Post on 02-Jun-2018
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P R E P A R E D B Y : K A R E N G R A C E V A L D E Z , M B A
Labor Supply: The
Macroeconomic Perspective
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Assignment: Gary Becker
1. Beckers theory of marriage
Marriage Labor market
Seeking partnersObtaining complete
informationCost of obtainingadditional information(forgone benefits)Additional information canlead to unfavorable
situations, ending theoptimality of the match
Seeking jobsObtaining complete
informationCost of obtainingadditional information(forgone benefits)Additional information canlead to people leaving jobs
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Assignment: Gary Becker
2. Household as a little factory (allocate time: work,household production, household consumption---allproviding utility maximizing commodities)
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Assignment: Gary Becker
3. Children are time-intensive durable goods (price =forgone earnings)
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Assignment: Gary Becker
4. Beckers theory of human capital
Firms Workers
Decision to purchasephysical capital
Decision to invest oneducation and training
Application: Criminals rationally choose between crime and labor marketwork(recall: Marginalism)
Just the same with LABOR MARKET DISCRIMINATION: analyzed as apreference that the discriminator is willing to pay.
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Assignment: Labor Issue
What could be an evident labor issue in thePhilippines nowadays?
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LABOR SUPPLY: The Macroeconomic Perspective
Labor Supply Aggregate Labor Supply; Labor Supply Curve
In the long run, total labor supply depends on the fertility decisionsmade by earlier generations
Labor Force: the population 15 years old and over, whether employed
or unemployed, who contribute to the production of goods and servicesin the country
Labor Force Participation Rate= [ total number of persons in thelabor force / total population 15 years old and over ] x 100%
Employment Rate = [ total number of employed persons / total
number of persons in the labor force ] x 100% Unemployment Rate= [ total number of unemployed persons / total
number of persons in the labor force ] x 100%
Employment-population ratio = [total number of employed/totalpopulation] x 100%
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LABOR SUPPLY: The Macroeconomic Perspective
Employed: include all those who, during the referenceperiod are 15 years old and over as of their last birthday andare reported either:
At work. Those who do any work even for one hour during
the reference period for pay or profit, or work without payon the farm or business enterprise operated by a member ofthe same household related by blood, marriage or adoption;or
With a job but not at work. Those who have a job orbusiness but are not at work because of temporaryillness/injury, vacation or other reasons. Likewise, personswho expect to report for work or to start operation of a farmor business enterprise within two weeks from the date of
the enumerators visit, are considered employed.
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LABOR SUPPLY: The Macroeconomic PerspectiveUnemployed (ILO definition): include all those who, during the reference period are 15 years old and over
as of their last birthday, are:without work, or had no job/business during the basic survey reference period;
AND seeking work, i.e., had taken specific steps to look for a job or establish business during the basic survey
reference period; OR not seeking work due to the following reasons:
believe no work available
awaiting results of previous job application;
temporary illness/disability;
bad weather; and
waiting for rehire/job recall
AND currently available for work, i.e., were available and willing to take up work in paid employment or self-employment during the basic survey reference period, and/or would be available and willing to take up workin paid employment or self-employment within two weeks after the interview date
NOTE:
The current definition of "unemployed" is based on the International Labor Organization (ILO) concept.
Adopted by the National Statistics Office in April 2005, the ILO concept sets three criteria in order for aperson 15 years old or older to be considered as unemployed. He or she must bewithout work, AND isactively seeking work OR not seeking work due to valid reasons, AND currently available forwork.
The old Philippine definition of "unemployed" considered only the first two criteria.Under the new definition (ILO concept), people unavailable for work, or are available for work but are notlooking for work, are not part of the labor force and are not considered as unemployed.
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LABOR SUPPLY: The Macroeconomic Perspective
Underemployed:include all employed personswho express the desire to have additional hours ofwork in their present job or an additional job, or to
have a new job with longer working hours.
Underemployment rate:[ total number of underemployed persons / total
number of employed persons ] x 100%
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LABOR SUPPLY: The Macroeconomic Perspective
Determinants of the Total
Labor Services Available
Births
Deaths
Net immigration
Population
LFPR
Hrs of Work
Quantity ofLabor
Quantity ofLabor
LaborSupply
Emigrateis to immigrateas gois to come.
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Source: NSCB
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P R E P A R E D B Y : K A R E N G R A C E V A L D E Z , M B A
Labor Supply: The
Microeconomic Perspective
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LABOR SUPPLY: The Microeconomic Perspective
Individual Labor Supply (backward bending laborsupply)
Neo-classical model of labor-leisure choice
Utility and indifference curves Budget Constraints
A Workers (labor supply) optimal decision
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The Neo-classical Model of Labor-leisure choice
Isolates other factors that affect labor supply
Satisfaction from consumption of goods and leisure
Goods = value of purchases (C) y-axis
Leisure = number of hours of leisure (L) x-axis U =f(C,L)
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Indifference Curves
Ronnie Cabs is consuming Php 5000 worth ofconsumption goods and 100 hours of leisure weekly
Ronnie Cabs level of utility for this particularconsumption basket (above) is 25,000 utils
Ronnie Cabs is indifferent to consuming Php 4,000worth of goods and 125 hours of leisure orconsuming the consumption basket above
Ronnie Cabs will be happier if he is going toconsume Php 450 worth of goods and 150 hours ofleisure as this will yield to 40,000 utils
Construct Ronnie Cabs indifference map
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Income-Leisure Indifference Curve
Shows combinations ofreal income (C) andleisure time (L) that will
yield some specific level
of utility to theindividual
Subjective,psychological
information concerningan individuals work-leisure preferences
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Properties of Indifference Curves
1. Downward sloping (Assumption: Ronnie likes bothgoods and leisure)
2. Higher indifference curves indicate higher levels of
utility3. Do not intersect
4. Convex to the origin (MRS in consumption ratioof marginal utilities)
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What is the implication?
Clarissa has relatively steep indifference curves
Roni Pags has relatively flat indifference curves
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What is the implication?
Relatively steepindifference curves impliesthat it will require a persona substantial bribe to giveup an additional hour ofleisure (Clarissa)
Relatively flat indifference
curves indicate that theworker values his leisuretime less (Roni Pags)
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Budget Constraint
Shows combinations ofreal income (C) andleisure time (L) that a
worker might realize orobtain, given the wagerate
Objectivemarket
information
Assumption: 8 hrs of sleep/day
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Budget Constraint Mathematical Model
C = f (time, income)
Part of individual income (property income,dividends, lottery prizes) is independent of how
many hours he worksC = wh + V
V = non-labor income
h = # of hours allocated to the labor market W = hourly wage rate
C = dollar value of expenditures
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Budget Constraint Mathematical Model
C = wh + V
T = total time available (say, per week)
C = w(T-L)+ V
C = wT wL + V
C = (wT + V) wL [y = b mx]
work
leisure
h
L
T = h + L
h = T - L
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Budget Constraint Mathematical Model
Given:C = (wT + V) wL
Construct the functionof this BudgetContraint
Assumption: 8 hrs of sleep/day
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The budget line delineates the
workers opportunity set(the set of all the consumptionbaskets that a particular workercan afford to buy
EndowmentPoint(if the personDecides not
To work at all,He can still purchaseV dollars worthOf goods
Budget lines fan out clockwise from the origin as
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Budget lines fan out clockwise from the origin asthe wage rate increases
Assumption: 24 hrs a day to allocatebetween work and leisure (sleepingconsidered leisure)
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The Optimal Bundle: Hours-of-Work Decision
Optimal work-leisureposition
MRS = wMUL/MUC = wMUL/w = MUC
Assuming that wage is constant what happens to
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Assuming that wage is constant, what happens tohours of work when
1. Non-labor income increases
2. Non-labor income decreases
h l b
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Changes in Non-labor income:Normal Good vs. Inferior Good The impact of the changein non-labor income on
the number of hours of
work is called INCOMEEFFECT
*** Leisure activities are usually regarded as Normal Goods.
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Since leisure activities are regarded as normalgoods
Assuming non labor income is constant what
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Assuming non-labor income is constant, whathappens to hours of work when
1. Wage increases
2. Wage decreases
The effect of a change in the wage rate on hours
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The effect of a change in the wage rate on hoursof work: A wage increase.
Leisure becomesexpensive for high wageworkers
Leisure ischeap for low wageworkers
To enjoy thefruits of higher
income orcannot afford to
lose a potentialmarginal income
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Income Effect and Substitution Effect
IE
SE
Net effect (+) Net effect (-)
Work Work
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In mathematical terms:
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In mathematical terms:Income Effect and Substitution Effect
Income Effect
IE =number of hours of work given a constant wage
income
Substitution Effect
SE =
number of hours of work given a constant incomewage
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Derivation of the backward bending supply curve
SE > IE
IE > SE
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Exercise
Illustrate the impact of a DECREASE in wage rate onthe individuals working hours if income effectexceeds substitution effect
Illustrate the effect of this scenario on the laborsupply curve
Gi th t IE SE d ill i
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Given that IE>SE, a wage decrease will increaseworking hours
Net effect (-)
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Reservation Wage
The highest wage rate at which an individual isindifferent between working or not working(remaining at an endowment point, and working atthat first hour)
The highest wage rate that the individual chooses notto work
The lowest wage rate at which one would decide to
work
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Application: Reservation Wage
RW implies that the person will not work at all if themarket wage is less than the reservation wage
Decision to work = f (market wage, rw)
Market wage = f (firms willingness to pay) RW = f (how much a worker requires to be bribed to
work that first hour; persons taste for work)
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Labor Supply Elasticity
Responsiveness of hours of work to changes in thewage rate
E = %hours of work h/h h . w%wage rate w/w w . h
= =
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Exercise
Suppose Marios wage is initially 1000 per hour, andhe works 1,900 hours per year. Mario gets a raise of2,000 per hour, and he decides to work 2,090 hoursper year. Calculate labor supply elasticity
Is there a relatively large change in hours of work fora given wage rate?
Empirical Relationship: A regression model of
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Empirical Relationship: A regression model ofworking hours and wages
hi= awi+ bVi+ other variables hi number of hours a person (i) works wi his wage rate Vihis non labor income
a
impact of a one-dollar increase on hours of work,holding non-labor income constant (depends onincome and sunbstitution effect)
b measures the impact of a one-dollar increase in
non-labor income, holding wage constant (must benegative because workers with high levels ofnon-labor income consume more leisure,assuming leisure is a normal good)
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Labor Supply Application
Nonparticipation of a
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Nonparticipation of aCollege Student
Steep ICs highsubjective evaluation ofnonwork time (L)
HN availability of non
labor income Rekatively flat NW low
earning ability
These are all factorsconducive to NOTparticipating in the laborforce
i1
i2i3
i4
Effect of a
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Effect of awelfare programon hours of work
cash grant 500 50% tax on labor
earnings In the absence of
welfare P Income effect
move optimality topoint Q
Substitution effect
move optimalityto point R Thus this welfare
program reduceshours of work