00:01
So to estimate the labor supply elasticity, you would need an instrumental variable, iv, that is correlated with labor supply but uncorrelated with the error term in the labor supply equation.
00:16
So it should meet the criteria for being a valid instrument.
00:37
So one potential iv for estimating labor supply elasticity is a change in the wage rate that is due to factors outside the individual's control.
00:46
So an example would be if there's a sudden and unexpected change in the minimum wage or a change in labor laws that affect wages, this could serve as a valid iv.
00:55
So basically, changes in the wage rate are not driven by individual choices but are exogenous to the labor supply decision.
01:52
So historically, natural experiments or policy changes that affect wages are unrelated to individual labor supply decisions.
02:00
And have been used as ivs in labor economics research.
02:09
So let's give an example.
02:13
So there's minimum wage changes.
02:25
So these increase or decrease in the minimum wage that are not anticipated by workers can be used as instrumental variables to estimate labor supply elasticities.
02:36
Number two, tax reforms...