Labor Supply of New York City Cab Drivers: One Day at a Time

Abstract

Life-cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages because such changes have virtually no effect on life-cycle wealth. Previous attempts to test this hypothesis empirically with time-series data have not been supportive; estimated elasticities are typically negative or nonsignificant. Such analyses, however, are vulnerable to measurement error and other estimation problems. We use data on daily observations of wages and hours for New York City cab drivers to estimate the supply response to transitory fluctuations in wages. Cab drivers decide daily how many hours to supply, and face wages that are positively correlated within days, but largely uncorrelated between days. Using these data, our central finding is that wage elasticities are persistently negative–from -.5 to -1 in three different samples–even after correcting for measurement error using instrumental variables. These negative wage elasticities challenge the notion that cab drivers trade off labor and leisure at different points in time and question the empirical adequacy of life-cycle formulations of labor supply.

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