler's
search for Giffen goods is in vain. See George Stigler.

SEPTEMBER

1973

increase, and individuals supplying labor

will experience positive wealth effects. On
this account, the slope of the supply curve
may become negative. On the other hand,
individuals, in their capacity as owners of
capital, will experience negative wealth
effects and will demand less leisure and
offer more labor services. For an individual
whose capital holdings are exactly proportionate to the quantity of labor he supplies,
the two income effects will cancel out. The
other extreme is where all but one individual have no capital whatsoever while
a single individual owns the entire capital
stock of the economy. The wealthy owner
will increase his labor supply as a result of
the decline in his wealth by at most
twenty-four hours a day. Since his contribution will be a minute fraction of the
total, the aggregate supply curve can
easily be negatively sloped. The actual
situation is somewhere in between these
two extremes and while the notion that the
aggregate supply curve may slope down
at a point in time is greatly weakened, it
cannot be entirely rejected on a priori
grounds.
IV. The Empirical Evidence
In The Price of Leisure, John Owen compiled U.S. time-series spanning the years
1901-61 for (among other things) the
number of weekly hours of work and the
corresponding real hourly wage. A number
of important adjustments to the raw data
make these series particularly useful for
our purposes, especially in adjusting
weekly hours for vacations and holidays
and in excluding working students from
the series from 1940 on.
The data, however, should be interpreted with great care. The coverage is for
"private, non-agricultural wage and salary
workers." If we assume, as seems reasonable, that the larger the asset holdings of
an individual, the larger the chance that
he will become self-employed, then the

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VOL. 63 NO. 4

BARZEL AND McDONALD: SUPPLY CURVE OF LABOR

above classification of workers is biased

towards individuals with low asset holdings. This has strong implications in interpreting the time-series. First, we saw
that when the wage is parametric, the
supply curve of individuals will vary substantially according to whether their level
of assets is such that A-S > Oor A-S <O;
this is evident in a comparison of the first
and third rows of panels in Figure 1. In
particular, as asset holdings increase, the
relation A - S < 0 will change to A-S > 0,
and at the same time, individuals will tend
to drop out of the class of workers covered
by the series. The individuals covered by
the time-series, then, have particular asset
holdings that will tend to bias the observed
relation towards a negative slope.
Second, as noted above in the section on
aggregation, to the extent that the change
in wages is not accompanied by a shift in
the transformation curve, the income effect
on wage earners will be more or less
matched by an income effect in the opposite direction on asset owners. But since
the latter tend to be excluded from the
sample, the effect on them is missed, and
again the aggregative curve is biased towards a negative slope.'7
In addition, during the period covered a
dramatic shift occurred in productivity,
and the observed increase in wage earners'
incomes was not at the expense of asset
holders. Consequently, the evidence afforded by the aggregative time-series corresponds more closely to that of the individual where wages are parametric and
where increased wages mean a higher level
of income than to the aggregative supply
curve at a point in time where total income is constant.
The above discussion leads us to view
the time-series as being obtained from a
population for which asset holdings are not
17 These two
biases, however, are fortunate from the
viewpoint of identifying the parameters of the underlying utility function.

60

200

58.

log. w
175

54

629

57
0 55

53
*52

50

51

150
49.
48.

*46
*47

125
40
39

\.
38

100

34

*42
41
37

335

*36
33?12

*31
30

75

29
26

.
23

19

13
50

42

44

46

485052

5456

58

60

FIGURE2

high (though perhaps rising) and to view

the wage changes as parametric. So the
data may narrow down the range of utility
functions consistent with the evidence by
shedding some light on the constanty of
o-and on its value.
The data are plotted in Figure 2, where
the horizontal axis measures hours worked
per week and the vertical axis measures
(on a logarithmic scale) the index of real
wages. Individual points are identified according to their year. From 1901 to 1929
only selected points are available; from
1929 to 1961 the data are annual except
for the omission of the war years, 1943-45.
The pattern that emerges conforms
closely to Panel VIII of Figure 1, where
and where o-=1.18 During the
A-S<0
first half of the period, from 1901 to the
18 We should bear in mind that each of the diagrams
in Figure 1 is drawn for a constant level of nonwage
income. Since nonwage income is not held constant in
the actual data, and since such income may be correlated with the level of wages, a possibility of a bias is
present.

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630

THE AMERICAN ECONOMIC REVIEW

mid-1930's, real wages doubled, and weekly

hours fell from 58 to about 42. During the
second period, from the mid-1930's to
1961, real wages doubled again but hours
remained virtually constant, particularly
so if the war-related years are ignored.
From 1948 to 1961, the range of variation
of weekly hours is in the narrow band
between 40.4 (1954) and 42 (1952) with no
apparent trend.'9 This corresponds to the
Cobb-Douglas utility function where the
supply curve approaches asymptotically a
positive number of hours.20 Given that
American wages in 1901 were substantially
above those required for subsistence, the
above evidence is insufficient to determine
the minimum levels of consumption and
rest.
Owen's data go only to 1961 and cover a
very broad class of workers. During the
1960's real wages continued to increase,
but weekly hours showed very little, if
any, decline. Weekly hours for all production workers fell from 38.6 in 1961 to
37.021 (the coverage does not differ much
from Owen's but the hours are unadjusted). This decline, however, is entirely
due to a decline in hours in wholesale and
retail trade (from 38.3 to 35.1); none of the
other four subclasses, which include mining, construction, manufacturing and finance, showed any decline. Note that both
1961 and 1971 had high unemployment
rates. The last decade, then, conforms to
the pattern of the earlier period.
An interesting empirical implication
(also useful for testing the conclusion that
the utility function is Cobb-Douglas) is
19 The range will be further
narrowed if we take
account of cyclical fluctuations in unemployment,
which are negatively correlated with the number of
hours.
20 It is interesting to note that since the end of the
Second World War, weekly hours in Great Britain
are also almost constant. There, however, the number
is around 48 hours per week, The difference of about
7 hours per week between the two countries is an interesting puzzle.
21 See the Monthly Labor Review.

SEPTEMBER 1973

that as wages go up the divergence with respect to hours of work tends to disappear
as between the capitalist and noncapitalist
classes, i.e., between those with A -S>O
and those with A - S < 0. Casual notions
suggest that working habits of wealthier
individuals in the United States do not
differ much from those of less well-off
individuals. Casual notions also suggest
that the "leisure" class is quite prominent
in poor countries where the real wages are
low. These notions, if correct, tend to support the hypothesis that av= 1. Of course, a
more careful and systematic analysis of the
evidence is necessary to determine whether
these casual notiong are correct.
V. Some Further Comments
The attainable (survival) consumption
set used in the preceding analysis was of a
simple, "fixed coefficient" nature. A more
complicated (and perhaps more realistic)
formulation, allowing some substitution
between the two commodities in meeting
the requisites of survival, would in principle cause few difficulties in the formal
theory.22 However, the notion of net
consumption (above survival) would then
have little intuitive appeal, and it thus
might be impossible to find a formulation
of preferences yielding simple expressions
like equations (8) and (9) for the slopes
of the demand curves. The assumptions
used do, however, seem to strike a reasonable balance between complicating the
analysis severely and ignoring subsistence
needs completely, since they allow simple
types of preferences to generate a wide
variety of types of demand (supply)
curves.
Thus Hanoch verges on an error when
he asserts (p. 639) that CES utility functions cannot produce backward bending
22 Provided that the new attainable set is convex.
Otherwise, it may be impossible to even define convex
preferences over the entire set of attainable consumption bundles. See Arrow and Gerard Debreu (1954)
and Debreu.

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VOL. 63 NO. 4

631

BARZEL AND McDONALD: SUPPLY CURVE OF LABOR

supply curves and that a C-D utility

function produces a vertical supply curve.
His failure to take into account the wealth
position and subsistence requirements of
the individual has led him to use an unnecessarily complicated utility function to
get his desired qualitative results. His
illustration of a "conventional" supply
curve, with (A -S) implicitly set at zero,
shows how unreasonable one can get if
minimum consumption is not specified.
Since his supply of labor becomes zero at
all wage rates below w= 1,23 his consumer
then would apparently prefer to starve to
death rather than work and live at a wage
less than 1.
In empirical studies of the supply of
labor, the asset position of the individual
is seldom taken into account. But a comparison of the first and third rows of
Figure 1 clearly shows that even when
assets are present we cannot simply add
nonwage income as another variable in,
say, a regression equation. Clearly, the
coefficient for the wage rate depends on
the level of nonwage income, and it even
changes sign as assets pass through the
level A =S. A simple relation allowing for
no interaction effects, even if statistically
"significant," gives average results for
diverse groups of individuals, which in
this case are entirely meaningless. More
specificallv, in a sample with assets distributed on both sides of the subsistence
level, the estimated effect of the wage
rate on the supply of labor will be biased
toward zero. Given the model formulated
above, however, the correct specification
for the labor supply is shown by equations
(A 10) and (A 11) of the Appendix. Equation (A 11), where it is assumed that o= 1,

can be readily estimated by standard techniques; (A 10) poses more of a problem

but could also be estimated if the hypothesis that o- 1 is not tenable.
APPENDIX

To derive equation (10) it will be convenient to solve explicitly for the effects of
asset changes on the demands for C and R.
We can differentiate equations (4) and (6)
totally to get
dC + wdR =dA
f,dC+ f2dR

+ (D'

R)dw

dw

Letting dw be zero and recalling that at

equilibrium w=f, we see that the partial
effect of income on leisure is
R
(A 1)

= fi/(ffl-f2)

aA

Substituting this into (9) and rearranging,

we have
aL
(A 2)

[-(D'-R)]

-a=fli(ffl-f2)

fll(ffl

f2)

*--

(C+S-

A)]

where the budget constraint (4) has been

used to substitute for (D'-R) and we have
again used w =f.
Assume now that the individual's preferences are homothetic in C and R, so the
marginal rate of substitution is a function
only of the ratio of consumption to leisurethat is, f(C, R) is homogeneous of degree
zero-so we may write
f(C, R) = h ()

23

The units of w are not specified; thus, the entry

point into the labor market is not invariant to the choice
of units for the consumption good. His specific utility
function in our notation is:
V(fR, C) = R exp

epY -

_A

Thenfi andf2 can be written as

(A 3)

11=-;I

f = Rf2
R=

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C h'
R R

THE AMERICAN ECONOMIC REVIEW

632

SEPTEMBER 1973

and we have
Ih' (C + hR)
=R->
R
R

(A4)
(A 4) ffl-f

(A 10) L

(A 5)

R
(C+wR)

and

AC
AA

(C+wR)

R(i)
dflf

Ch'

and then we have

Rh

= Co
h/
fi
Equations (A5) and (A7) may then be substituted into (A2) to yield (A8).
(A 8)

1
AL
R
- = -2v (C + wR)
'aw
- [C(y- 1) + (A -S) ]

Working in a parallel manner, equation (7)

can be rewritten as
(A 9)

ACC

aw

(A 11)

L = aD'-

/A -S\
(1a)

(C + wR)

[R(o-

when o-= 1. This is the supply function that

would be generated by a Cobb-Douglas
type of utility function.

90.

Rh

which reduces to

REFERENCES
K. J. Arrow and G. Debreu, "Existence of
an Equilibrium for a Competitive Economy," Econometrica, July 1954, 22, 265-

where the differentials are for movements

along an indifference curve. When preferences are homothetic this is simply

(A 7)

\w

4R)

,=C

'

(1a

where the derivation of the latter parallels

that for leisure.
The elasticity of substitution between the
net quantities of consumption and leisure
is defined as

(A 6)

(j

7v,+ w

by convexity. So it must be true that h'>0.

The income effects then become
AR
-=
aA

1) + D']

It can also be shown that no weaker specifications on the individual's preferences will
give these results.
The further assumption that the elasticity
of substitution is a constant yields the explicit supply function

M. J. Bailey, "The Marshallian Demand

Curve," J. Polit. Econ., June 1954, 62,
2 55-61.

, National Income and the Price Level,

New York 1962, p. 34.
K. E. Boulding, Economic Analysis, 3d ed.,
New York 1955.
G. Debreu, Theory of Values: An Axiomatic
Analysis of Economic Equilibrium, New
York 1959.
M. Friedman, Price Theory, rev., Chicago
1966, p. 204.
, "The Marshallian Demand Curve,"
J. Polit. Econ., Dec. 1949, 57, 463-94; reprinted in Essays in Positive Economics,
Chicago 1953.
G. Hanoch, "The 'Backward-Bending'Supply
of Labor," J. Polit. Econ., Dec. 1965, 73,
636-42.
J. R. Hicks, Value and Capital, 2d ed., Oxford 1946, p. 37.
L. R. Klein and H. Rubin, "A Constant Utility Index of the Cost of Living," Rev.
Econ. Stud., 1948-49, 15, 84-87.
J. D. Owen, The Price of Leisure, Rotterdam
1969.
L. Robbins, "On the Elasticity of Demand for
Income in Terms of Effort," Economica,
June 1930, 29, 123-29.
P. A. Samuelson, "Some Implications of

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All use subject to JSTOR Terms and Conditions

VOL. 63 NO. 4

BARZEL AND McDONALD: SUPPLY CURVE OF LABOR

'Linearity'," Rev. Econ. Stud., 1948-49,

15, 88-90.
-, Economics, 8th ed., New York 1970.
G. J. Stigler, "Notes on the History of the
Giffen Paradox,"J. Polit. Econ., Apr. 1947,
55, 152-56.

633

R. D. Stone, "Linear Expenditure Systems

and Demand Analysis: An Application to
the Pattern of British Demand," Econ. J.,
Sept. 1954, 64, 511-27.
Monthly Labor Review, U.S. Department of

Labor, July 1972, p. 82.

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