- Identifying Behavioral Responses in Labor Supply: Revisiting the New York Taxi Industry (pdf)
This paper presents empirical evidence that the labor supply elasticity of taxi drivers has a different sign depending on the source of the earnings shocks. The observed pattern cannot be explained only by different magnitude of the income or substitution effects and is thus inconsistent with the neoclassical life-cycle model of labor supply. To get this result, I decompose unexpected earnings variations into a market-wide component and an idiosyncratic component. I use microdata on the universe of New York medallion taxi trips in 2013 to identify abnormally large tips. These large tips act as an exogenous proxy for the idiosyncratic component of the drivers’ earnings. I find that a negative labor supply elasticity is observed for the idiosyncratic component; taxi drivers respond to a positive idiosyncratic shock by decreasing their labor supply by an economically significant amount. On the other hand, a positive earnings shock at the market level causes their labor supply to increase, consistent with an optimizing rational agent. This differs from previous studies which assume a homogeneous labor supply effect of unexpected earnings shocks. Three types of psychological factor consistent with my empirical findings are compared and discussed.