EC306 Labour Economics. Chapter 2# Labour Supply

Transcription

1 EC306 Labour Economics Chapter 2# Labour Supply 1

2 Chapter objectives Terminology/measurement# Review consumer choice theory# Basic model of labour supply (individuals)# Intensive and extensive margins# Income and substitution effects# Extensions and applications 2

3 Labour Force LF (Labour Force) Individuals in the eligible population (15 years and older) who participate in labour market activities, either employed or unemployed LFPR The fraction of the eligible population that participates in the labour force LFPR = LF/POP 3

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5 Participation Rate Men Men 55+ Women Women Source: Labour Force Survey, Cansim Table , using estat. 5

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9 Unemployment 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 9

10 Employment and unemployment rates UR = U/LF ER=E/POP. ( working age ) 10

11 12 10 Unemployment Rate Men Women Source: Labour Force Survey, Cansim Table , using estat.

12 Review: Consumer choice Y M=PxX+PyY X Yes, you need to do the math... 12

13 Review:consumer choice theory Slope of budget constraint Slope of indifference curve Diminishing marginal rate of substitution Solve the utility maximization problem - review derivatives if necessary 13

14 Example

15 Review: consumer choice theory Substitution effects - changes in relative prices Income effects - overall ability to purchase goods 15

16 Basic Income Leisure Model The choice of hours worked given opportunities and value of non-market time preferences and constraints individuals choose the feasible outcomes which yield the highest level of satisfaction 16

17 Preferences Two goods consumption leisure Represented by indifference curves (A person is indifferent between various combinations of consumption and leisure on an indifference curve) 17

18 Indifference Curve Consumption Slope - Marginal Rate of Substitution A. Willing to give up an abundance of consumption for leisure B. Willing to give up an abundance of leisure for consumption 0 Leisure 18

19 Constraints Constrained are determined by the economic properties of the market, which, in turn, transform consumption-leisure to income-leisure by setting the price of consumption 19

20 Relationship between Wages, Earnings, Compensation, and Income 20

21 Linear Potential Income Constraint Income W 1 T+Y N W 1 High wage W 0 T+Y N Slope depends on # the wage rate W 0 Low wage Y N Leisure 0 T 21

22 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 leisure for consumption (or income) Market Wage Rate: measures the ability to exchange leisure for income 22

23 Equilibrium of a participant Income W 0 T+Y N Interior solution: market wage exceeds reservation wage Y N 0 Leisure T 23

24 Equilibrium of a non-participant Income Corner solution: reservation wage exceeds market wage W 0 T+Y N Y N 0 Leisure T 24

25 Reservation wage of a participant Income W 0 T+Y N Interior solution: market wage exceeds reservation wage Y N 0 Leisure T 25

26 The utility maximization problem Given all prices (consumer goods and leisure), choose the feasible amount of consumption and leisure that maximizes your utility Yes, you need to do the math 26

27 Example

28 The Effect of an Increase in Non-Labour Income on Labour Supply (two effects) 1. Labour Participation Effect If Leisure is a normal good: Increase in non-labour income leads to increase in consumption of leisure (some leave the labour market: decrease in labour supply, and non-participants continue to remain non-participants) If Leisure is an inferior good: Increase in non-labour income leads to reduction of consumption of leisure (increase in labour supply) 28

29 Effect of Non-Labour Income on Labour Supply 2. Hours of Work Effect #Increase in non-labour income results in a parallel outward shift of the budget constraint Leisure, Normal good: more leisure will be consumed resulting in less work hours Leisure, Inferior good: less leisure will be consumed resulting in more work hours 29

30 The Effect of an Increase in Non-Labour Income on Supply (hours of work) Consume more leisure Consume less 30

31 Change in Wage Rate Two effects: 1. Income effect the worker has more income to buy more goods including leisure (reduces work hours) 2. Substitution effect individual may work more because the returns are greater substituting away from leisure 31

32 Income and substitution effects for increase in wage. Income Find substitution effects first W 1 T+Y N W 0 T+Y N B A C Y N 0 Leisure T 32

33 Effect of Wage Increase on Participation The net effect depends on both substitution effect and income effect If income effect dominates, hours of work may decline For a non-participant an W may leave the equilibrium unchanged or induce the individual to participate 33

34 Individual Supply Curve If substitution effect dominates, " wage leads to labour supplied wages continue to until a point where substitution effect and income effect offset each other# Supply curve bends backward when income effect dominates substitution effect 34

35 Deriving the individual supply curve 35

36 Deriving the individual supply curve

37 Deriving the individual supply curve

38 Extensions and Applications of the Model 38

39 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? 39

40 Fixed hours constraints Income W 0 T+Y N Fixed hours constraints lead to moonlighting (B) B Y N A 0 Leisure T 40

41 Overtime and Overemployment Workers prefer to work fewer hours at the going wage rate Workers are induced to work more hours through an overtime premium 41

42 Overtime Income W 0 T+Y N Y N 0 Leisure T 42

43 Overtime Premium Substitution effect is larger than the income effect Price of leisure is higher for overtime hours 43

44 Is Overtime Premium preferred to Straight Line Equivalent? Why? No! Because: Worker would not remain at overtime equilibrium New (Straight Line) equilibrium on a higher utility curve Income effect outweighs the substitution effect causing the person to supply less work 44

45 Choice in Working Hours Changing work force Different groups with different preferences for work-time arrangements 1985: two-thirds of the work force was discontent with work-time arrangements 45

46 Gains from Alternative Work Schedules Income A. Constrained B. Preferred W 0 T+Y N A C. Willing to accept lower wage for preferred work schedule B C Y N 0 46 Leisure T

47 Solution No difference in utility between A and C even though C implies a lower wage rate Allowing workers to work desired amount of hours saves on costs Flex-time Compressed work week 47

48 Reading and references Required # BGLR Ch. 2# Suggested# Guide to the Labour Force Survey 2011( g eng.htm )# 48