Are Long-term Wage Elasticities of Labor Supply More Negative than Short-term Ones?

A fundamental prediction of inter-temporal labor supply theory is that the wage-elasticity of labor supply must be more negative the longer the wage change lasts. This paper analyzes labor supply using unique data on workers who choose their own daily hours and who experience both short-term and long-term wage changes. Workers decrease their daily hours in response to shortterm wage increases, but not in response to a 20% long-term wage increase. This is consistent with a specific daily income goals model- one in which these goals remain unadjusted to unexpected short-term wage fluctuations, but fully adjust to expected longer-term wage fluctuations.