Neoclassical Intertemporal and Reference-Dependent? The Wage Elasticity of New York City Cab Drivers

Since 1997, five papers debating the labor supply elasticity of New York City cab drivers have been published in top 5 economics journals. The most recent paper by Farber (2015 Quarterly Journal of Economics) uses an instrumental variable (IV) approach and finds that unanticipated wage elasticity is positive, which is inconsistent with reference-dependent preferences. By contrast, this paper finds that unanticipated wage elasticity is negative when controlling for measurement error and division bias. Moreover, after providing theoretical and empirical evidence showing that Farber's IV approach is inconsistent, I propose a new IV that yields negative elasticity. In addition, I find that the elasticity becomes more negative as cab driver experience grows. Although negative elasticity is consistent with reference-dependent preferences, I propose an approach based on the neoclassical intertemporal model in which anticipated wage elasticity is positive while unanticipated elasticity is negative, which is also compatible with reference-dependent preferences