Labor-Leisure Choice: Is Everything as Straightforward as One Might Have Thought?

Abstract

We argue that a full understanding of a rational labor supply choice in a standard dynamic life cycle fram ework is obscure, despite the framework’s being seemingly self-ex planatory, straight-forward, and intuitively sensible. In a completely friction-free environment, we, to our knowledge, are the first to provide a complete analytic solution to the benchmark model that presumes a kind of labor supply behavior that is typically taken as the standard in economic studies. We find that such standard behavior holds only for a narrow set of parameters. For many alternative parameterizations, the labor supply behavior of a rational agent is either highly unrealistic, or extremely hard to predict and interpret. A complete understanding of a rational, intertemporal labor supply choice requires further analysis.