Does Poverty Change Labor Supply? Evidence from Multiple Income Effects and 115,579 Bags

The income elasticity of labor supply is a central parameter of many economic models. We test the response of labor supply and effort to exogenous changes in income using data from a randomized evaluation of a multi-faceted grant program in northern Ghana combined with a bag-making operation that we implemented. We find strong evidence of a positive "income effect" on labor supply. We argue that simple models with either labor or capital market frictions cannot explain the results, whereas a model that allows for positive physiological or psychological productivity effects from higher income fits with our findings.