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Topics in Labor Supply

Topics in Labor Supply. 南華大學 管理經濟學系 黃瓊玉 2011 年 10 月 23 日. Outline. Labor supply over the life cycle Labor supply over the business cycle Husband-wife joint-decisions to supply labor Fertility. 2. Wage Rate. Hours of work. Age. Age. 50. 50.

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Topics in Labor Supply

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  1. Topics in Labor Supply 南華大學 管理經濟學系 黃瓊玉 2011 年 10 月 23 日

  2. Outline • Labor supply over the life cycle • Labor supply over the business cycle • Husband-wife joint-decisions to supply labor • Fertility 2

  3. Wage Rate Hours of work Age Age 50 50 The Life Cycle Path of Wages and Hours for a Typical Worker

  4. Labor Force Participation Rates over the Life Cycle in 2005

  5. Hours of Work over the Life Cycle, 2005

  6. Theoretical issues of evolutionary wages • A person will work more hours when wages are higher (i.e., the substitution effect tends to dominate) • The profile of hours of work over the life cycle will have the same shape as the age-earnings profile • Intertemporal substitution hypothesis: people substitute their time over the life cycle to take advantages of changes in the price of leisure

  7. Intertemporal Substitution Hypothesis • There should be a positive relationship between changes in hours of work and changes in the wage rate • As a worker ages, increases in the wage rate should increase hours of work

  8. Labor supply over the business cycle • Added-worker effect • So-called “secondary” workers currently out of the labor market are affected by a recession because the main breadwinner becomes unemployed or faces a wage cut • This implies the labor force participation rate of secondary workers has a counter-cyclical trend

  9. Labor supply over the business cycle • Discouraged worker effect • Unemployed workers find it almost impossible to find jobs during a recession, so they give up searching • Implies that labor force participation is pro-cyclical • The discouraged worker effect dominates the correlation between labor force participation and the business cycle

  10. Household Production • Leisure includes many forms of nonmarket work, including work around the home • Why do some household members specialize in the market sector and other members specialize in the household sector?

  11. Household Production Function • Consider Jack and Jill, a married couple • Their household opportunity set is greater than when Jack and Jill were not married (since each can specialize in the sector where they are relatively more productive)

  12. Market Goods ($) Market Goods ($) 200 150 100 250 Household Goods ($) Household Goods ($) Jack and Jill – unmarried opportunity sets

  13. G 350 F 200 Jack’s 150 Jill’s E E Household Goods ($) 100 340 250 350 Budget Lines and Opportunity Frontier of Married Couple At point E, Jack and Jill allocate all their time to the household sector. If they wish to buy market goods, Jack gets a job because he is relatively more productive in the labor market, generating segment FE of the opportunity frontier. After he uses up all his time in the labor market, Jill then gets a job, generating segment GF of the frontier.

  14. Market Goods ($) Market Goods ($) Market Goods ($) P U P U P U Household Goods ($) Household Goods ($) Household Goods ($) Who Works Where?

  15. Increases in the Wage Rate or Household Productivity Lead to Specialization Market Goods ($) P P U U Household Goods ($) An increase in Jack’s wage moves the household from point P to point P and Jack specializes in the labor market

  16. Increases in the Wage Rate or Household Productivity Lead to Specialization Market Goods ($) P P U U Household Goods ($) An increase in Jill’s marginal product in the household sector moves the household from point P to point P and Jill specializes in the household sector.

  17. Fertility Malthus Theory of Fertility: as incomes rise, families want more children (focus on income effect) An increase in the price of a person’s time will increase the opportunity cost of rearing children when this person exits the market sector

  18. The Fertility Decision Goods I/pX P Indifference Curve Number of Children 3 I/pN The household’s utility depends on the number of children and on the consumption of goods. A utility-maximizing household chooses point P and has three children.

  19. The Impact of Income and Prices on the Household’s Fertility Goods Goods I/PX P R U1 R Q U1 P U0 U0 D 3 4 1 2 3 Number of Children Number of Children • (a) Increase in Income • (b) Increase in the price of children

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