Transcript Labour Supply: Individual Attachment to the Labour Market

Chapter Two
Labour Supply
Chapter 2-1
Learning Objectives
 Labour
Market Attachment
 Labour

Measurement and Trends
 Hours
 Basic
of Work
Income-Leisure Model
 Utility
 Labour
Maximizing Behaviour
Supply
 Factors
Chapter 2
Force Participation
Influencing the Supply of Labour
© 2007 McGraw-Hill Ryerson Ltd.
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Chapter 2-2
Learning Objectives,
cont’d
 Changes
in the Wage Rate and the
Labour Supply
 Extensions and Applications
 Added
and Discouraged Worker Effects
 Hidden Unemployment
 Moonlighting, Overtime, and Flexible Hours
Chapter 2
© 2007 McGraw-Hill Ryerson Ltd.
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Chapter 2-3
Labour Force Participation
Rate
 LFPR
 the
fraction of the eligible population that
participates in the labour force
 LFPR=LF/POP
 LF
(Labour Force)
 individuals
in the eligible population who
participate in labour market activities either
employed or unemployed
Chapter 2-4
Chapter 2
© 2007 McGraw-Hill Ryerson Ltd.
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Chapter 2-5
Figure 2.2
Labour Force Participation
Rates by Sex, 1901-1991
Chapter 2-6
Chapter 2
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Chapter 2-7
Chapter 2
© 2007 McGraw-Hill Ryerson Ltd.
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Chapter 2-8
Chapter 2
© 2007 McGraw-Hill Ryerson Ltd.
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Chapter 2-9
Unemployment

1.
2.
3.
Chapter 2
To be considered unemployed, a
person must be in one of the following
three categories:
Without work but has made specific efforts
to find a job within the previous four weeks
Waiting to be called back to a job from
which he or she has been laid off
Waiting to start a new job within four weeks
© 2007 McGraw-Hill Ryerson Ltd.
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Chapter 2-10
Basic Income - Leisure Model
 Max
U(C,L) s.t. (1) P*C=wH+v and (2)
T=H+L.
 The maximization with fixed endowment
 The choice of hours worked given
opportunities and value of nonmarket
time.
 preferences
U and constraints (income and
time)
 individuals choose the feasible outcomes
which yield the highest level of satisfaction
Chapter 2-11
Preferences
 Two
“goods”
 consumption
 leisure
(C)
(L)
 Represented
by indifference curves, U
 Indifferent between various
combinations of consumption and
leisure
Chapter 2-12
Figure 2.4a
Indifference Curve
Slope - Marginal Rate
of Substitution
A-abundance of
consumption willing to
give up for leisure
A
B-abundance of leisure willing
to give up for consumption
C
C-consumption and leisure
are substitutable
B
0
Leisure
Chapter 2-13
Figure 2.4b MRS Of Two Different
Consumers
C11
C21
C0
A
U20
U10
0
l1
l0
Leisure
Chapter 2-14
Preferences
 Preferences
over all conceivable
combinations of consumption and
leisure
 All combinations lie on some
indifference curve
 Represented by an indifference map
Chapter 2-15
Figure 2.4 c
Indifference Curve Map
For an Individual
Consumption
U2
U1
U0
0
Leisure
Chapter 2-16
Constraints
 Constrained
by economic properties of
the market
 Transform consumption-leisure to
income-leisure by setting the price of
consumption
Chapter 2-17
Figure 2.5 a
Income
Simple Full-Time/PartTime Choice
C
IF+YN
IF Full-time
B
IP+YN
IP
Part-time
A
YN
0
hP
LF
LP
hF
YN No Paid Work
T
Leisure
Chapter 2-18
Figure2.5 b
Linear Potential Income
Constraint
Income
W1T+YN
W0T+YN
W1 High wage
Slope depends on
Individual’s wage rate
W0 Low wage
YN
0
T Leisure
Chapter 2-19
The Consumer’s Optimum

Optimal amount of income and leisure
 Utility-maximizing equilibrium


highest indifference curve given the income
constraint
Compare MRS with the Market Wage Rate


MRS - measures the willingness to exchange time
for income
Market Wage Rate - measures the ability to
exchange leisure for income
Chapter 2-20
Figure 2.6 a
Income
Equilibrium of
Nonparticipant
U
R
Slope=-W0
U1
U0
R
2
Market Wage less than
the reservation wage
Slope= -WR
Corner
Solution
A=E0
YN
0
R’
T
Leisure
Chapter 2-21
Figure 2.6 b
Equilibrium of a
Participant
U1
U2
Market wage exceeds the
reservation wage
U0
E0
W0h0+YN
Interior Solution
Indifference curve tangent
To budget constraint
R
YN
R’
0
l0
T
Leisure
Chapter 2-22
Figure 2.7
The Effect of an Increase in
Nonlabour Income on Supply
Consume more
Consume less
Chapter 2-23
Effect of Non-labour Income
on Hours of Work
 in nonlabour income results in a parallel
shift outward of the budget constraint
 normal good-if leisure is a normal good more
will be consumed resulting in less work hours
 inferior good- if leisure is an inferior good less
will be consumed and more work hours are
spent

Chapter 2-24
Change in Wage Rate
 Two
effects
 Income effect



the worker has more income to buy more goods
including leisure (reduces work hours).
The effect is positive on leisure if leisure is normal,
I.e., dL/dv>0.
Substitution effect


individual may work more because the returns are
greater substituting away from leisure
it is negative, I.e., dL/dw<0 (where d represents
“change”)
Chapter 2-25
Figure 2.8 Income and Substitution Effect of
Wage Increase
W1T=YN
-W1
Income
W0T=YN
-W0
E’
E1
E0
U1
U0
Net effect
Substitution effect
Income effect
0
l’
l1 l0
T
leisure
Chapter 2-26
Effect of Wage Increase on
Participation
 Both
substitution effect and income effect
 If income effect dominates, hours of work
may decline (not withdraw )
 For a nonparticipant an  W may leave
the equilibrium unchanged or induce the
individual to participate
 Other institutional constraints such as fix
working hours may affect the result
Chapter 2-27
Effects of an Increase in Nonlabour
Income on Participation
 Opposite
to wage increase
 Pure income effect
 May cause participants to leave the
labour force (which occurs when
nonlabour income is sufficiently high)
 Examples include transfer payments
from government (incentives are
reduced)
Chapter 2-28
Individual Supply Curve
 Substitution
wage leads to labour supplied

 As

effect > income effect
wages continue to
there is a point where substitution effect
and income effect offset each other
 Supply
curve bends backward when
income effect > substitution effect
Chapter 2-29
Elasticity of Labour Supply

Responsiveness of labour supply to changes
in the wage rate
 Uncompensated elasticity


Income elasticity


% change in labour supply from a 1% increase in
wage (indeterminate)
% change in labor supply from a 1% increase in
nonlabour income (negative)
Compensated elasticity

% increase in labour supply from a 1% increase in
wage after compensating for increased income
(positive)
Chapter 2-30
Moonlighting, Overtime,
Flexible Work Hours
 Why
do some people moonlight at a
second job at a wage less than their
market wage on their first job?
 Why do some people require an
overtime premium to work more?
Chapter 2-31
Figure 2.11 a
Income
Fixed Hours Constraint
Y1
Yc
0
C
Lc
T
Leisure
Chapter 2-32
Figure 2.11 b
Underemployment
Income
YT
D
Yd
Ud
C
Yc
0
Uc
Ld
Lc
T
Leisure
Chapter 2-33
Overtime and
Overemployment
 Prefer
to work fewer hours at the going
wage rate
 Induced to work more hours through an
overtime premium
Chapter 2-34
Figure 2.12
Overtime
Overemployment and
Yt
I
C
Yc
D
Yd
ud
Uc
I
Yo
0
Lc
Ld
L
T
O
Yt
C
Ud
Uc
0
Tt
L
Chapter 2-35
Overtime Premium
 Substitution
effect is larger than the
income effect
 Price of leisure is higher for overtime
hours
 Examples include medical doctors
working overtime
 People in safe cities often work
overtime (relative to those in unsafe
cities)
Chapter 2-36
Overtime Premium vs Straight
Line Equivalent
 worker
would not remain at overtime
equilibrium
 New equilibrium on a higher utility curve
 Income effect outweighs the substitution
effect causing the person to supply less
work
Chapter 2-37
Gains for Alternative Work Schedules
I
C-some individual are
discontent
Yt
C
D- preferred work schedule
Yf
F- willing to give up wages
for preferred work schedule
D
F
Ud
Uc
0
T
L
Chapter 2-38
Comparison:
 No
difference in utility between C and F
even though F implies a lower wage
rate
 Allowing workers to work desired
amount of hours can improve utility as
long as w> T Yf line
Chapter 2-39
End of Chapter Two
Chapter 2-40