Labor Supply of Stockholm Cab Drivers: Revisiting the Evidence

Sammanfattning: In this paper, panel data on the hours worked and wage rates of taxicab drivers in the city of Stockholm are used to test two competing theories of labor supply: the standard neoclassical model, which predicts positive wage elasticity, and the target income model, which predicts negative wage elasticity. Particularly comprehensive and precise data sets allow us to revisit the evidence presented in recent literature that focuses on professions in which workers are free to set their own hours. In contrast to Camerer et al. (1997), this paper identifies significant positive autocorrelation in the wage across days and positive wage elasticity estimates for a number of specifications, implying that the labor supply behavior of Stockholm taxicab drivers is inconsistent with a one-day target income hypothesis. This conclusion demonstrates that further attention must be given to factors influencing the decision-making time horizon of labor supply, as well as to the effect of the extensive margin on wage elasticity estimates.