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In the standard model of labor supply, each worker is a price taker,where the relevant price is an hourly wage rate which is fixed in the short run, and which does not depend upon the number of hours supplied. With this basic assumption, the wage can be regarded as exogenous for the purpose of estimating a labor supply function. This paper proposes and implements a pair of tests for the exogeneity of wages in a longitudinal labor supply model, and for the particular failure of exogeneity associated with jobs that offer wage-hour packages.The first test is very simple -- it amounts to a test of whether hours Granger -- cause wages at the individual level. The second test involves a simultaneous estimation of labor supply and wage offer equations. Both tests indicate that the offered wage is related to hours worked, though the offer locus is, for this sample, very flat. The principal conclusion is that labor supply equations cannot properly be estimated in isolation from the process generating wages, even when long time series are available on a sample of individuals.

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This study presents a model of labor supply in which individuals may face constraints on their choice of work hours, and analyzes the sensitivity of parameter estimates and policy conclusions to the usual assumption of unrestricted choice. We set up the labor supply decision asa discrete choice problem, where each worker faces a finite number of employment opportunities, each offering fixed hours of work.The distribution from which these are drawn, as well as the number of draws, is estimated along with the behavioral parameters of individual labor supply.The standard model with unconstrained hours appears as a special case where the number of draws approaches infinity. We estimate the mean absolute difference between desired and actual work hours to be about ten hours perweek. The results strongly support the notion that hours choices are constrained, and suggest that models which ignore restrictions on hours worked may yield biased estimates of the wage elasticity of desired hours. Further, we suggest that analysis of policies such as income transfers and the flat rate tax which do not consider their effects on the distribution of hours offered may be very misleading.

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