Labor Supply
Labor Supply
Decision to Work Anastasiya Shamshur 05.10.2010
Measuring the Labor Force
All persons aged 16 and older are classi ed as Employed All those who have a job (US: an hour of paid or 15 hours of unpaid job) Unemployed does not have a job; available to start working; searched for a job during last four weeks. Out of the labor force inactive/non-participants
the Labor Force: De nitions LF = working + unemployed Labor force participation rate = LF/P Employment-population ratio=E/P Unemployment rate=U/LF Unemployment Rate vs. Hidden Unemployment vs. Economically Active Population
Male participation rates, by age (US)
Female participation rates, by age (US)
Why the Participation Rate of Females has Risen
Rising real wage rates for women: Becker income and substitution eect
Substitute towards goods in terms of both consumption and production of commodities. Small income eect since its eect dependson the number of hours already working (0 if not currently working).
Changing preferences and attitudes
Career objectives of women have changed over time towards more market work ( atter ICs).
Rising productivity in the household
Technology improvement have reduced the time for household production and freed time for market work.
Why the Participation Rate of Females has Risen, contd.
Declining birthrates
High wages tend to lower the birth rate since it rises the opportunity cost of children. The impact of children on participation has declined over time.
Rising divorce rates
The incentive for women to work to protect themselves against the impact of a potential divorce.
Expanding job accessibility
Jobs traditionally held by men. Part-time jobs availability.
Male participation rates, by age (CZ)
Female participation rates, by age (CZ)
Neo-Classical Theory of Labor Supply
Basics:
Preferences Constraints Choosing Hours to Work Income and Substitution Eects
Labor-leisure choice model: Preferences U=f(C, L) Downward sloping
individuals prefer more of both C and L. Convex to origin
With low hours of leisure, individuals are willing to give up large amount of income to get 1 more leisure hour. With high hours of leisure, individuals are willing to give up small amount of income to get 1 more leisure hour. Higher ICs - higher levels of utility
Labor-leisure choice model: Preferences U=f(C, L), contd.
X vY Y vZ X v Z? ICs do NOT intersect
They may dier from person to person!!! They may not change for the person!
The Slope of an IC: MU, MRS
Marginal Utility of leisure (MUL ) Marginal Utility of consumption (MUC ) Marginal Rate of Substitution:
MRS = −
MUL MUC
Constraints
Time Constraint 24 hours Budget Constraint At a wage rate of $15, worker could get a maximum income of $360 per day.
At a wage rate of $5, a worker could get a maximum income of $120 per day ($5/hour * 24)
Full-income budget constraint Time Constraint: T = h + L Budget Constraint:
C = wh + V
Full-income budget constraint: C + wL = wT + V where
wT + V is maximum person could earn if working T hours of the day; wL is an amount of full income spent on leisure (Note: price of an hour of leisure is the wage rate).
Choosing Hours to Work
Problem:
max U = f (C , L) s.t. C + wL = wT + V Solution: ∂ U /∂ L =w ∂ U /∂ C
Labor-Leisure Decision: Case Studies
Entering labor market Reservation wage Rise in non-labor income Rise in salary (wage) Income and Substitution eects Policy applications Welfare programs
To Work or NOT to Work?
Increase in NON-labor Income
How would extra non-labor income affect the leisure/consumption decision?
Less leisure, less consumption Less leisure, more consumption More leisure, less consumption More leisure and more consumption
Non-labor income and hours of work
Non-labor income and hours of work
Assumption (con rmed with data) The Income Effect (change in the number of leisure-hours caused by a change in the non-labor income) is always positive.
Homework
Required: Borjas, Ch 2; Homework #1 due to 12.10; Additional:
Ehrenberg and Smith, Ch 6-7. Blau and Kahn (2007). "Changes in the Labor Supply Behavior of Married Women: 1980-2000", Journal of Labor Economics No. 25 (3).
Decision to Work Anastasiya Shamshur 05.10.2010
Measuring the Labor Force
All persons aged 16 and older are classi ed as Employed All those who have a job (US: an hour of paid or 15 hours of unpaid job) Unemployed does not have a job; available to start working; searched for a job during last four weeks. Out of the labor force inactive/non-participants
the Labor Force: De nitions LF = working + unemployed Labor force participation rate = LF/P Employment-population ratio=E/P Unemployment rate=U/LF Unemployment Rate vs. Hidden Unemployment vs. Economically Active Population
Male participation rates, by age (US)
Female participation rates, by age (US)
Why the Participation Rate of Females has Risen
Rising real wage rates for women: Becker income and substitution eect
Substitute towards goods in terms of both consumption and production of commodities. Small income eect since its eect dependson the number of hours already working (0 if not currently working).
Changing preferences and attitudes
Career objectives of women have changed over time towards more market work ( atter ICs).
Rising productivity in the household
Technology improvement have reduced the time for household production and freed time for market work.
Why the Participation Rate of Females has Risen, contd.
Declining birthrates
High wages tend to lower the birth rate since it rises the opportunity cost of children. The impact of children on participation has declined over time.
Rising divorce rates
The incentive for women to work to protect themselves against the impact of a potential divorce.
Expanding job accessibility
Jobs traditionally held by men. Part-time jobs availability.
Male participation rates, by age (CZ)
Female participation rates, by age (CZ)
Neo-Classical Theory of Labor Supply
Basics:
Preferences Constraints Choosing Hours to Work Income and Substitution Eects
Labor-leisure choice model: Preferences U=f(C, L) Downward sloping
individuals prefer more of both C and L. Convex to origin
With low hours of leisure, individuals are willing to give up large amount of income to get 1 more leisure hour. With high hours of leisure, individuals are willing to give up small amount of income to get 1 more leisure hour. Higher ICs - higher levels of utility
Labor-leisure choice model: Preferences U=f(C, L), contd.
X vY Y vZ X v Z? ICs do NOT intersect
They may dier from person to person!!! They may not change for the person!
The Slope of an IC: MU, MRS
Marginal Utility of leisure (MUL ) Marginal Utility of consumption (MUC ) Marginal Rate of Substitution:
MRS = −
MUL MUC
Constraints
Time Constraint 24 hours Budget Constraint At a wage rate of $15, worker could get a maximum income of $360 per day.
At a wage rate of $5, a worker could get a maximum income of $120 per day ($5/hour * 24)
Full-income budget constraint Time Constraint: T = h + L Budget Constraint:
C = wh + V
Full-income budget constraint: C + wL = wT + V where
wT + V is maximum person could earn if working T hours of the day; wL is an amount of full income spent on leisure (Note: price of an hour of leisure is the wage rate).
Choosing Hours to Work
Problem:
max U = f (C , L) s.t. C + wL = wT + V Solution: ∂ U /∂ L =w ∂ U /∂ C
Labor-Leisure Decision: Case Studies
Entering labor market Reservation wage Rise in non-labor income Rise in salary (wage) Income and Substitution eects Policy applications Welfare programs
To Work or NOT to Work?
Increase in NON-labor Income
How would extra non-labor income affect the leisure/consumption decision?
Less leisure, less consumption Less leisure, more consumption More leisure, less consumption More leisure and more consumption
Non-labor income and hours of work
Non-labor income and hours of work
Assumption (con rmed with data) The Income Effect (change in the number of leisure-hours caused by a change in the non-labor income) is always positive.
Homework
Required: Borjas, Ch 2; Homework #1 due to 12.10; Additional:
Ehrenberg and Smith, Ch 6-7. Blau and Kahn (2007). "Changes in the Labor Supply Behavior of Married Women: 1980-2000", Journal of Labor Economics No. 25 (3).
