Lecture Labour market economics: Chapter 2 - Dwayne Benjamin, Morley Gunderson, Craig Riddell

Chapter 2 - Labour supply: individual attachment to the labour market. In this chapter, the following content will be discussed: Labour market attachment, labour force participation rate, labour supply, changes in market wage, overtime premiums.

© 2002 McGraw-Hill Ryerson Ltd Chapter 2-1

© 2002 McGraw­Hill Ryerson Ltd Chapter 2­2

Chapter Focus

 Labour market attachment

 Labour Force Participation Rate

 Labour supply

 Changes in market wage

 Overtime premiums

 Is labour supply an upward sloping function

of the wage rate?

© 2002 McGraw­Hill Ryerson Ltd Chapter 2­4

Quantifying Labour Market

Attachment

 Labour Force Participation

 the decision to participate in paid labour market activities

 influences the size and composition of our labour force

 impacts the economy

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Figure 2.2 Labour Force Participation

Rates by Sex, 1901-1991

 Short run hours appear fixed

 altered by the need for flexible hours, part time and working structures

© 2002 McGraw­Hill Ryerson Ltd Chapter 2­8

Basic Income - Leisure Model

 The choice of hours worked given

opportunities and value of nonmarket time

 preferences and constraints

 individuals choose the feasible outcomes which yield the highest level of satisfaction

 Represented by indifference curves

 Indifferent between various

combinations of consumption and

leisure

A­abundance of  consumption willing to  give up for leisure

A

Slope - Marginal Rate of

Substitution

U 2 0

C 1 1

© 2002 McGraw­Hill Ryerson Ltd Chapter 2­12

Preferences

 Preferences over all conceivable

combinations of consumption and

© 2002 McGraw­Hill Ryerson Ltd Chapter 2­16Leisure

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The Consumer’s Optimum

 Optimal amount of income and leisure

 Utility-maximizing equilibrium

 highest indifference curve given the income

constraint

 Compare MRS with the Market Wage Rate

 MRS - measures the willingness to exchange time for income

 Market Wage Rate - measures the ability to

exchange leisure for income

Corner  Solution

Slope= ­WRR

R’

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Figure 2.7 The Effect of an Increase in

Nonlabour Income on Supply

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The Effect of an Increase in Nonlabour Income on Labour Supply

 Normal goods

income leads to consumption of

leisure (decrease in labour supply)

 Inferior goods

income leads to consumption of

leisure (increase in labour supply)

© 2002 McGraw­Hill Ryerson Ltd Chapter 2­22

Effect of Non-labour Income

on Hours of Work

 in nonlabour income results in a parallel

shift outward of the budget constraint

 normal 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 spent

© 2002 McGraw­Hill Ryerson Ltd Chapter 2­25

Effect of Wage Increase on

Participation

 Both substitution effect and income effect

 If 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 participate

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Effects of an Increase in Nonlabour Income on Participation

 Opposite to wage increase

 Pure income effect

 May cause participants to leave the

labour force

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Individual Supply Curve

 Substitution effect > income effect

 wage leads to labour supplied

 As wages continue to

 there is a point where substitution effect and income effect offset each other

 Supply curve bends backward when

income effect > substitution effect

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Elasticity of Labour Supply

 Responsiveness of labour supply to changes

in the wage rate

 Hidden Unemployment- unemployment

underestimated due to amount of

discouraged workers not counted

 Added worker - enter the labour force to

supplement family income in high

unemployment

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Moonlighting, Overtime,

Flexible Work Hours

 Why 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?

Figure 2.11 a Fixed Hours Constraint

 New equilibrium on a higher utility curve

 Income effect outweighs the substitution effect causing the person to supply less work

© 2002 McGraw­Hill Ryerson Ltd Chapter 2­37

Choice in Working Hours

 Changing work force

 Different groups with different

preferences for work-time arrangements

 1985 - two thirds of the work force was discontent with work-time arrangements

C­some individual are  discontent 

D

D­ preferred work schedule

 Allowing workers to work desired

amount of hours saves on costs

 Flex-time

 Compressed work week

© 2002 McGraw­Hill Ryerson Ltd Chapter 2­40

End of Chapter Two