Calibrated Labor Supply Elasticity of Housing Subsidies

In Simple Words

By comparing workers who received housing coupons against workers who did not, economists calculate how much people reduce work when given unearned income (income elasticity) versus when their effective hourly take-home pay drops (compensated wage elasticity).

Research question

Determining how low-income households respond to housing subsidies requires estimating underlying income and wage elasticities to predict labor supply adjustments.

Participants

N = 42,358 low-income, working-age, able-bodied adults; Chicago, Illinois.

Study Design

Structural calibration of a Constant Elasticity of Substitution (CES) utility model using experimental treatment and control group means for post-tax wages, hours worked, and virtual income.

Results

Calibrated utility parameters ($\mu = 0.7285$) yield an income elasticity of -0.09 and a compensated wage elasticity of 0.15.

Takeaway

Apply calibrated income (-0.09) and compensated wage (0.15) elasticities when modeling structural labor supply changes in response to means-tested transfer adjustments.

Related findings

• Age-Dependent Labor Supply Reduction Near Retirement →Labour & employment

  Imagine runners in a marathon. Young runners who receive a boost of energy mid-race keep running with a slightly adjusted pace, but runners who are already within sight of the finish line use that extra energy to cross the line early and sit down on the bench immediately.

• Disutility of Leisure and Wage Discipline Effect →Labour & employment

  Imagine a resort club where membership used to allow relaxing all day for free. If the club manager introduces mandatory daily chore shifts for members, staying in the club becomes much less attractive.

• Effective Wage Differential Bundle Mechanism →Labour & employment

  Imagine a fruit stand offering a small basket of 5 apples for $10 and a larger basket of 10 apples for $15; the true cost of those 5 additional apples isn't the average price per apple, but the $5 price difference divided by the 5 extra apples ($1 per extra apple).

• Flat Participation Fees and Income Targeting →Labour & employment

  Imagine a taxi driver who receives a guaranteed $50 payment just for turning on their car each morning. Under target-earning theories, drivers who aim for a fixed daily income quit early once that $50 cushion gets them close to their target; however, when liquidity constraints are severe, the fixed fee does not reduce effort, leaving workers fully responsive to per-job incentive rates.