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Do Workers Work More if Wages Are High?

Do Workers Work More if Wages Are High?

Evidence from a Randomized Field Experiment

The canonical model of life-cycle labor supply predicts a positive response of labor supplied to transitory wage changes. We tested this prediction by conducting a randomized field experiment with bicycle messengers. We find that workers increase monthly working time and decrease their daily effort but since the working time effect dominates the effort effect overall labor supply increases. This provides evidence in favor of intertemporal substitution with regard to total labor supply. However, the decrease in daily effort contradicts the canonical model of intertemporal labor supply with time separable preferences, since the wage in our experiment directly rewarded effort. We show that a simple model of loss averse, reference dependent, preferences can account for both the increase in working time and the decrease in daily effort. Moreover, we elicit independent individual measures of loss aversion and show that workers who are more prone to loss aversion are more likely to reduce e