Duality and the Slutsky income and substitution effects of increases in wage rate uncertainty

Authors: Menezes, Carmen F.¹; Wang, X. Henry²

Source: Oxford Economic Papers, Volume 57, Number 3, July 2005 , pp. 545-557(13)

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Abstract:

The labor supply decision under wage rate uncertainty has received considerable attention in the literature. While the literature has obtained the Slutsky decomposition for an increase in the expected wage rate under uncertainty, it has yet to provide a Slutsky decomposition for an increase in wage rate uncertainty. This paper uses duality to obtain such decomposition. Under plausible assumptions about preferences, the Slutsky income effect is positive while the Slutsky substitution effect is negative. This confirms the intuition in the literature that the total effect of an increase in wage uncertainty is the composite of opposing tendencies.

Keywords: JEL classification: D81

Document Type: Research article

DOI: http://dx.doi.org/10.1093/oep/gpi029

Affiliations: 1: *University of Missouri-Columbia 2: †Department of Economics, University of Missouri-Columbia, Columbia, MO 6211, USA;, Email: WangX@missouri.edu

Publication date: 2005-07-01

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Oxford Economic Papers is a general economics journal, publishing refereed papers in economic theory, applied economics, econometrics, economic development, economic history, and the history of economic thought. It occasionally publishes survey articles in addition to original papers. Books are not reviewed, but substantial review articles are considered. The journal occasionally publishes survey articles in addition to original papers, and occasionally publishes special issues or symposia.