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.

Chapter Two Labour Supply: Individual Attachment to the Labour Market  Created by: Erica Morrill, M.Ed           Fanshawe College © 2002 McGraw-Hill Ryerson Ltd Chapter 2-1 Chapter Focus  Labour market attachment  Labour Force Participation Rate  Labour supply  Changes in market wage  Overtime premiums © 2002 McGraw­Hill Ryerson Ltd Chapter 2­2 Labour Supply  How individuals earn a living by selling labour services through the labour market  Question:  Is labour supply an upward sloping function of the wage rate? © 2002 McGraw­Hill Ryerson Ltd Chapter 2­3 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 © 2002 McGraw­Hill Ryerson Ltd Chapter 2­4 Labour Force Participation Rate  LFPR  the fraction of the eligible population that participates in the labour force  LFPR=LF/POP  LF (Labour Force)  individuals in the eligible population who participate in labour market activities either employed or unemployed © 2002 McGraw­Hill Ryerson Ltd Chapter 2­5 Figure 2.2 Labour Force Participation Rates by Sex, 1901-1991 © 2002 McGraw­Hill Ryerson Ltd Chapter 2­6 Hours of Work  Variety of dimensions  Institutional arrangements  Affects quantity and quality of labour supply  Short run hours appear fixed  altered by the need for flexible hours, part time and working structures © 2002 McGraw­Hill Ryerson Ltd Chapter 2­7 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 © 2002 McGraw­Hill Ryerson Ltd Chapter 2­8 Preferences  Two “goods”  consumption  leisure  Represented by indifference curves  Indifferent between various combinations of consumption and leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 2­9 Figure 2.4a Indifference Curve Slope - Marginal Rate of Substitution Consumption A A­abundance of  consumption willing to  give up for leisure B­abundance of leisure willing  to give up for consumption C C­consumption and leisure  are substitutable B Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 2­10 Effects of an Increase in Nonlabour Income on Participation  Opposite to wage increase  Pure income effect  May cause participants to leave the labour force © 2002 McGraw­Hill Ryerson Ltd Chapter 2­26 Individual Supply Curve  Substitution wage leads to   As  effect > income effect labour supplied 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 © 2002 McGraw­Hill Ryerson Ltd Chapter 2­27 Elasticity of Labour Supply Responsiveness of labour supply to changes in the wage rate  Uncompensated elasticity    Income elasticity   % change in labour supply from a 1% increase in wage (indeterminate) % 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) © 2002 McGraw­Hill Ryerson Ltd Chapter 2­28 Added and Discouraged Worker Discouraged worker- in high unemployment drop out of the labour force  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  © 2002 McGraw­Hill Ryerson Ltd Chapter 2­29 Moonlighting, Overtime, Flexible Work Hours  Why some people moonlight at a second job at a wage less than their market wage on their first job?  Why some people require an overtime premium to work more? © 2002 McGraw­Hill Ryerson Ltd Chapter 2­30 Figure 2.11 a Income Fixed Hours Constraint Y1 Yc C Lc T Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 2­31 Figure 2.11 b Underemployment Income YT Yd D Ud Yc C Uc Ld Lc T © 2002 McGraw­Hill Ryerson Ltd Chapter 2­32 Leisure Overtime and Overemployment  Prefer to work fewer hours at the going wage rate  Induced to work more hours through an overtime premium © 2002 McGraw­Hill Ryerson Ltd Chapter 2­33 Figure 2.12 Overtime Overemployment and Yt I C Yc D Yd I Yo ud Uc Lc Ld T L O Yt C Ud Uc L Tt © 2002 McGraw­Hill Ryerson Ltd Chapter 2­34 Overtime Premium  Substitution effect is larger than the income effect  Price of leisure is higher for overtime hours © 2002 McGraw­Hill Ryerson Ltd Chapter 2­35 Overtime Premium vs Straight Line Equivalent  worker would not remain at overtime equilibrium  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 2­36 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 © 2002 McGraw­Hill Ryerson Ltd Chapter 2­37 Figure 2.14 Gains for Alternative Work Schedules I C­some individual are  discontent  Yt C D­ preferred work schedule Yf F­ willing to give up wages for preferred work schedule D F Ud Uc T L © 2002 McGraw­Hill Ryerson Ltd Chapter 2­38 Solution  No difference in utility between C and F even though F implies a lower wage rate  Allowing workers to work desired amount of hours saves on costs  Flex-time  Compressed work week © 2002 McGraw­Hill Ryerson Ltd Chapter 2­39 End of Chapter Two © 2002 McGraw­Hill Ryerson Ltd Chapter 2­40 .. .Chapter Focus  Labour market attachment  Labour Force Participation Rate  Labour supply  Changes in market wage  Overtime premiums © 20 02 McGraw­Hill Ryerson Ltd Chapter 2 2 Labour. .. participate in labour market activities either employed or unemployed © 20 02 McGraw­Hill Ryerson Ltd Chapter 2 5 Figure 2. 2 Labour Force Participation Rates by Sex, 190 1-1 991 © 20 02 McGraw­Hill Ryerson Ltd... Leisure © 20 02 McGraw­Hill Ryerson Ltd Chapter 2 10 Figure 2. 4b MRS Of Two Different Consumers Consumption C1 C21 C0 A U 20 U 10 l1 l0 Leisure © 20 02 McGraw­Hill Ryerson Ltd Chapter 2 11 Preferences