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You’d probably have to pay me a lot of money to persuade me to retire from my lovely colleagues here at the Financial Times, although anyone who finds my writing particularly irritating is welcome to make me an offer. Maybe I’d use the extra time to write more songs, or read more books. I’d certainly take more naps.
The question of how you would respond to a windfall of this kind is a fun thought experiment. But for policymakers, it carries more weight. They have to consider whether a stimulus check or a tax break would encourage people to quit their jobs, or make them deaf to the pleas of desperate employers. They have to ask how much money it costs to put someone out of work.
Economists have been trying to answer this question for decades. In theory, free time is fun, and an unexpected windfall should make people consume more of it. But in practice, there may be a lot of weird workaholics like me.
An early approach was to see how people reacted to a promotion for their partner, assuming that the raise would be shared. It is strange that individuals do not seem to be so generous, and besides, causality could also run the other way. What if I pressured my partner to climb the career ladder so that I could quit my job and serenade my (multiple) fans? If promotions do not come randomly, it is difficult to be sure that whatever happens is really their outcome.
Another approach is to look at what people do after receiving a legacy. (Trust economists to turn a moment of grief into an opportunity to estimate the effects of unearned income.) Studies typically show that women are more likely to drop out of the workforce after such an event. In Europe, for example, women’s labor force participation dropped by five percentage points after receiving an inheritance of at least €5,000. (The research is frustratingly vague about exactly how much they received.)
But this method has its flaws. People who inherit large enough amounts to influence their work decisions are likely to be better off than the average person. They can also anticipate the money.
A better way to find an unexpected shock in the form of a lottery winner is to look at lottery winners. (Ticket holders probably think the odds of success are high enough to buy a ticket, but low enough that they don’t plan their careers around a jackpot win.)
This is a fairly rich area of research. A recently published study of American laureates shows that for every $100,000 of additional wealth, the winner’s odds of being employed decrease by just under 4 percentage points. Poorer people are more likely to quit their jobs, while richer people are more likely to stay at work but reduce their hours. Another study of individuals in Spain found that winning enables some people to start their own businesses.
All these clever ways of calculating the consequences of windfalls are very impressive. But there is a simpler approach. Why not just… ask?
Historically, simply questioning people in this way would have been quite controversial. Stefanie Stantcheva of Harvard University says that economists may not have trusted the technique at all a decade ago. They thought people’s words were unreliable and that it was much better to measure their actions.
But in many cases, the perfect data or setting simply doesn’t exist. And recent work by Stantcheva and coauthors has shown several cases in which what people say they would do is pretty close to what they actually do. In recent years, she says, the adoption of surveys has grown dramatically.
A new working paper from researchers at the Center for Economic Policy Research and Stanford University takes this approach, asking Europeans what they would do if they received between €5,000 and €100,000.
Below €25,000, people say they would continue working. But for amounts between that threshold and €100,000, their chance of working drops by an average of 3 percentage points. Women, but also people who are older, have less debt or are nearing retirement, drop out more often.
Stantcheva says that survey questions are most reliable when the hypothetical situations are “very close to everyday life.” So maybe someone’s opinion about what they would do with a €100,000 surprise should be taken with a grain of salt. Still, for the smaller amounts that are relevant to most policy interventions, these effects seem fairly insignificant. Maybe I’m not such a weirdo after all.
soumaya.keynes@ft.com
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