The Hausman-MaCurdy Controversy: Why Do the Results Differ across Studies?

The two perhaps most influential empirical labor supply studies carried out in the United States in recent years, Hausman (1981) and MaCurdy, Green, and Paarsch (1990), report sharply contradicting labor supply estimates. In this paper we show that the seemingly irreconcilable views on the size of work disincentive effects and welfare losses can be attributed to the use of differing nonlabor income and wage measures in the two studies. Monte Carlo experiments suggest that the wage measure adopted by MaCurdy, Green, and Paarsch (1990) might cause a severely downward biased wage effect such that data falsely refute the basic notion of utility maximization.