Labor Market Information Provision and Job FairsService Sector Female Labor Preference

Labor Supply Adjustment Lag

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In Simple Words

When a worker receives a major long-term financial windfall, they rarely quit or reduce working hours on day one; instead, they complete existing work commitments, deliberate over lifestyle changes, and gradually reduce earnings over a multi-year period.

Same winners receiving at most $100,000 a year

Year of winning
0.4 cents more per prize dollar
First full year after winning
5.6 cents less per prize dollar
Second to sixth years after winning
About 10 cents less per prize dollar

194 winners, empirical earnings responses across years zero to six. Winning-year earnings include time before the win. Estimates have uncertainty.

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Research question

Evaluating the timing of behavioral responses to unearned wealth transfers requires determining whether workers alter labor supply immediately or undergo a structural transition period over multiple years.

Participants

N = 194 human Massachusetts Megabucks lottery winners receiving $100,000 or less annually, tracked across 6 post-winning years via Social Security Administration data.

Study Design

Year-by-year longitudinal OLS panel regressions of Social Security earnings on yearly lottery payments from Year 0 through Year 6 post-winning.

Results

MPE is 0.004 in the year of winning (Year 0), drops to -0.056 in Year 1, and stabilizes around -0.10 from Year 2 onward, demonstrating a 1-to-2-year adjustment period.

Takeaway

1. Factor a 1-to-2-year transition period into economic forecasting models before expecting labor supply reductions to reach full steady-state levels following a cash transfer policy.

Source and citation

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Read alongside the research

Plain-English glossary

Original explanations, informed by the references below. Examples are illustrations, not data from the studies above. The research text stays unchanged.

Longitudinal study

A study that checks the same group of people at different times. This lets researchers examine how things change over time.

ExampleResearchers ask the same workers about their wellbeing at the start, after three months and after six months.

NICE · Longitudinal study ↗Read more about longitudinal study →

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