Flexible working hours : an innovation in the quality of work life

This work is a concise and thoughtful survey of the literature on labor supply under taxation. Brown begins by introducing the traditional labor-leisure choice model of the individual. He then discusses theoretical and empirical problems associated with nonlinear budget constraints, which arise if the wage rate changes with hours of work or if marginal tax rates vary with labor earnings. Much, but not all, of the empirical literature is surveyed in a highly readable fashion. This survey includes some very technical econometric works and some works by the author; but the discussion throughout is intuitive rather than technical. I will discuss the main points of this study below. In chapters 1 and 2 the author introduces income and substitution effects from wage changes and lump-sum income effects. He develops multisegmented budget constraints via examples of overtime premiums, nonproportional taxes, transfers, and moonlighting. He provides a careful explanation of "as if" debts or transfers induced by kinks in the budget constraint, suggesting two complications of kinked constraints that serve as the basis for the remaining chapters. First, if budget constraints are not linear, the net wage rate cannot be treated as exogenously determined. Second, under nonlinear constraints, those variables traditionally found in estimating equations-the average hourly wage and nonearned income-are insufficient uniquely to identify the budget constraint. In chapter 3 Brown discusses problems of data collection and measurement of variables. He includes a (too) terse discussion of selectivity bias and what seems to be an irrelevant discussion of whether individuals have misconceptions about their budget constraints. Empirical evidence on the issue of taxes and labor supply is then reported, beginning with the results of interview studies in which individuals were asked whether taxes affected their work status. The replies, though mixed, were generally negative, suggesting inelastic labor supply responses. Next is an especially good survey of the empirical results of cross-sectional studies of the male labor supply response to taxes. These studies are divided into three groups: models in which hours are regressed against wages, income, and a set of other variables; regression models that attempt to identify the budget constraint by computing "as if" intercepts to account for kinks in the constraint; and empirical studies that come to grips in some fashion with the endogeneity of hours and wages and the problem of nonlinear constraints. We find as we work through these studies that labor is more responsive to change in taxes than was first realized. The book also contains a summary of studies of income-maintenance experiments and crosssectional studies of the female work response. With the latter studies, a short discussion of household decision making and censoring is found. The final chapter is devoted to policy recommendations, though there is little that is new here. The author succeeds in giving those who are unfamiliar with this topic an easily understandable and fairly broad survey of the tax-labor supply issue. He instills a sense of caution in the interpretation of results of estimated labor supply effects by setting out the underlying assumptions of these studies, beginning at the level of data collection, and working forward through the theory of labor supply and the specification of empirical models. The results reported here, however, may already be somewhat dated. Two recent studies by Nakamura and Nakamura, in which the assumption that offered wages are independent of reservation wages is relaxed, report backward-bending labor supply curves for women. Taxes appear to increase work effort, a result at odds with the earlier studies reported by Brown. In sum, however, the book has much to offer. It is a good, nontechnical summary of the field. It should be particularly useful to beginning graduate students in labor economics. I will use it in my classroom. Janet C. Hunt Assistant Professor Department of Economics The University of Georgia