ABSTRACT
This chapter aims to report a procedure for obtaining labour supply estimates which are free from endogeneity bias, and to use this procedure to determine the magnitude of the errors in the earlier labour supply estimates for the UK which had been obtained by E. Levin and D. T. Ulph. It outlines the model and its stochastic specification. The classical theory of individual labour supply derives a supply of labour function relating the number of hours an individual wishes to work to his wage rate and the level of his unearned income. A widely adopted procedure for estimating the supply function in the conditions is to take a linear approximation to the budget constraint at the individual’s actual hours of work. The representation is chosen so that for every set of parameter values and for every individual can explicitly solve for the hours of work which maximize utility subject to the piecewise linear budget constraint.
