The backward bending labour supply curve (*)

1. To insert your company logo on this slide • From the Insert Menu • Select “Picture” • Locate your logo file • Click OK • To resize the logo • Click anywhere inside the logo. The boxes that appear outside the logo are known as “resize handles.” • Use these to resize the object. • If you hold down the shift key before using the resize handles, you will maintain the proportions of the object you wish to resize. The backward bending labour supply curve(*) Elsa Fontainha Technical University of Lisbon ISEG – Institute of Economics and Business Administration Department of Economics Rua Miguel Lupi, 20 1249-078 Lisboa Portugal email:elmano@iseg.utl.pt ;Phone: +351 213925993 Fax: + 351 213922808 IATUR Conference 2003 Free University of Brussels (*) Paper will be available on the 2003 IATUR Conference website (www.vub.ac.be/TOR/iatur ) or directly from the author elmano@iseg.utl.pt).

2. Main Topics • Labour Supply – Theoretical approaches; Backard bending supply curve and wages as explanation of labour supply and working time • Labour Supply and Time Use - stilyzed facts and trends • Empirical evidence of a backard bending labour supply curve • Results and discussion The Backward Bending Labour Supply Curve - Elsa Fontainha

3. Labour Supply – core subject • The core subject of labour supply economics studies is the explanation of how and why people sell labour services ( i.e. allocate scarce time to working paid activities) throug the labour market. The Backward Bending Labour Supply Curve - Elsa Fontainha

4. Labour supply measurements • Labour supply could be measured in different ways: • Actual working time(*) • Participation rate • Part time work and overtime work • … • (*)Actual working time is the result of a balance between demand (firms) and supply (active people) in different economic, demographic, social, technological, institutional, cultural, contexts. So, • actual working time is not a revealed preference of employed persons. • Measurement (and comparability) of working time are difficult The Backward Bending Labour Supply Curve - Elsa Fontainha

5. Labour Supply ExplanationSome Theoretical approaches • Individual and static models and Extentions • Individual and static models ; women labour supply specif theories • Extension with household • Extension with life cycle • Level of analysis • Microeconomic • Macroeconomic • Period of analysis • Short run • Long run The Backward Bending Labour Supply Curve - Elsa Fontainha

6. Labour supply and Labour-Leisure trade off is an old question Adam Smith wrote at 1776: “ The wages of labour are the encouragement of industry, which, like every other human qualities, improves in proportion to the encouragement it receives… • Some workmen, indeed, when they can earn in four days what will maintain themthrough the week, will be idle the other three. This, however, is by no means the case with the greater part. • Workmen, on the contrary, when they are liberally paid by the piece, are very apt to over work themselves, • and to ruin their health and constitution in a few years“ Adam Smith, The Wealth of Nations(ed.E.Cannan), Boook I (London:Methuen and Company,Ltd.,1930),p.83 The Backward Bending Labour Supply Curve - Elsa Fontainha

7. Labour Supply Economic determinants- in brief The Backward Bending Labour Supply Curve - Elsa Fontainha

8. Wages explain Labour Supply • There are several economics explanations for labour supply, but wages and incomes are at the heart of all theories. The Backward Bending Labour Supply Curve - Elsa Fontainha

9. Labour Market – Supply and Demanda basic text book presentation Microeconomic behaviour of supply and demand of labour is similar any other market of goods wage Supply (active population) Demand (from firms) Quantity of labour The Backward Bending Labour Supply Curve - Elsa Fontainha

10. But work is a special kind of “good”… • And relation between labour supply (and working time) and wages could be represented by different shape curve. • For example: The Backward Bending Labour Supply Curve - Elsa Fontainha

11. What is a backward bending labour supply curve? • is a labour supply curve that • instead of growing continuously as wages increase, (as other supply curve of a good, growing with price) • moves upwards to a certain point and then begins to go backward The Backward Bending Labour Supply Curve - Elsa Fontainha

12. Backard bendingLabour Supply Curve Leisure is preferred wage IE >SE Why? Work is “preferred” SE >IE Labour supply (time supplied) The Backward Bending Labour Supply Curve - Elsa Fontainha

13. Backbended curve. Why? • because some people with higher wages/incomes prefer leisure to work, or, in other words, are willing to sacrifice part of the income that they would have if they worked more hours (- work) in return for the benefits that they derive from having more time available (+ leisure). The Backward Bending Labour Supply Curve - Elsa Fontainha

14. Question of research • This research seeks to study to what extent the Time Use Data makes it possible to analyse the trade-off between work and leisure and the backward bending supply curve. • with the term “work” being considered to include both paid and unpaid work. The Backward Bending Labour Supply Curve - Elsa Fontainha

15. Searching for the empirical evidence of a backward bending curve • If the behaviour associated with the backward bending curve exists, then it is expected that: • At individual (micro) level labour supply grows with wage until a certain wage level and after decrease with the increase of wage. • At aggregated (macro) similar results will appear based on cross section analysis for example between countries. • (In a coeteris paribus context) The Backward Bending Labour Supply Curve - Elsa Fontainha

16. Labour Supply and Time Use – some facts and trends – in brief • Stylised facts about Labour Supply – from Economics Studies • Stylised facts about working time trends – from Time Use Studies ... and “fuzzy” trends or no-trended evolutions The Backward Bending Labour Supply Curve - Elsa Fontainha

17. Methodology and Data Sources • Descriptive analysis • Data Sources: • Eurostat and OECD • Time Use Surveys • Portuguese Time Use Survey (INE, 1999) The Backward Bending Labour Supply Curve - Elsa Fontainha

18. Part time work and Labour supply • Part time work increase, could be a good “proxy” indicator for labour supply decrease. How is it related with hourly wages in European Countries? • Some referred reasons for part time work are: sectorial structure, women participation rate and other. Leisure preference also when voluntary. The Backward Bending Labour Supply Curve - Elsa Fontainha

19. +WAGE =(-Work & + LEISURE ) The Backward Bending Labour Supply Curve - Elsa Fontainha

20. …as hourly wages increase, labour supply decrease Does Backward bending labour supply curve exists? Note: The results obtained for the association between overtime work relation and wage (expected as symmetric) are not so clear The Backward Bending Labour Supply Curve - Elsa Fontainha

21. Evidence from Time Use Data? * Important note: Comparability of TU data only between countries inside a box. Because lack of comparability between data above figure must be considered only as illustrative. The Backward Bending Labour Supply Curve - Elsa Fontainha

22. labour supply curve grows as wages increase. As other any other good, supply grows with price/wage. (green part of the curve……..). This behaviour occurs at low levels of hourly wages… But work is a different “good”and labour supply curve is also different from other goods supply curves… Labour supply curve is backard bending.WHY? Because, at higher levels of hourly wages people prefer leisure to work, or, in other words, are willing to sacrifice part of the income that they would have if they worked more hours (LESS WORK) in return for the benefits that they derive from having more time available (MORE LEISURE). (red part of the curve……..). Does TU data confirm a Backward bending curve? The Backward Bending Labour Supply Curve - Elsa Fontainha

23. Results and discussion-I • preliminary results suggest the existence of a backward bending labour supply curve at macroeconomic level (the theory is developed usually at micro behaviour level) • As segmentation theories of labour market assume different (and sometimes simetrical) labour supply behaviour could be found. • the identification of the “turning point” and “reference wage” at the bb curve could be useful to a better knowledge of employers motivation and labour policy incentives The Backward Bending Labour Supply Curve - Elsa Fontainha

24. Results and discussion-II • this type of analysis is important for a better understanding of the situation and trends of labour supply, namely involuntary and insignificant nature of part-time work and other forms of labour flexibility in Portugal and other countries with low hourly wages • some inconclusive results about working time and leisure trends and stylised facts (for example: using time-series and cross-section data) could be explained by this kind of labour supply curve The Backward Bending Labour Supply Curve - Elsa Fontainha