chapter 3 topics in labor supply. 2 extensions of static model labor supply over the lifecycle...
TRANSCRIPT
Chapter 3
Topics in Labor Supply
2
Extensions of Static Model
Labor supply over the lifecycleFertilityHousehold productionRetirementPolicy: Decline in work attachment among older workers
3
Labor Supply over the Lifecycle
Workers can “save” earnings when H* is high and enjoy more C and L later in lifeAge-earnings profile OC of leisure _____ when
young and old OC of leisure _____ during
“prime” working years “Inverse U”
Note: Workers anticipate evolution of wages, so high wages during prime years do not increase lifetime income
4
Labor Supply over the Lifecycle
Given age-earnings profile, younger and older workers enjoy leisure more than prime age workers H* and w
In the lifecycle model, an increase in w is expected (evolutionary ∆wOC of leisure), but does not increase lifetime income (lifetime opportunity set)
5
Labor Supply over the Lifecycle
Recall: In the lifecycle model, an increase in w is expected and only induces a substitution effect for a particular workerComparing the level of two wage profiles generates an income effect Jeff’s hours profile = Jeff if substitution effect dominates Jeff’s hours profile = Jeff if income effect dominates
6
LFPR over the Lifecycle
Reservation wage: in years when w > , people will work less likely for younger and older workers,
so it is as young and old ages that LFPR tends to be lower (than at prime-age years)
changes over the lifecycle (# children, etc), so LFP varies over the lifecycle
w~
w~
7
Empirical Evidence
Should show ↑ LFPR and ↑ H* when wages are high Intertemporal Substitution hypothesis:
LFP Males: participation peaks between ages 20 and
50 Females: participation peaks during early 40s Substantial decline after age 50 – retirement,
health, disability insurance programs, etc.Hours worked Males: increase to age 30, decline after age 50
(2100 annual during prime years) Females: peak during 40s (many PT before)
8
Fertility
Evidence: as per capital income rose, fertility rates have declinedModel: N = number of children
(will depend upon income and prices)
X = quantity of goods and services
pN = price of another child (~100K including foregone earnings)
pX = price of consumption goods
I = incomeAt tangency,
9
Comparative Statics
Suppose I↑, ceteris paribus
If children are a normal good, N*
10
Comparative Statics
Suppose pN↑, ceteris paribus
Income Effect: _ to _ Substitution Effect:
_ to _ Income and
substitution effects ____________
11
Empirical Evidence
Theory suggests the demand for children will __crease with wages [corr(income , N*) _ 0] or with a __crease in the cost of raising children [corr(pN , N*) _ 0] Strong negative correlation between
mother’s wage and the number of children (10% in wages decreases N* by 3%)
Weak negative correlation between N* and income (10% increase in wages decreases N* by 0.4%)
Why?:
12
Household Production
Model Leisure = childrearing, cooking, cleaning, etc. Household production yields commodities
consumed in the household such as meals household production is an input to these commodities
Evidence Labor market activity – Married men: 40 hours;
Single men: 33 hours Women allocate fewer hours than men to the
labor market. Married women allocate fewer hours than single
women to the labor market. Household production – Married women: 35
hours; Married men: 14 hours
13
Household Production, cont.
Goal: Determine how households allocate time to the labor market and to household production Determined by comparative advantage:
Spouse with lower wage rate or greater household productivity specializes in __________
Production Possibilities frontier
14
Household Production, cont.
OC of $1 of HH goods = slope = = $ of market good production
OC of $1 of HH goods = slope = = $ of market good production
Tim has a comparative advantage in __________________, and Jane has a comparative advantage in _____________________
15
Household Production, cont.
Jane: $210Total: $
Tim: $252
Joint PPF Case 1: Jane and Tim both
work in the labor market
Case 2: Jane and Tim both work at home
Case 3: Specialize
Jane: $225Total: $
Tim: $360
Jane: $210 in labor mkt
Tim: $360 in HH prod.
16
Household Production Decision
Who does what? Depends where joint PPF
and indifference curves are tangent
A: flat indifference curve (households enjoy market goods, so must work outside home)
B: households enjoy both goods
C: steep indifference curve (households enjoy goods produced at home)
17
Comparative Statics
Suppose Jane’s wage increases Her contribution to the PPF
becomes __________. Tim’s productivity at home
remains the same ($360, and slope does not change)
Jane will work ______ in the market and may eventually only work in the labor market
18
Comparative Statics
Suppose Tim’s home productivity increases His contribution to the
PPF ________________. Jane continues to earn a
maximum of $210 in the labor market.
Tim will spend _______ time on household production and may eventually only work at home.
19
HH Production Empirical Evidence
Gender differentials Wage gap is shrinking Improvements in household technology decrease
the household productivity differential
10% increase in wages (OC of HH production) HH hours decrease by 2% When wage↑, HH production is less valuable
and OC of leisure↑ LFP ↑ Technological advances reduce HH productivity
relative to labor market productivity, so HH hours ↓ (H*↑), primarily for women
20
Retirement
Model Assume H = 0 after retirement (no PT work) After retirement, individuals spend previous
savings and employer-provided and/or government-provided pension benefits
More can be consumed by those who work longer since incomes usually exceed pensions
Tradeoff between leisure (longer retirement) and consumption budget constraint downward sloping
Determinants of retirement age: Wage Pension benefits
21
Retirement Decision
Assume someone who lives to age 80 decides to retire sometime between age 60 and age 80Vt =
22
Comparative Statics
Suppose w↑, benefits constant If worker retires when
wage increase goes into effect, the increase
If retirement is delayed until after wage increase,
Here, _____________ effect dominates
23
Comparative Statics
Suppose benefits↑, wage constant If years of retirement = 0,
Income effect:
Substitution effect:
Years of retirement __crease
24
Retirement Empirical Evidence
LFPR of older men (ages 55-64) decreased between 13 and 35 percentage points between 1960 and 1996Theory: 10% increase in wages reduces prob(retire
before 65) by 6 percentage points ______________ effect dominates
Higher benefits _________ retirement 10% increase in benefits reduces retirement
age by 1 month
25
Shortcomings of Model
Model does not
In US, changed from age 65 to 70 in 1978 Abolished in 1986
Model does not
SS: 9% per year increase if individual retires between 62 and 65, additional 4% per year after age 65
2/3 of men retire between 62 and 65
26
Policy Application: Labor Supply Response to Child Care Subsidies
Examples: school lunches, day care subsidies, tax credits40% of American families utilize day care totaling, on average, 7% of incomeExample 1: Reduce hourly cost of day care (assume no fixed cost component)
H* will
dominateseffect _________ ifdecrease
dominateseffect _________ ifincrease
27
Policy Application: Labor Supply Response to Child Care Subsidies
Example 2: Reduce fixed costs (assume no variable cost) Equivalent to an
increase in non-labor income (V)
Non-workers
28
Policy Application: Labor Supply Response to Child Care Subsidies
Example 2, cont.: Reduce fixed costs (assume no variable cost) Equivalent to an increase in
non-labor income (V)
Workers
Summary: Subsidies should __crease LFPR and __________ _____________effect on H*
Empirical evidence supports LFP prediction, especially among low income workers
29
Policy Application: Decline in Work Attachment Among Older Workers
Why has LFPR among older workers (men) ↓? ________: Life expectancy at age 50 of white men
rose from 22 to 26.7 years ___________________________: 26% covered in 1950,
66% in 1990 Prob(men aged 58-63 with private penions work) ↓ by 18
percentage points ______________________: rose in 1970s and
remained constant (when real wages ↓) in 1980s, but at most 15% of LFP ↓ attributable to SS
______________________: disabled worker receives SS benefits as if he/she retired at age 65, regardless of when disability occurred
Recipients (age 55-64) of DI increased from 3.5% to 10.5% between 1960 and 1985
Mixed evidence regarding effect of DI in LFPR
30
Policy Application: Decline in Work Attachment Among Older Workers
Social Security Earnings Test Provision of SS
system which discourages recipients (aged 65-69) from working
Workers can earn up to $17K without affecting benefits
Earnings beyond $17K taxed $1 for every $3 earned (33% tax rate)
Workers over age 70 unaffected
31
Policy Application: Decline in Work Attachment Among Older Workers
How does the SS Earnings Test affect H*? Worker A:
Worker B:
Worker C:
32
Policy Application: Decline in Work Attachment Among Older Workers
Empirical Evidence on the effect of the elimination of the SS Earnings Test on H*
Only individuals working a moderate number of hours would increase the number of hours worked (because of the substitution effect)
20% of retirees work, and 60% of those workers are affected by the SS earnings test
Estimate: removing the Earnings Test would increase H* by approximately 1 hour per week (from 3.2 to 4.4 hours)