Summary:

In the Dynamic Effects of Labor Supply paper I show (both empirically and in the model) that the crucial factor explaining the cross-sectional trends in hours between the top and bottom of the wage distribution, was the strengthening over time in the dynamic story of hours for those at the top, and in reverse a weakening process for the bottom. Even though the mechanism is introduced and documented, I am agnostic to why those changes happened. In several talks, seminars, and presentations of the job-market paper, that was a question I almost always received. My only possible answer has been that it was not the goal of the original paper to know why, but only how important those changes were to labor supply decisions. Nevertheless, it would be very valuable to provide an economic justification for the documented changes in the dynamic mechanism.

There are two strong candidates that could solve this issue. The theory presented here fits well the tournament-type labor contracts where workers compete with each other for a particular job that has a higher wage. That could explain why current hours lead to higher wage increase in following periods (hours matter for mobility). For this type of contract successfully help explain the cross-sectional differences in the mechanism, either of two scenarios must be verified: (i) over time this type of contract becomes more predominant than alternative labor contracts (salaries, or hourly paid), especially in sectors or positions with a larger share of individuals from the top wage quintiles; (ii) the spread of wages of the competing workers and/or the likelihood of promotion increased at the top of the wage distribution and decreased at the bottom. The CPS data I used in the main paper confirms the hypothesis with respect to the changes in the spread of wages, but how the likelihood of promotion has changed is still an open question. An alternative justification for the changes in the dynamic component is Human Capital accumulation. The relationship lies in that experience (hours) leads to a higher level of human capital, which is rewarded in the labor market in the form of higher wages (first pre-requisite that hours matter for mobility is again established). As explanation of why this effect has evolved differently across quintiles, it could be that experience has become relatively more important to the top quintiles than it was 30 years ago, while for the bottom quintiles the returns from experience have declined.