copyright © 2009 pearson education, inc. 6- 1 topic 3. chapters 6 & 7 supply of labor

Copyright © 2009 Pearson Education, Inc. 6- 1

Topic 3. Chapters 6 & 7

Supply of Labor


Labor Force Participation Rates (LFPR)

Population (P) = Employment (E) + Unemployment (U) + Out of labor force (O)

LFPR = {(E+U) / P}*100Unemployment Rate (UR) = {U/(E+U)}*100


Table 6.1: Labor Force Participation Rates of Females in the United States over 16 Years of

Age, by Martial Status, 1900-2005 (percentage)


Table 6.2: Labor Force Participation Rates for Male in the United States, by Age,

1900-2005 (percentage)


Table 6.3: Labor Force Participation Rates of Women and Older Men, Selected Countries, 1965-2004 (percentage)


Figure 6.1: An Individual Labor Supply Curve Can Bend Backward


Figure 6.2: Two Indifference Curves for the Same Person


Figure 6.3: An Indifference Curve


Figure 6.4: Indifference Curves for Two Different People


Figure 6.5: Indifference Curve and Budget Constraint


Exercise 1: How to Draw a Budget Constraint (and an optimal choice of labor supply)?

1. You can supply up to 16 hours of labor a day. Your current hourly wage rate is $8 per hour (and no other income). Draw your budget line.

2. Draw an indifference curve showing that your optimal daily labor supply at this wage is 9 hours.


Figure 6.6: The Decision Not to Work is a “Corner Solution”


Exercise 2. How to Draw a Budget Constraint with an increase in non-labor income

1. You can supply up to 16 hours of labor a day. Your current hourly wage rate is $8 per hour (and no other income). Your rich aunt gives you $36 every day as an allowance;

2. Draw a budget constraint and an indifference curve showing that your optimal daily labor supply at this wage decreased from 9 hours to 8 hours.


Figure 6.7: Indifference Curves and Budget Constraint (with an increase in nonlabor

income)


Exercise 3: How to Draw a Budget Constraint with an increase in wage?

1. You can supply up to 16 hours of labor a day. Your current hourly wage rate is $8 per hour (and no other income) and you work 8 hours per day. Your wage increases to $12 per hour. Amend the budget constraint

2. Draw an indifference curve showing that your optimal daily labor supply at the new wage increases from 8 hours to 11 hours.


Figure 6.8: Wage Increase with Substitution Effect Dominating


Figure 6.9: Wage Increase with Income Effect Dominating


Figure 6.10a: Wage Increase with Substitution Effect Dominating: Isolating

Income and Substitution Effects


Figure 6.10b: Wage Increase with Substitution Effect Dominating: Isolating



Figure 6.10c: Wage Increase with Substitution Effect Dominating: Isolating



Figure 6.12: Reservation Wage with Fixed Time Costs of Working


Figure 6.13: Budget Constraint with a Spike


Figure 6.14: Income and Substitution Effects for the Basic Welfare System


Figure 6.15: The Basic Welfare System: A Person Not Choosing Welfare


Figure 6.16: The Welfare System with a Work Requirement


Example 6.6: Wartime Food Requisitions and Agricultural Work Incentives


Figure 6.17: Earned Income Tax Credit (Unmarried, Two or More Children), 2006


Other Examples

Overtime payMoonlighting


LFPR and economy

Added worker hypothesis: in the face of falling family income, the number of family members increases. Increase LFPR and overestimate UR

Discouraged worker hypothesis: stress the importance of the reduction in market opportunities. Decrease LFPR and underestimate UR

Evidence: Discouraged > Added


LFP Revisited

w* (reservation wage=slope of indifference curve)

w (market wage=slope of budget constraint) then work

w* > w then do not work, and vice versaExplain the trend of female LFPR (Table

6.2) using w* and w (education, affirmative action, fertility, divorce rate, technological change, etc)


Factors affecting the distribution of works in a household

Wage rateNumber of young kidsSubstitution of mother’s time (baby sitting, A

plus program, washing machines, etc.)Sudden increase in non-labor incomeThe future value of kids/spouse


Table 7.1: Weekly Hours Spent in Household Work, Paid Work, and Leisure Activities by

Men and Women over Age 18, 2005


Figure 7.1: Household Time and Income Are Substitutes in the Production of

Commodities Sally Consumes


Table 7.2: Labor Force Participation Rates and Full-Time Employment, Mothers of Young Children, by Age of Child, 2006


Figure 7.2: Home versus Market Productivity for a Partner


Figure 7.3: Life-Cycle Allocation of Time


Table 7.3: Assumed Social Security Benefits and Earnings for a Hypothetical Male, Age 62

(yearly wage = $40,000; Interest rate = 2%; life expectancy = 17 years)


Figure 7.4:

Choice of Optimum

Retirement Age for

Hypothetical Worker

(based on data in Table 7.3)


Figure 7.5: Labor Supply and Fixed Child-Care Costs: A Parent Initially

Out of the Labor Force


Figure 7.6: Labor Supply and Fixed Child-Care Costs: A Parent Initially

Working for Pay


Figure 7.7: Budget Constraints Facing a Single Parent before and after Child

Support Assurance Program Adopted


Figure 7.8: A Single Parent Who Joins the Labor Force after Child Support

Assurance Program Adopted

copyright © 2009 pearson education, inc. 6- 1 topic 3. chapters 6 & 7 supply of labor

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