Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 1997:30: The Hausman-MaCurdy Controversy - Why do results differ between studies?

Matias Eklöf () and Hans Sacklén
Additional contact information
Matias Eklöf: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Hans Sacklén: FIEF, Postal: Wallingatan 38, 111 24 Stockholm, Sweden

Abstract: The two perhaps most influential empirical labor supply studies carried out in the U.S. in recent years, Hausman (1981) and MaCurdy, Green & Paarsch (1990), report sharply contradicting labor supply estimates. In this paper we seek to uncover the driving forces behind the seemingly irreconcilable results. Our findings suggest that differences with respect to the estimated income and wage effects can be attributed to the use of differing nonlabor income and wage measures, respectively, in the two studies. Monte Carlo experiments suggest that the wage measure adopted by MaCurdy et al might cause a severely downward biased wage effect such that data falsely refute the basic notion of utility maximization.

Keywords: Labor supply; Slutsky condition; maximum likelihood estimation

JEL-codes: J22

42 pages, December 4, 1997

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