Family labour supply and labour market segmentation

This paper examines the differences in individuals’ labour supply decisions in different segments of the labour market. It tests one of the main hypotheses of the dual labour market theory that the labour market can be divided into at least two segments, and also whether the family labour supply decisions of individuals differ in the two segments. The possibility of individuals’ wage rates depending on the number of hours worked is recognized and a model is developed in which both the wage rates and hours of work of individuals are jointly determined, with the personal income tax system as an intervening variable since hours of labour supply depend on the post tax wage rate whereas if the marginal product of labour is a positive function of hours worked, this affects the pre-tax wage rates. Other alternative wage functions are specified and a simultaneous equations labour supply model using Three Stage Least Squares (3SLS) procedure is estimated. The results indicate that there was sample selectivity bias in the model. It is concluded that the family labour supply decisions of individuals differ by labour market segment.