On the Theory of Labor Supply with Wage Rate Uncertainty

Abstract

Kim (1994) uses the uncertainty counterpart of price compensations to decompose the effect of increased wage uncertainty on labor supply into income and substitution terms. This paper complements Kim's work by formulating the uncertainty counterpart of income compensations commonly used in economic theory. Substitution and income effects based on income compensations are derived and compared to those derived by Kim. Necessary and sufficient conditions on preferences to sign these effects are also provided.