Habit Formation in Labor Supply

Co-authors: Luisa Cefala, Heather Schofield, and Yogita Shamdasani

Abstract
We examine the possibility of habit formation in labor supply. Using a field experiment with casual urban laborers in India, we randomly provide treated workers with small financial incentives for attendance over 7 weeks, leading to a 26% increase in labor supply. We then test for the persistence of impacts after the incentives are removed. First, we see a persistent 18% increase in labor supply over the following 2 months, resulting in a 10% increase in employment. Second, labor market disruptions deplete habit stock: shocks that temporarily pull workers out of the labor market instantly eliminate persistence effects. Third, we see no “fixed cost” changes in household time use, or learning among workers or employers—consistent with true state-dependence in labor supply. Rather, workers self-report an increase in automaticity—suggesting a change in their psychological default. Fourth, treated workers exhibit a higher willingness to accept work contracts that are of longer duration and less flexible. Fifth, employers accurately predict treatment effects, and prefer hiring workers who have been treated with our habit stock intervention. Our results support the view that state-dependence in labor supply has relevance for a variety of labor market phenomena. They also suggest that intermittent employment and frequent shocks may inhibit low-income workers from becoming habituated to regular work—with potential implications for absenteeism, turnover, and the transition to formal employment in poor countries.