Labor supply when productivity keeps growing

4 September 2023 12:11

Labor supply when productivity keeps growing

New paper titled "Labor supply when productivity keeps growing" by Jonna Olsson (with Timo Boppart and Per Krusell) has been published in Review of Economic Dynamics in August 2023.


We examine the intensive and extensive margins of labor supply in an incomplete-markets framework where productivity keeps growing. What are, in particular, the long-run implications for who will work how much, and how the distribution of economic welfare among households will change? We insist the relative strengths of income and substitution effects to be such as to match historical and cross-country observations. That is, hours will fall toward zero as productivity and income rise, while wages per hour will keep rising and be consistent with stable income shares for labor and capital. Despite this rather drastic path toward zero hours worked, we find that few features of the distribution of outcomes in the population are affected much at all by productivity growth. In particular, the relative distribution of hours worked and of consumption will look very similar to the case without productivity growth.