Bài giảng Labour Market Economics - Chapter 2 Labour Supply: Individual Attachment to the Labour Market

Chapter TwoLabour Supply: Individual Attachment to the Labour Market Created by: Erica Morrill, M.Ed Fanshawe CollegeChapter 2-1© 2002 McGraw-Hill Ryerson Ltd.Chapter FocusLabour market attachmentLabour Force Participation RateLabour supplyChanges in market wageOvertime premiums2© 2002 McGraw-Hill Ryerson Ltd.Labour SupplyHow individuals earn a living by selling labour services through the labour market.Question:Is labour supply an upward sloping function of the wage rate?3© 2002 McGraw-Hill Ryerson Ltd.Quantifying Labour Market AttachmentLabour Force Participationthe decision to participate in paid labour market activities influences the size and composition of our labour forceimpacts the economy4© 2002 McGraw-Hill Ryerson Ltd.Labour Force Participation RateLFPRthe fraction of the eligible population that participates in the labour forceLFPR=LF/POPLF (Labour Force)individuals in the eligible population who participate in labour market activities either employed or unemployed5© 2002 McGraw-Hill Ryerson Ltd.Figure 2.2 Labour Force Participation Rates by Sex, 1901-19916© 2002 McGraw-Hill Ryerson Ltd.Hours of WorkVariety of dimensionsInstitutional arrangements Affects quantity and quality of labour supply Short run hours appear fixedaltered by the need for flexible hours, part time and working structures7© 2002 McGraw-Hill Ryerson Ltd.Basic Income - Leisure ModelThe choice of hours worked given opportunities and value of nonmarket time.preferences and constraintsindividuals choose the feasible outcomes which yield the highest level of satisfaction8© 2002 McGraw-Hill Ryerson Ltd.PreferencesTwo “goods”consumptionleisureRepresented by indifference curvesIndifferent between various combinations of consumption and leisure9© 2002 McGraw-Hill Ryerson Ltd.Figure 2.4a Indifference CurveLeisure0ConsumptionBB-abundance of leisure willing to give up for consumptionC-consumption and leisure are substitutableCA-abundance of consumption willing to give up for leisureASlope - Marginal Rate of Substitution10© 2002 McGraw-Hill Ryerson Ltd.Figure 2.4b MRS Of Two Different  ConsumersLeisure0ConsumptionU10U20Al0C0l1C21C1111© 2002 McGraw-Hill Ryerson Ltd.Preferences Preferences over all conceivable combinations of consumption and leisureAll combinations lie on some indifference curveRepresented by an indifference map12© 2002 McGraw-Hill Ryerson Ltd. Figure 2.4 c Indifference Curve Map For an IndividualLeisure0ConsumptionU0U1U213© 2002 McGraw-Hill Ryerson Ltd.ConstraintsConstrained by economic properties of the marketTransform consumption-leisure to income-leisure by setting the price of consumption14© 2002 McGraw-Hill Ryerson Ltd.Figure 2.5 a Simple Full-Time/Part- Time ChoiceLeisure0IncomeTYNAYNNo Paid WorkLPIP+YNBIPPart-timeLFIF+YNCIFFull-timehPhF15© 2002 McGraw-Hill Ryerson Ltd.Leisure0TIncomeW1 High wageW0 Low wageFigure2.5 b Linear Potential Income ConstraintW1T+YNW0T+YNYNSlope depends on Individual’s wage rate16© 2002 McGraw-Hill Ryerson Ltd.The Consumer’s OptimumOptimal amount of income and leisureUtility-maximizing equilibrium highest indifference curve given the income constraintCompare MRS with the Market Wage RateMRS - measures the willingness to exchange time for incomeMarket Wage Rate - measures the ability to exchange leisure for income17© 2002 McGraw-Hill Ryerson Ltd.Leisure0IncomeU1U0Figure 2.6 a Equilibrium of NonparticipantRMarket Wage less than the reservation wage TSlope=-W0U2YNA=E0Corner SolutionSlope= -WRRR’18© 2002 McGraw-Hill Ryerson Ltd.Figure 2.6 b Equilibrium of a  ParticipantLeisure0IncomeMarket wage exceeds thereservation wageTRR’YNIndifference curve tangentTo budget constraintU1U2U0l0W0h0+YNE0Interior Solution19© 2002 McGraw-Hill Ryerson Ltd.Figure 2.7 The Effect of an Increase in  Nonlabour Income on SupplyConsume moreConsume less20© 2002 McGraw-Hill Ryerson Ltd.The Effect of an Increase in Nonlabour Income on Labour SupplyNormal goods ­ income leads to ­ consumption of leisure (decrease in labour supply)Inferior goods­ income leads to ¯ consumption of leisure (increase in labour supply)21© 2002 McGraw-Hill Ryerson Ltd.Effect of Non-labour Income on Hours of Work in nonlabour income results in a parallel shift outward of the budget constraintnormal good-if leisure is a normal good more will be consumed resulting in less work hours inferior good- if leisure is an inferior good less will be consumed and more work hours are spent22© 2002 McGraw-Hill Ryerson Ltd.Change in Wage RateTwo effectsIncome effectthe worker has more income to buy more goods including leisure (reduces work hoursSubstitution effect individual may work more because the returns are greater substituting away from leisure23© 2002 McGraw-Hill Ryerson Ltd.E0leisure0IncomeU0T-W0Figure 2.8 Income and Substitution Effect of Wage Increasel0E’l’Substitution effectIncome effectNet effectW0T=YNW1T=YNl1U1E1-W124© 2002 McGraw-Hill Ryerson Ltd.Effect of Wage Increase on ParticipationBoth substitution effect and income effectIf income effect dominates hours of work may decline (not withdraw )For a nonparticipant an  W may leave the equilibrium unchanged or induce the individual to participate25© 2002 McGraw-Hill Ryerson Ltd.Effects of an Increase in Nonlabour Income on ParticipationOpposite to wage increasePure income effectMay cause participants to leave the labour force26© 2002 McGraw-Hill Ryerson Ltd.Individual Supply CurveSubstitution effect > income effect ­ wage leads to ­ labour suppliedAs wages continue to­ there is a point where substitution effect and income effect offset each otherSupply curve bends backward when income effect > substitution effect27© 2002 McGraw-Hill Ryerson Ltd.Elasticity of Labour SupplyResponsiveness of labour supply to changes in the wage rateUncompensated elasticity% change in labour supply from a 1% increase in wage (indeterminate)Income elasticity% change in wages from a 1% increase in nonlabour income (negative)Compensated elasticity% increase in labour supply from a 1% increase in wage after compensating for increased income (positive)28© 2002 McGraw-Hill Ryerson Ltd.Added and Discouraged WorkerDiscouraged worker- in high unemployment drop out of the labour forceHidden Unemployment- unemployment underestimated due to amount of discouraged workers not countedAdded worker- enter the labour force to supplement family income in high unemployment29© 2002 McGraw-Hill Ryerson Ltd.Moonlighting, Overtime, Flexible Work HoursWhy do some people moonlight at a second job at a wage less than their market wage on their first job?Why do some people require an overtime premium to work more?30© 2002 McGraw-Hill Ryerson Ltd.0IncomeLeisureY1TCLcYcFigure 2.11 a Fixed Hours Constraint31© 2002 McGraw-Hill Ryerson Ltd.0IncomeLeisureCLcYcYTTUcUdFigure 2.11 b UnderemploymentDLdYd32© 2002 McGraw-Hill Ryerson Ltd.Overtime and OveremploymentPrefer to work fewer hours at the going wage rateInduced to work more hours through an overtime premium33© 2002 McGraw-Hill Ryerson Ltd.YtYtFigure 2.12 Overemployment and Overtime0ITtL0IudUcLTYoCUcUdLcCYcLdDYdO34© 2002 McGraw-Hill Ryerson Ltd.Overtime PremiumSubstitution effect is larger than the income effectPrice of leisure is higher for overtime hours35© 2002 McGraw-Hill Ryerson Ltd.Overtime Premium vs Straight Line Equivalentworker would not remain at overtime equilibrium New equilibrium on a higher utility curveIncome effect outweighs the substitution effect causing the person to supply less work36© 2002 McGraw-Hill Ryerson Ltd.Choice in Working HoursChanging work force Different groups with different preferences for work-time arrangements1985 - two thirds of the work force was discontent with work-time arrangements37© 2002 McGraw-Hill Ryerson Ltd.L0IUcTCYtFigure 2.14 Gains for Alternative Work SchedulesFYfF- willing to give up wagesfor preferred work scheduleC-some individual are discontent UdDD- preferred work schedule38© 2002 McGraw-Hill Ryerson Ltd.SolutionNo difference in utility between C and F even though F implies a lower wage rateAllowing workers to work desired amount of hours saves on costsFlex-timeCompressed work week39© 2002 McGraw-Hill Ryerson Ltd.End of Chapter Two40© 2002 McGraw-Hill Ryerson Ltd.