Labor Supply (3)

8/11/2019 Labor Supply (3)

1/49

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


2/49

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


3/49


2. Household as a little factory (allocate time: work,household production, household consumption---allproviding utility maximizing commodities)


4/49


3. Children are time-intensive durable goods (price =forgone earnings)


5/49


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.


6/49

Assignment: Labor Issue

What could be an evident labor issue in thePhilippines nowadays?


7/49

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%


8/49


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.


9/49

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.


10/49


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%


11/49


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.


12/49


13/49

Source: NSCB


14/49


15/49

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


16/49

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


17/49

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)


18/49

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


19/49

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


20/49

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)


21/49

What is the implication?

Clarissa has relatively steep indifference curves

Roni Pags has relatively flat indifference curves


22/49

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)


23/49

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


24/49

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


25/49


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


26/49


Given:C = (wT + V) wL

Construct the functionof this BudgetContraint

Assumption: 8 hrs of sleep/day


27/49

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


28/49

Budget lines fan out clockwise from the origin asthe wage rate increases

Assumption: 24 hrs a day to allocatebetween work and leisure (sleepingconsidered leisure)


29/49

The Optimal Bundle: Hours-of-Work Decision

Optimal work-leisureposition

MRS = wMUL/MUC = wMUL/w = MUC

Assuming that wage is constant what happens to


30/49

Assuming that wage is constant, what happens tohours of work when

1. Non-labor income increases

2. Non-labor income decreases

h l b


31/49

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.


32/49

Since leisure activities are regarded as normalgoods

Assuming non labor income is constant what


33/49

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


34/49

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


35/49

Income Effect and Substitution Effect

IE

SE

Net effect (+) Net effect (-)

Work Work


36/49

In mathematical terms:


37/49

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


38/49

Derivation of the backward bending supply curve

SE > IE

IE > SE


39/49

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


40/49

Given that IE>SE, a wage decrease will increaseworking hours

Net effect (-)


41/49

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


42/49


43/49

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)


44/49

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

= =


45/49

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


46/49

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)


47/49

Labor Supply Application

Nonparticipation of a


48/49

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


49/49

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

Labor Supply (3)

Documents

Transcript of Labor Supply (3)