Scale Invariance of Marginal Labor Supply Effects
RCTReview
Fixed adjustment costs in changing work schedules predict that small financial windfalls produce negligible work adjustments, whereas large wealth shocks trigger disproportionately large labor cutbacks. Testing for non-linear marginal responses verifies whether labor adjustment costs distort small wealth transfers.
Picture this
Imagine a worker who reduces work hours by the exact same proportion for every thousand dollars received, whether the prize is small or huge, rather than ignoring small cash gifts and only taking time off work when the prize becomes massive.
What the evidence says
Estimated marginal effects per unit of wealth are statistically indistinguishable across small, moderate, and large lottery prizes, rejecting hypotheses that fixed adjustment costs suppress labor supply responses to moderate wealth windfalls.
- Who was studied
- N = 244,826 observations of Swedish lottery winners across prize sizes ranging from under 1,000 SEK to over 5 million SEK.
- How
- Quadratic and spline regression modeling with knots at 1M SEK, alongside sample trimming specifications excluding prizes exceeding 1M, 2M, or 5M SEK.
What to do
Apply linear marginal propensity to earn parameters uniformly across both small and large wealth transfer sizes when forecasting labor market responses.
From the source
"The point estimates suggest the marginal effect of lottery wealth is smaller for larger prizes, but the difference is not statistically significant."
f8929526-9215-4a78-95ce-8377460687e7-The Effect of Wealth on Individual and Household Labor Supply- Evidence from Swedish Lotteries..pdf