by Matteo Picchio, Sigrid Suetens and Jan van Ours, Voxeu.org
Appeared originally at Voxeu.org 06 December 2015
The impact of wage and income shocks on labour supply is difficult to measure. Some studies therefore use lottery prizes as an exogenous shock on income. This column looks at the effect of the size of the prize won on employment status and salaried earnings, using data from Dutch lotteries. The findings show that lottery prizes lead to a reduction of working hours but not to a decrease in the employment rate.
Understanding the impact of income and wage shocks on labour supply is not easy. Theory provides ambiguous predictions about the effect of a wage change on labour supply if leisure is a normal good. On the one hand, a wage increase makes the individual richer, lowering the preferred hours of work (income effect). On the other hand, an increase in the wage rate increases the opportunity cost of not working, pushing up the preferred number of working hours (substitution effect).
Empirically, it is tricky to estimate how and to what extent changes in the wage rate or in non-labour income affect labour force participation (see Keane 2011 for a discussion). The main problems are related to measurement error in wages and non-labour income, endogeneity of wages and non-labour income arising from simultaneity or correlation with tastes for work, and unobservability of wages for non-workers.
Labour supply changes due to changes in non-labour income may be informative about the income effect but such changes may be endogenous. Individuals with a strong preference for work and weak preferences for leisure may accumulate more assets and therefore have more non-labour income.
Lottery prizes as an exogenous non-labour income shock
Data from lottery prize winners are informative on how labour supply is affected by an exogenous shock on unearned income. The psychology literature reports about a number of surveys of lottery winners. These suggest that lottery prizes tend to reduce labour supply for some individuals but not for the majority of prize winners.
Kaplan (1987) analyses a survey of 576 US lottery winners of whom 139 won 1 million dollar or more. Although the majority of the prize winners did not change their work behaviour, of the million dollar winners, 1 in 4 stopped working. Not surprisingly, of the winners of less than 50,000 dollars, none stop working. Similar results are found by Arvey et al. (2004) and Hedenus (2012).
Furaker and Hedenus (2009) find that few prize winners stopped working, some of them took unpaid full-time leave, but for the vast majority this is less than a month. Some prize winners reduced their working hours, but on average less than 10 hours per week. Hedenus (2009) concludes that young winners living alone take periods of unpaid leave while female prize winners without children at home reduce their hours of work.
There are also a number of studies in the economic literature that exploit information about lottery prize winners to study labour supply effects. Imbens et al. (2001) use data from the Megabucks lottery in Massachusetts, played in the 1980s, where major prizes are paid out in yearly instalments over 20 years, to estimate labour supply effects. They find significant income effects; an increase on non-labour income of $100,000 would reduce earnings by $11,000. Cesarini et al. (2015) study the effect of lottery prizes on individual and household labour supply in Sweden. They find significant responses at the intensive and extensive margins. Winning a lottery prize immediately and permanently reduces earnings for more than ten years, with an estimated lifetime marginal propensity to consume leisure of about 0.10.
We study employment and earnings of lottery players who were subscribed to participate in the Dutch State Lottery between 2005 and 2008 (see Picchio et al. 2015 for details). Statistics Netherlands matched the lottery data to two administrative datasets: the Municipal Personal Records Database, containing demographic, family, and residence information, and the Social Statistical Database of Jobs, containing information on employment and earnings. The merging of these different datasets allows us to track lottery winners over a number of years and study their labour supply responses in terms of employment and earnings. We have information about 10,871 individuals on yearly lottery prizes, yearly ticket expenditures, and yearly salaried earnings, along with other personal characteristics.
We are interested in quantifying the impact of income shocks related to lottery prizes at the extensive margin (do workers stop working?) and the intensive margin of labour supply (do workers work less hours?). Furthermore, we analyse the impact of lottery prizes of labour market outcomes in the year of the lottery participation but also one, two, and three years ahead. Under the assumption of randomness of lottery win we estimate the effect of the size of the prize won on employment status and salaried earnings in regressions that control for ticket expenditures.
Figure 1 below summarises our main findings. It displays the effect of a €100,000 lottery prize on labour earnings and employment probabilities. If an employee wins €100,000, earnings go down by an amount of €50 in the same year. In later years, the effect is larger, possibly because it takes some time for employees to organise their ‘new’ working hours. In the first year after winning a lottery prize of €100,000, earnings go down by an amount of €1,160. Two years later this is €1,640 and after three years it is €1,770. The effect thus seems to persist over time. We do not find significant effects of lottery prizes on the probability of being employed per se.
- The results suggest that winning a large prize induces workers to work less hours but does not lead them to withdraw completely from the labour market.
Figure 1. Impact of 100,000 euros lottery prize on earnings and employment
We also show that the effect on salaried earnings is heterogeneous and driven by young, single individuals without children. Three years after winning a lottery prize of €100,000, earnings go down by €1,900 for those younger than 50, by €2,570 for singles, and by €2,750 for workers without dependent kids.
Finally, in the spirit of Cesarini et al. (2015), we check whether there are ‘spillover’ effects from the spouse in a family winning a prize. In particular, the question is whether if an individual wins a lottery prize the partner reduced his or her earnings. We find no lasting effects from lottery prizes won by the spouse on individuals’ labour earnings, apart from a small significant effect in the year in which the lottery prize was won.
We find that lottery prizes lead to a reduction of working hours but not to a decrease in the employment rate. This might be explained by the fact that in the Netherlands since 2000 workers can easily and flexibly adjust upward or downward the number of working hours within their current job, unless the request is in conflict with employers’ business interest.
- Arvey, R D, I Harpaz, and H Liao (2004), “Work centrality and post-award work behavior of lottery winners”, Journal of Psychology: Interdisciplinary and Applied, 138: 404-420.
- Cesarini, D, E Lindqvist, M Notowidigdo, and R Östling (2015), “The effect of wealth on household labour supply: Evidence from Swedish lotteries”, Mimeo.
- Furaker, B and A Hedenus (2009), “Gambling windfall decisions: Lottery winners and employment behaviour”, Gaming Research & Review Journal, 13: 1-15.
- Hedenus, A (2009), “Time for work or time for family? Work-life balance after winning the lottery”, World Leisure Journal, 51: 27-38.
- Hedenus, A (2012), “Who wants to work less? Significance of socio-economic status and work conditions for work commitment among Swedish lottery winners”, Acta Sociologica, 55: 335-350.
- Imbens, G, D Rubin, and B Sacerdote (2001), “Estimating the effect of unearned income on labour earnings, savings, and consumption: Evidence from a survey of lottery players”, American Economic Review, 91:778–794.
- Kaplan, H R (1987), “Lottery winners: The myth and reality”, Journal of Gambling Behavior, 3: 168-178.
- Keane, M P (2011), “Labour supply and taxes: A survey”, Journal of Economic Literature, 49: 961-1075.
- Picchio, M, S Suetens, and J C Van Ours (2015), “Labour Supply Effects of Winning a Lottery”, CEPR Discussion Paper No. 10929.
About The Authors
Matteo Picchio (1979) is Assistant Professor in Economic Policy at Marche Polytechnic University (Ancona, Italy) since November 2012. He is also CentER fellow (Tilburg University), Sherppa fellow (Ghent University), and IZA research fellow. He got a Ph.D. in Economics from Marche Polytechnic University (2007) and a Ph.D. in Economics in 2009 from Université catholique de Louvain (Louvain-la-Neuve, Belgium). His research interests include labour economics, economics of education, health economics, and microeconometrics. He has published in journals like Journal of the Royal Statistical Society Series A, Economics of Education Review, Oxford Bulletin of Economics and Statistics, Labour Economics, Economics Letters, Journal of Income Inequality, and Empirical Economics.
Sigrid Suetens (1977) is associate professor at the Department of Economics of Tilburg University. She received a PhD in applied economics at the University of Antwerp in 2005. She has published in journals in economics (for example, Review of Economic Studies, Journal of the European Economic Association, Journal of Economic Behavior & Organization, Journal of Industrial Economics) as well as in multidisciplinary journals (Evolution and Human Behavior, Scientific Reports). Her research focuses on understanding motives for cooperation in dilemma games (e.g., strategic versus non-strategic motives, role of strategic environment, guilt aversion, evolutionary dynamics) and probability biases (the gambler’s fallacy and the hot hand fallacy) by means of controlled experiments. She teaches courses in micro-economics and experimental economics. She is associate editor at the Journal of Economic Behavior & Organization.
Jan van Ours (1954) is professor in Labor Economics at the Department of Economics, Tilburg University and Professorial Fellow at the Department of Economics, University of Melbourne. He is also CEPR Fellow and IZA Fellow. Jan van Ours studied mining engineering at the Technical University in Delft and economics at Erasmus University Rotterdam, where he also got his Ph.D. He has published in journals like Journal of Political Economy, American Economic Review, Review of Economic Studies, Journal of Labor Economics, Economic Journal, Journal of Health Economics, Journal of Public Economics, Journal of Economics History, and European Economic Review. In 1996 he was awarded with the Hicks-Tinbergen medal of the European Economic Association (joint with Geert Ridder). His current research is on unemployment dynamics, effects of policy interventions in the labor market, unemployment benefits, immigrants and the labor market, illicit drugs. He teaches courses in Labor Economics. He recently published the second edition of the text book The Economics of Imperfect Labor Markets (at Princeton University Press, joint with Tito Boeri). He was the 2009 President of the European Society for Population Economics, is the current President of the European Association of Labour Economists and managing editor of De Economist.
Leave a Reply