Subsistence Theory in the U.S. Context: A Cross-Sectional Labor Supply Estimate

Subsistence theory predicts the distress sale of labor at very low wages, such that the income effect dominates not only at high wages (as is relatively established) but also below a ‘subsistence wage’. This theory has been developed and tested in the context of mainly agricultural economies, but more recent theoretical work has suggested its applicability in industrialized economies, where it has not yet been tested. Some previous studies of labor supply in the context of the United States have experimented with flexible functional forms, noting that the canonical model makes no a priori predictions as to its shape. However, little attention is given to the slope changes themselves, which are of prime importance in subsistence theory. This paper uses a unique method of pinpointing endogenous slope changes in the estimated labor supply response, finding the ‘subsistence wage’ to be $6.60/hr ($8.39 in 2008 dollars) using 2000 Census data. This is not only inherently interesting but also important for minimum wage policy, because setting the minimum wage up to this level would not increase unemployment.