We specify a model of municipal labor demand when resource flows available to the municipality are uncertain. The model allows us to test the hypothesis that employment decisions are rational in the sense that they incorporate all available information at the time that the decisions are made. We find that, for our sample of communities, on the whole one cannot reject the hypothesis that labor demand is consistent with intertemporal utility maximization under uncertainty. However, small and large communities exhibit different behavior. The employment decisions of small communities are consistent with the model, while those of large communities are not.

This paper examines the effect of earnings taxes on wage variability over time. We estimate a "hedonic wage locus," which indicates how the market allows individuals to substitute the mean level of the wage for its variability across jobs. Information from this locus is used to estimate the parameters of individuals' indifference curves between the mean and temporal variation of hourly wages. On the basis of these utility-function parameters, we predict that lowering the rate of taxation on earnings would on average lead workers to choose jobs with slightly lower pretax mean wages and with less pretax wage variation.

We investigate the effect of entrepreneurs' personal taxes on their use of labor, analyze the tax returns of sole proprietors before and after the Tax Reform Act of 1986, and determine how the substantial reductions in marginal tax rates affected their hiring decisions and wage bills. Individual income taxes exert a statistically and quantitatively significant influence on the probability of hiring workers. Raising the entrepreneur's “tax price” by 10% raises the mean probability of hiring by about 12%. Further, taxes influence total wage payments to workers. The tax‐price elasticity of the median wage bill is about .37.