At a Dutch economists “Masterclass” session in Fall 1991, Orley Ashenfelter explained that labour supply was unresolved and actually some kind of a researcher’s nightmare. In a break I put my suggestion on the blackboard, and my ‘quiggly’ line (see below) at least drew the compliment of an amused smile. I almost put this suggestion into Colignatus (1994a), but backed away from that since it was not essential for that paper (and I used only the normal right hand side of the supply graph). However, to my surprise and pleasure I saw that same quiggly line in De Groot & Keuzenkamp (1995) who discuss results of Quah (1993).
De Groot & Keuzenkamp have another subject than labour supply. Their problem is whether international economic growth results into convergence, as Adam Smith’s “The Wealth of Nations” seems to imply. De Groot & Keuzenkamp refer to the results of Quah (1993) who has compiled the distribution of output per labourer per country, which turns out to be that quiggly line.
To understand the point, let me first explain my reasoning on labour supply. At low productivity, one has to work 24 hours around the clock in order to survive. For example, if subsistence is at B and productivity is y, then the hours are B / y. Hours thus quickly rise when y drops (the working poor). When productivity increases, one quickly starts working less hours, particularly since the kind of work at that level often concerns hard labour. At higher levels of productivity again, the kind of work is less exacting and pay is better, and one may work longer hours again. However, at the highest levels of productivity, labour again becomes a relative disutility. In summary, when plotted in a graph, the figure looks like a dromedary, starting high at the left, having a dip in the neck, then the bump, and sliding away towards the tail.
If labour supply is like this, then it likely affects the productivity distribution across nations. While every individual has his or her own parameters, aggregation may average things out, and as a result one nation then may stand for a certain income group. Thus Quah’s finding is consistent with my intuition and indirectly confirms it.
Figure 20 plots the quiggly line, for imaginary income y in thousands of dollars and subsequent working hours per week, for both long and short ranges of income so that the curvature can better be appreciated.
Figure 20: Supply in hours per week, depending upon income
Note: These are not observations, just give an hypothesis on shape
I’m still working on a correct form of the complete utility function. Barro & Sala-i-Martin (1995) give a recent discussion of the trade-off of work and leisure in the context of growth, and that might be a fruitful framework. However, for the present purposes, our development may stop here.