Transcript Labor Supply : Theory and Evidence

LABOR SUPPLY :
THEORY AND EVIDENCE
1
Hewi-Lin Chuang, Ph.D.
2014/02/26
觀光帶動就業 嘉市失業率全國最低
桃園縣去年失業率4.3% 並列全國最高
2014-01-22 【中廣新聞／黃悅嬌】 2014-02-17 【自由時報／邱奕統】
行政院主計總處公布一百零二年平均失業率百分之四點一八，各縣
市以嘉義市失業率百分之三點九最低，主要為觀光業成長，帶動商
業活動就業機會增加。
而桃園縣去年的失業率為四．三％，不僅是六都中失業率最高的，
更與南投、宜蘭縣並列全國最高。對此，勞動局長簡秀蓮說，桃園
縣內提供的工作機會遠高於需求，平均每名求職者可有三個工作選
擇，因多數職缺都以勞力密集的第一線作業為主，讓年輕人沒有意
願投入，企業主不得不引進外勞填補勞動缺口，而全縣現有的八萬
三千名外勞也間接衝擊本國就業人口。
資料來源
http://tw.news.yahoo.com/%E6%A1%83%E5%9C%92%E7%B8%A3%E5%8E%BB%E5%B9%B4%E5%A4%B1%E6%A
5%AD%E7%8E%874-3-%E4%B8%A6%E5%88%97%E5%85%A8%E5%9C%8B%E6%9C%80%E9%AB%98004046160.html
http://tw.news.yahoo.com/%E8%A7%80%E5%85%89%E5%B8%B6%E5%8B%95%E5%B0%B1%E6%A5%AD2
%E5%98%89%E5%B8%82%E5%A4%B1%E6%A5%AD%E7%8E%87%E5%85%A8%E5%9C%8B%E6%9C%80%E4%
BD%8E-035915102.html
失業率創新高 薪資倒退嚕 非青貧即窮忙
2014-01-25【自立晚報／郭玉屏】

據行政院主計總處2013年失業率相關統計顯示，15-24歲者在2013年
的平均失業率高達13.17%！更創下近10年來新高！

由教育程度區分失業週數，亦看出令人擔憂的高學歷、高失業週數之
情況，據勞委會之統計，2013年高中職學歷年平均失業週數為24.85
週、大專以上之年平均失業週數為27.32週，亦即較高學歷之民眾在
等待新工作或轉職之時間除了逼近7個月，等待期也偏高近3週，由此
可知高學歷的求轉職不易，關鍵原因之一為高等教育的產學失衡。

2013年的就業狀況也不是只有青年遭殃，普遍性的全國受僱者「薪」
情亦屬不佳，據勞委會2013年統計資料顯示，我國國人受僱薪資在不
到3萬元者佔總受僱者比例高達41.6%、亦即全國有將近4成的上班族
每個月的荷包進帳不到3萬元。
資料來源
3

http://tw.news.yahoo.com/%E5%A4%B1%E6%A5%AD%E7%8E%87%E5%89%B5%E6%96%B0%E9%AB%98%E9%A6%AC%E5%90%91%E9%9D%92%E5%B9%B4%E8%AA%AA%E6%81%AD%E5%96%9C%E7%99%BC%E8
%B2%A1-185204407.html
LABOR SUPPLY : THEORY AND EVIDENCE
Labor supply decisions can be roughly divided
into two categories:
(1) Decisions about whether to work at all, if so, how long
to work.
(2) Decisions about the occupation or general class of
occupation in which to seek offers and the
geographical area in which offers should be sought.
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1. SOME STYLIZED FACTS ABOUT LABOR SUPPLY
 Trends
in LFP:
(1)  女性勞動參與率由1964年的34%逐漸上升至
1986年的45%，1986-1999年則維持在45%左右，
1999年開始逐漸上升，至2013年已達到50.46%。
男性勞參率由1978年的77.96%逐漸下降至2013年的66.74%。
(2)  15-19歲組勞參率由1978年的45%顯著下降至
2003 年的12%，至2013年都維持在10%上下。
 20-24歲組勞參率由1978年的65%逐漸下降至2005年的53%，
自2005年始到2013年為止都在53%上下起伏。
 其他各年齡組均呈現上升或持平之趨勢。
5
台灣歷年勞動力參與率-按年齡組別分
15~24歲
25~44歲
45~64歲
65歲以上
總
男
女
總
男
女
總
男
女
總
男
女
1978
53.53
56.79
50.78
69.54
97.39
40.90
61.01
86.43
27.07
9.48
16.82
2.47
1979
53.11
55.96
50.74
69.69
97.55
41.05
61.24
86.32
28.03
9.26
16.74
2.00
1980
51.84
53.87
50.20
69.93
97.52
41.62
60.55
84.94
28.62
8.48
15.27
1.78
1981
50.94
52.53
49.65
69.74
97.54
41.27
60.05
84.67
28.46
8.55
15.24
1.86
1982
50.25
51.73
49.05
70.37
97.32
42.81
59.78
83.80
29.23
8.48
14.88
2.01
1983
50.75
51.49
50.15
72.47
97.11
47.34
60.52
83.07
32.24
9.11
15.35
2.70
1984
50.25
50.54
50.02
73.66
97.18
49.68
60.98
82.87
33.99
9.07
15.04
2.80
1985
49.05
48.90
49.16
74.01
96.91
50.62
60.55
81.98
34.51
9.74
15.72
3.36
1986
49.57
48.52
50.44
75.55
96.74
53.91
60.61
81.04
36.20
10.53
16.66
3.89
1987
49.31
47.98
50.41
76.61
96.74
56.07
61.18
81.65
37.10
10.59
16.70
3.88
1988
47.10
45.43
48.47
76.44
96.86
55.59
60.87
81.92
36.48
9.64
15.21
3.43
1989
46.29
44.69
47.61
76.51
96.77
55.84
60.64
82.13
36.08
10.34
16.03
3.92
1990
43.93
42.19
45.36
76.19
96.53
55.43
59.65
81.08
35.62
9.77
14.80
4.02
1991
42.63
41.05
43.93
76.53
96.57
56.06
59.74
81.80
35.54
9.93
14.92
4.12
1992
41.55
40.83
42.15
77.39
96.61
57.71
60.24
82.39
36.34
9.69
14.48
4.07
1993
39.65
38.46
40.68
77.68
96.28
58.74
60.09
82.17
36.63
9.83
14.72
4.00
1994
39.78
38.84
40.60
78.15
96.12
59.87
60.24
82.37
37.12
9.68
14.38
4.04
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台灣歷年勞動力參與率-按年齡組別分(續)
15~24歲
25~44歲
45~64歲
65歲以上
總
男
女
總
男
女
總
男
女
總
男
女
1995
38.46
37.93
38.93
78.21
95.83
60.35
60.83
82.96
38.11
9.79
14.39
4.24
1996
37.40
36.44
38.25
78.60
95.41
61.60
60.87
82.44
39.04
8.95
13.05
3.98
1997
36.88
36.07
37.59
78.80
95.38
62.04
61.20
83.01
39.34
8.76
12.87
3.86
1998
35.96
34.76
37.01
79.17
95.18
62.98
60.81
82.80
38.91
8.51
12.45
3.89
1999
36.56
35.29
37.69
79.36
94.81
63.72
60.35
81.09
39.70
7.92
11.49
3.84
2000
36.28
35.28
37.18
79.60
94.54
64.52
59.80
80.12
39.62
7.71
11.25
3.73
2001
35.47
33.56
37.21
79.71
94.09
65.31
59.13
78.93
39.47
7.39
10.91
3.52
2002
35.29
32.75
37.59
79.97
93.57
66.33
59.04
78.35
39.91
7.79
11.54
3.78
2003
33.91
30.79
36.76
80.34
93.12
67.55
59.58
78.05
41.31
7.78
11.38
4.01
2004
33.52
30.77
36.05
81.25
93.30
69.25
59.96
78.10
42.03
7.42
10.83
3.93
2005
32.61
29.65
35.35
81.87
93.19
70.62
60.24
78.12
42.59
7.27
10.66
3.86
2006
31.48
28.46
34.35
82.98
93.34
72.75
60.01
77.61
42.68
7.58
11.18
4.04
2007
31.10
28.13
33.96
83.41
92.99
73.98
60.55
77.25
44.13
8.13
11.95
4.45
2008
30.17
27.81
32.47
83.81
92.94
74.83
60.83
76.89
45.08
8.10
11.74
4.64
2009
28.62
25.72
31.48
84.19
92.98
75.58
60.25
75.65
45.17
8.05
11.95
4.4
2010
28.78
26.46
31.06
84.72
93.15
76.51
60.31
75.36
45.61
8.09
12.07
4.43
2011
28.56
26.43
30.7
85.56
93.89
77.53
60.36
75.54
45.59
7.93
12
2012
29.08
26.94
31.23
86.33
94.6
78.38
60.48
75.39
46.01
8.1
12.46
4.23 7
4.2
2013
29.58
28.32
30.83
86.64
94.49
79.09
60.73
74.82
47.08
8.34
12.82
4.38
台灣歷年勞動力參與率-按年齡組別分
100
90
80
70
60
50
40
30
20
10
0
1978
1983
15~24歲
1988
1993
25~44歲
1998
45~64歲
2003
2008
65歲以上
2013
8
台灣歷年勞動力參與率-按教育組別分
國中及以下
高中職
大專及以上
總
男
女
總
男
女
總
男
女
1978
59.36
83.86
37.13
54.36
62.82
43.64
63.34
68.37
53.79
1979
59.17
83.74
37.05
55.29
64.27
44.24
62.92
68.56
52.48
1980
58.43
82.82
36.67
55.07
64.32
44.25
64.08
70.19
53.03
1981
57.61
81.99
35.85
55.33
65.22
43.90
64.83
71.15
53.91
1982
57.60
81.68
36.09
55.75
65.62
44.61
65.09
71.02
54.85
1983
58.93
81.36
38.92
57.15
66.61
46.66
66.09
71.26
57.44
1984
59.17
80.61
40.06
58.13
67.72
47.66
66.51
71.84
57.67
1985
58.80
79.78
40.04
57.96
67.55
47.60
66.77
71.87
58.42
1986
59.43
79.00
41.81
59.46
68.40
50.04
67.35
72.20
59.47
1987
59.72
79.04
42.29
60.46
69.20
51.27
67.74
72.02
61.17
1988
58.46
78.35
40.61
60.42
69.44
51.02
67.58
72.27
60.45
1989
57.96
77.88
40.07
60.91
70.51
50.99
67.52
72.54
59.94
1990
56.69
76.86
38.71
60.51
70.48
50.23
66.40
71.19
59.29
1991
56.22
76.40
38.12
60.65
70.66
50.39
66.80
71.46
60.01
1992
56.13
75.91
38.33
60.93
71.23
50.44
67.22
72.18
60.12
1993
55.11
74.65
37.63
60.70
70.45
50.76
66.71
71.32
60.22
1994
54.80
73.96
37.56
61.00
70.90
50.94
67.52
71.21
62.42
9
台灣歷年勞動力參與率-按教育組別分(續)
國中及以下
高中職
大專及以上
總
男
女
總
男
女
總
男
女
1995
54.04
73.03
36.88
60.94
70.91
50.82
67.65
71.50
62.60
1996
52.69
71.04
36.24
61.12
70.64
51.40
68.27
72.10
63.45
1997
51.98
70.02
35.82
61.08
71.09
50.96
68.75
73.21
63.24
1998
51.05
69.06
34.84
61.12
71.11
51.11
68.36
72.70
63.16
1999
50.26
67.71
34.62
61.36
71.21
51.50
67.98
71.96
63.21
2000
49.42
66.73
33.94
61.40
71.30
51.49
67.65
71.26
63.35
2001
48.51
65.70
33.14
61.38
70.68
52.14
66.40
69.79
62.41
2002
47.96
64.95
32.77
61.90
71.14
52.81
65.91
69.16
62.14
2003
47.24
63.47
32.64
62.43
71.64
53.42
65.43
68.51
61.95
2004
46.39
62.38
31.96
63.41
72.66
54.43
65.75
68.83
62.32
2005
45.53
61.43
31.24
63.45
72.67
54.46
66.40
69.18
63.35
2006
44.34
59.72
30.53
63.52
72.34
54.93
67.38
70.21
64.30
2007
43.88
59.01
30.34
63.95
72.24
55.82
67.63
70.36
64.71
2008
42.87
57.85
29.46
63.64
72.02
55.40
68.18
70.85
65.35
2009
41.67
56.22
28.61
62.61
71.13
54.22
68.4
70.82
65.89
2010
41.62
56
28.67
62.25
70.87
53.78
68.43
71.17
65.64
2011
41.18
55.99
27.62
62.36
70.93
53.97
68.23
71.29
10
65.19
2012
41.25
55.95
27.34
62.3
71.19
53.51
68
71.37
64.78
2013
41.5
55.64
27.51
61.82
70.6
53.02
67.77
71.76
64.14
台灣歷年勞動力參與率-按教育組別分
70
65
60
55
50
45
40
1978
1983
1988
國中以下
1993
1998
高中(職)
2003
大專以上
2008
2013
11
台灣歷年勞動力參與率-按婚姻別分
有配偶或同居
未 婚
離婚、分居或喪偶
總
男
女
總
男
女
總
男
女
1978
59.18
58.44
60.19
60.50
89.60
31.94
30.88
55.07
19.00
1979
61.38
62.26
60.30
60.48
89.56
31.87
29.13
52.65
17.87
1980
60.20
60.80
59.48
60.36
88.95
32.19
28.49
50.56
18.21
1981
59.75
60.41
58.95
59.91
88.65
31.72
28.32
49.39
18.45
1982
59.24
59.93
58.41
60.29
88.13
32.97
28.35
48.66
19.07
1983
59.58
59.82
59.29
62.12
87.77
36.96
30.25
49.52
21.13
1984
59.04
59.49
58.50
63.06
87.44
39.04
31.85
50.14
23.14
1985
58.31
58.76
57.78
63.10
86.91
39.68
32.10
49.81
23.63
1986
58.49
58.47
58.51
64.42
86.74
42.52
33.05
49.83
24.79
1987
58.98
59.17
58.75
65.07
86.55
43.91
33.46
49.77
25.49
1988
58.17
58.80
57.42
64.33
85.91
42.98
33.31
49.61
25.48
1989
58.11
59.13
56.88
64.16
85.63
42.94
33.96
50.72
25.73
1990
56.78
58.01
55.30
63.40
84.76
42.30
34.44
51.06
26.07
1991
56.30
57.77
54.53
63.50
84.84
42.47
34.90
51.20
26.69
1992
56.01
58.04
53.55
64.00
84.67
43.65
35.20
51.55
26.9412
1993
54.58
56.33
52.45
63.98
83.97
44.29
34.62
50.18
26.72
1994
54.96
56.92
52.56
64.02
83.20
45.13
34.53
50.05
26.71
台灣歷年勞動力參與率-按婚姻別分(續)
有配偶或同居
未 婚
離婚、分居或喪偶
總
男
女
總
男
女
總
男
女
1995
54.60
56.65
52.12
63.84
82.80
45.18
34.80
50.50
26.87
1996
54.14
55.96
51.94
63.71
81.73
45.95
34.91
50.52
27.17
1997
54.01
56.27
51.32
63.68
81.55
46.09
34.41
49.53
26.89
1998
53.85
55.83
51.50
63.45
81.12
46.06
33.75
48.43
26.70
1999
54.51
56.28
52.40
62.89
79.80
46.28
33.66
48.42
26.50
2000
54.69
56.35
52.71
62.40
79.00
46.14
33.97
48.79
26.68
2001
54.25
55.33
52.98
62.02
78.00
46.26
33.60
48.04
26.56
2002
54.85
55.67
53.89
61.91
77.37
46.64
34.15
48.93
26.88
2003
55.04
55.49
54.52
61.78
76.67
47.10
35.10
49.53
27.87
2004
56.00
56.62
55.28
61.92
76.21
47.77
35.56
50.39
28.12
2005
56.86
57.18
56.49
61.72
75.77
47.75
35.87
50.19
28.97
2006
57.38
57.56
57.17
61.70
75.12
48.35
36.49
51.59
29.24
2007
58.02
58.14
57.89
61.84
74.68
49.10
37.19
51.59
30.22
2008
58.64
58.88
58.38
61.53
73.99
49.11
37.59
51.60
30.88
2009
58.81
58.88
58.74
60.93
73.05
48.92
37.52
51.11
30.93
2010
59.74
60.01
59.43
60.7
72.54
49.03
37.63
51.78
30.76
13
2011
60.39
60.62
60.14
60.6
72.37
48.97
37.33
52.43
30.17
2012
60.95
61.29
60.57
60.51
72.14
49.05
37.87
53.34
30.35
台灣歷年勞動力參與率-按婚姻別分
70
65
60
55
50
45
40
35
30
25
1978
1983
1988
未婚
1993
有偶或同居
1998
2003
離婚、分居或喪偶
2008
2013
14
歷年五月台灣地區有偶婦女勞動參與率
總平均
女性平均
有偶婦女平均
子女均在6歲以
上有偶婦女
有未滿6歲子女
有偶婦女
尚無子女有
偶婦女
69
58.26
39.25
33.23
35.64
28.90
39.10
70
57.82
38.76
31.42
32.75
28.26
39.30
71
57.93
39.30
31.51
32.29
28.99
41.12
72
59.26
42.12
35.53
35.70
33.40
48.89
73
59.72
43.30
38.74
38.55
37.34
50.88
74
59.49
43.46
39.84
39.63
39.07
48.95
75
60.37
45.51
41.82
41.85
40.55
50.62
76
60.93
46.54
43.74
43.18
42.95
56.75
77
60.21
45.56
42.66
41.82
42.29
56.55
78
60.12
45.35
43.65
42.35
44.64
54.79
79
59.24
44.50
42.49
41.04
43.69
55.21
80
59.11
44.39
44.00
42.66
44.36
60.50
81
59.34
44.83
43.23
42.49
42.30
58.24
82
58.82
44.89
44.39
43.78
42.99
59.71
83
58.96
45.40
45.41
44.03
45.73
64.16
15
84
58.71
45.34
45.75
44.45
45.75
65.01
85
58.44
45.76
47.11
45.70
48.15
62.66
項目
年
歷年五月台灣地區有偶婦女勞動參與率(續)
總平均
女性平均
有偶婦女平均
子女均在6歲以
上有偶婦女
有未滿6歲子女
有偶婦女
尚無子女有
偶婦女
86
58.33
45.64
46.98
45.48
48.16
62.42
87
58.04
45.60
46.50
44.20
49.60
65.58
88
57.93
46.03
46.82
44.87
49.24
64.99
89
57.68
46.02
46.34
43.54
51.39
65.97
90
57.23
46.10
46.48
43.23
52.99
66.76
91
57.34
46.59
47.30
44.39
53.57
63.94
92
57.34
47.14
47.34
44.69
53.46
64.30
93
57.66
47.71
47.84
44.92
54.15
69.37
94
57.78
48.12
47.88
44.54
55.64
71.21
95
57.92
48.68
48.38
44.67
58.14
71.31
96
58.25
49.44
49.57
45.90
61.18
70.09
97
58.28
49.67
49.38
45.18
64.14
70.34
98
57.90
49.62
48.52
44.72
60.85
70.83
99
58.07
49.89
48.74
45.27
60.03
69.88
100
58.17
49.97
48.89
44.87
61.87
101
58.35
50.19
49.05
44.76
63.89
75.72
16
74.22
102
58.43
50.46
45.46
41.41
62.22
70.94
項目
年
17
 Trends
in Hours of Work:
 平均每人每週主要工作工時在1993-2000年間均為46小
時左右，在2001-2007年維持在45小時附近，到2012年
時下降至為43.69小時。
 男性平均工時由1978年的每週50小時下降至2003年的
44.96小時，2004-2007年稍微增加至45.46，到2012年又
降為為每週44.06小時。
 女性平均工時則由1978年的每週46小時上升為1993年的
46.47小時，之後下降，至2012年時下降到43.21小時。
18
臺灣地區就業者平均每人每週主要工作時數
總計
男
女
總計
男
女
1993
47.36
47.90
46.47
2003
44.75
44.96
44.44
1994
46.18
46.65
45.42
2004
45.14
45.48
44.67
1995
47.02
47.46
46.31
2005
44.97
45.34
44.46
1996
46.46
46.78
45.97
2006
45.12
45.56
44.53
1997
45.26
45.51
44.87
2007
45.02
45.46
44.45
1998
46.34
46.56
45.99
2008
43.83
44.19
43.35
1999
46.30
46.45
46.07
2009
43.42
43.60
43.19
2000
46.09
46.25
45.86
2010
43.60
43.96
43.15
2001
44.93
45.05
44.74
2011
43.39
43.79
42.87
2002
44.64
44.74
44.50
2012
43.69
44.06
43.21
19
臺灣地區就業者平均每人每週主要工作時數
20
2. A THEORY OF THE DECISION TO WORK
 The
decision to work is ultimately a decision about
how to spend time.
Spend time in pleasurable leisure activities
Use time to work (working for pay)
 The
discretionary time we have
(24 hours – time spent eating and sleeping)
can be allocated to either work or leisure.
Demand for Leisure
Supply of Labor.
21
Basically, the demand for a good is a function of three
factors:
1.
The opportunity cost of the good.
2.
One’s level of wealth.
3.
One’s set of preference.
The demand（D） for a normal good can be
characterized as a function of opportunity cost（C）
and wealth（V）
D = f（C, V）
22
Where f depends on preferences.
Demand for Leisure:
(1) The opportunity cost of an hour of leisure is very
closely related to one’s wage rate.
For simplicity, we shall say that leisure’s
opportunity cost is the wage rate.
(2) Economists often use total income as an indicator of
total wealth, since the two are conceptually so
closely related.
Demand for leisure function becomes
DL = f（W, Y）

23
w
(1) If income increases, holding wages（and f）
constant, the demand for leisure goes up.
If income increases（decreases）, holding wages
constant, hours of work will go down（up）.
Income effect on hours of work is negative.

H
0
Income Effect =
Y W
24
THE EFFECT OF A CHANGE IN NONLABOR
INCOME ON HOURS OF WORK
Consumption ($)
F1
F0
$200
P1
U1
P0
U0
$100
E1
E0
70
80
110
Hours of Leisure
An increase in nonlabor income leads to a parallel, upward
shift in the budget line, moving the worker from point P0 to
point P1. If leisure is a normal good, hours of work fall.
25
THE EFFECT OF A CHANGE IN NONLABOR
INCOME ON HOURS OF WORK
Consumption ($)
F1
F0
P1
U1
P0
$200
E1
U0
$100
E0
60
70
110
An increase in nonlabor income leads to a parallel, upward
shift in the budget line, moving the worker from point P0 to
point P1. If leisure is inferior, hours of work increase.
26
(2) If income is held constant, an increase（decrease）
in the wage rate will reduce（increase）the
demand for leisure, thereby increasing
（decreasing）work incentives.
Substitution effect on hours of work is positive.
Substitution Effect = H W Y  0
27
Both Effect Occur When Wages Rise
Income effect: For a given level of work effort,
he/she now has a greater command over
resources than before because more income is
received for any given number of hours of work.
Substitution effect: The wage increase raises
the opportunity costs of leisure, and thereby
increases hours of work.
28
MORE LEISURE AT A HIGHER WAGE
When the income effect dominates the substitution
effect, the worker increases hours of leisure in
response to an increase in the wage.
Consumption ($)
G
U1
R
D
Q
U0
D
F
P
V
E
29
0
70 75
85
110
Hours of Leisure
MORE WORK AT A HIGHER WAGE
When the substitution effect dominates the income
effect, the worker decreases hours of leisure in
response to an increase in the wage.
Consumption ($)
U1
G
R
D
Q
U0
F
D
P
V
E
30
0
65 70
80
110
Hours of Leisure
If income effect is dominant, the person will respond
to a wage increase by decreasing his/her labor supply.
Should the substitution effect dominate, the person’s
labor supply curve will be positively sloped.
Wage
W*
Backward-bending
Desired hours of work
31
3. A Graphic Analysis of the Labor-Leisure Choice
Two categories of goods: Leisure（L）and Money
Income ( M )
Since both leisure and money can be used to generate
satisfaction, these two goods are to some extent
substitutes for each other.
M
Indifference Curve:
A
B
C
D
IC2
A curve connecting the
various combinations of
money income and leisure
that yield equal utility.
32
IC1
L
Indifference curves have certain specific characteristics:
1. Any curve that lies to the northeast of another one is
preferred to any curve to the southwest because the
northeastern curve represents a higher level of utility.
2. Indifference curves do not intersect.
3. Indifference curves are negatively sloped.
4. Indifference curves are convex.
When money income is relatively high and leisure
hours are relatively few, leisure is more highly valued
than when leisure is abundant and income relatively
scarce.
33
5. Different people have different sets of IC’s
M
M
L
Person who place high
value on an extra hour of
leisure
L
Person who place low
value on an extra hour of
leisure
34
The resources anyone can command are limited.
Budget constraint reflects the combinations of leisure
and income that are possible for the individual.
M
The slope of the budget
constraint is a graphic
representation of the wage
rate.
E
Wage rate = OE/OD
0
D
L
35
GRAPHING THE BUDGET CONSTRAINT
Consumption ($)
wT+V
Budget Line
V
E
0
T
Hours of
Leisure
36
Note: Full income = wage rate * T
→It represents the maximum attainable income.
M
At point B: MUL/MUM>W or
MUL>W*MUM
L should increase
E
B
A*
IC2
At point C: MUL/MUM<W or
MUL<W*MUM
L should reduce, or
H should increase
IC*
C
IC1
D
L
IC2：impossible under current condition
IC1：possible, but higher level of utility
can be attained
IC*：utility-maximized level
A* ：utility-maximization point
•An indifference curve that is
just tangent to the constraint
represents the highest level of
utility that the person can
obtain given his or her
37
constraint.
The Decision Not to Work
What happens if there is no point of tangency?
M
The person’s IC are at every
point more steeply than the
budget constraint.
Pt. D is not a tangency point.
There can be no tangency if the
IC has no points at which the
slope equals the slope of the
budget constraint.
E
D
L
At this point（D）the person chooses not to be in the labor force.
38
TO WORK OR NOT TO WORK?
 Are
the “terms of trade” sufficiently attractive to
“bribe” a worker to enter the labor market?
 Reservation
wage: the lowest wage rate that would
make the person indifferent between working and not
working.

Rule 1: if the market wage is less than the reservation
wage, then the person will not work.

Rule 2: the reservation wage increases as nonlabor
income increases
39
THE RESERVATION WAGE
Consumption ($)
H
Has Slope -whigh
Y
G
X
UH
E
U0
Has Slope -w
0
T
Hours of Leisure
40
The Income Effect
Nonlabor income: Even if this person worked zero hour per
day, he/she will have this nonlabor income.
M
Note that the new constraint
is parallel to the old one.
E
B
A
IC2
→The increase in nonlabor
income has not changed the
person’s wage rate.
IC1
D
L
Pure income effect: The income effect is negative; as income
goes up, holding wages constant, hours of work goes down.
41
Income and Substitution Effects with a Wage Increase
The wage increase would cause both an income and a substitution effect;
the person would be wealthier and face a higher opportunity cost of leisure.
N1→N3: income effect
→ L↑, H↓
N3→N2: substitution effect
→L↓, H↑
N1→N2: observed effect
Substitution effect dominates.
L↓, H↑
Income effect: Had the person received nonlabor income, with no change
in the wage, sufficient to reach the new level of utility, he/she would have
reduces work hours from N1 to N3.
42
N1→N3: income effect
→L↑, H↓
N3→N2: substitution effect
→L↓, H↑
N1→N2: observed effect
Income effect dominates.
L↑, H↓
Note: The differences in the observed effects of a wage
increase are due to differences in the shape of the indifference
curve. i.e., different preference.
43
• Empirical Findings on the Labor/Leisure Choice
(1)The time-series study can be used to look
at trends in labor force participation rates
and hours of work over time.
(2)The cross-section study can be used to
analyze the patterns of labor supply across
individuals at a given point in time.
44
4. POLICY APPLICATION
Virtually all government income maintenance programs-from
welfare payments to unemployment compensation-have workincentive effect.
(1) Income Replacement Programs
Unemployment insurance, worker’s compensation, and
disability insurance might be called income replacement
programs.
→All these programs are intended to compensate
workers for earnings lost owing to their inability to work.
Note: All these programs in the U.S. typically replace roughly
just half of before-tax lost earning. The reason for incomplete
earnings replacement has to do with work incentives.
45
Replacing all of lost income could result in
overcompensation by generating a higher level of
utility than before the loss of income, and would
motivate the recipients of benefits to remain out of
work as long as possible.
M
E0
T
IC2
When employment
ceases, the worker
receives benefits equal to
E0, he/she will be at pt. T
on a higher IC.
IC1
46
L
（2）Actual Income Loss vs. “Scheduled” Benefits
Actual Income Loss: Workers who are either
totally or partially disabled receive benefits that
replace their actual lost earnings.
M
D
E0
C
B
A
L
If the injured worker
earned E0 before injury
and workers’
compensation replaced
all earnings loss up to
E0, then workers’
compensated budget
constraint would be
ABCD line.
Note: Throughout the horizontal segment BC, the individual’s net
wage is zero. When people cannot increase their income by working,
there is usually no incentive to work.
47
Using an impersonal schedule of
disability benefits preserves at
least some incentive to work
because benefits are not reduced if
earnings increase.
M
E
D
G
C
→ There are greater incentives to work if
benefits are scheduled than if benefits are
calculated to completely replace earnings
losses.
B
A
L
Grand benefit according to
some schedule without
regard to the individual’s
actual earnings loss.
→ Budget constraint BE.
Scheduled benefits cause only an income
effect. However, if actual earnings loss
were to become the benefit, there would
be an income effect and substitution
effect, and both would work in the same
direction. The benefits would
simultaneously increase income while 48
reducing the wage rate to zero.
5. CHILD CARE, COMMUTING, AND THE
FIXED COSTS OF WORKING
(1) Fixed Monetary Costs of Working
not work: at point a with
utility U1
ab: fixed per-period monetary
cost
→ If the individual works, the
budget line starts from point b.
49
a.
How large does the wage rate need to be to induce
this person to work for pay?
→The slope of the budget line bd represent the wage
such that any decrease in this wage will cause the
individual to drop out of the labor force. This is
because utility U1 will no longer be attainable if
he/she work any hour.
→The wage represented by the slope of bd is this
person’s reservation wage-the lowest wage for
which he/she will work.
50
b. What would happen to the reservation wages if the
fixed costs were to increase to ae?
→An increase in the fixed costs of work will tend to
raise the reservation wage of potential workers.
Consider the change from bg to ef:
→Increasing fixed costs of work will tend to increase
the hours of work for some workers but cause
others to drop out of the labor force.
→The net effect on labor supply is ambiguous a priori.51
(2) Fixed Time Costs of Working
If the individual does
work he/she incurs
fixed time costs ab.
→The maximum
number of hours a day
available for work or
leisure is T1.
At wage represented by
bh, he/she would be
indifferent between
working (pt D) and not
working (pt a).
52
reservation wage
Suppose that the fixed time costs of work increase from ab to ad,
then as long as leisure and income are both assumed to be normal
goods, hours of both work and leisure time will be reduced.
The increase in fixed time costs of work has an
income effect that reduces the worker’s demand for
both leisure and the goods income will buy. Given
a constant wage rate, a fall in income implies that
hours of work have been reduced.
Note: The increase in time cost has two important consequences:
（a）It reduces full income from og to ok.
（b）It reduces total time available for either leisure or work so
long as the individual continues to work.
53