Lecture Labour market economics: Chapter 4 - Dwayne Benjamin, Morley Gunderson, Craig Riddell

Chapter 4 - Labour supply over the life-cycle. The topics discussed in this chapter are: Labour supply patterns, lifetime planning and wage elasticity, labour supply over the lifetime, fertility and women’s labour supply decisions, retirement.

Chapter Four Labour Supply Over the Life-cycle  Created by: Erica Morrill, M.Ed           Fanshawe College © 2002 McGraw-Hill Ryerson Ltd Chapter 4-1 Chapter Focus Labour supply patterns  Lifetime planning and wage elasticity  Labour supply over the lifetime  Fertility and women’s labour supply decisions  Retirement  © 2002 McGraw­Hill Ryerson Ltd Chapter 4­2 Figure 4.1  Labour Force Participation Profiles Men     participation increases in twenties peak at 30-50 declining at retirement age participation of older men has declined since 1971 © 2002 McGraw­Hill Ryerson Ltd Chapter 4­3 Figure 4.1  Labour Force Participation Rates Women      data more complicated to interpret society/economic factors influence women’s participation rates generally shaped like men’s participation slower entry into labour market has been rising since 1971 © 2002 McGraw­Hill Ryerson Ltd Chapter 4­4 Dynamic Life Cycle Models A model based on the assumption that individuals plan out their lifetime supply of labour given their expected economic environment (specifically wages and other income) © 2002 McGraw­Hill Ryerson Ltd Chapter 4­5 Dynamic Life Cycle Model  Basic Assumptions:  preferences over consumption and leisure today and in the future  maximize utility function  optimize consumption an leisure in each period of time given expected lifetime budget constraint © 2002 McGraw­Hill Ryerson Ltd Chapter 4­6 Figure 4.2 Dynamic Life Cycle Wage Changes Two profiles  Illustrates how wages first increase and then decline  “blip” represents a temporary one-time wage increase at t  © 2002 McGraw­Hill Ryerson Ltd Chapter 4­7 The Dynamic Life Cycle Model in Context  Substitution and income effects differ depending on  permanent or temporary wage change  anticipated or unanticipated wage change  Labour supply response will differ depending on the source of the wage increase © 2002 McGraw­Hill Ryerson Ltd Chapter 4­8 Figure 4.2 Dynamic Life Cycle Wage Changes A B Permanent wage difference  B C Evolutionary wage change associated with aging  C D Evolutionary wage change associated with aging  © 2002 McGraw­Hill Ryerson Ltd Chapter 4­9 Fertility and Childbearing Important in understanding women’s labour supply  Variables affecting fertility decision        income cost of child price of related goods tastes and preferences technology advances consumption vs nonmarket time © 2002 McGraw­Hill Ryerson Ltd Chapter 4­10 Income  Positive relationship between income and the desired number of children  Contraceptive knowledge and the cost of having children tend to be related to the income variable  Difficult to separate the pure effect income on decision © 2002 McGraw­Hill Ryerson Ltd Chapter 4­11 Price and Cost of Children  The demand for children is negatively related to the price or cost of having children  The main cost is income foregone by spouse  potential earnings can have both an income and substitution effect on decision to have children © 2002 McGraw­Hill Ryerson Ltd Chapter 4­12 Price of Related Goods  Dramatic changes in private costs can impact the decision to have children  A rise in the price of complementary goods would reduce desired number of children  Fall in price (public subsidies) could encourage larger family sizes © 2002 McGraw­Hill Ryerson Ltd Chapter 4­13 Retirement Decisions and Pensions  An area of increasing concern  Retirement could imply:  leaving the labour force  reducing hours worked  moving to a less difficult job  Impacts social policy  Concerns of solvency of pension funds © 2002 McGraw­Hill Ryerson Ltd Chapter 4­14 Retirement  Theoretical Determinants of Retirement  mandatory age  wealth and earnings  health and the nature of work and the family  pension plans © 2002 McGraw­Hill Ryerson Ltd Chapter 4­15 No Retirement Test Figure 4.3 a No Retirement Test YM EO YB EP B (retirement) T © 2002 McGraw­Hill Ryerson Ltd Chapter 4­16 Figure 4.3 b Y No Retirement Test Full Retirement YM B YB (retirement) T © 2002 McGraw­Hill Ryerson Ltd Chapter 4­17 Figure 4.3 c Y YM No Retirement Test Partial Retirement Test D YB C YB B YB d C (retirement) T © 2002 McGraw­Hill Ryerson Ltd Chapter 4­18 Employer-Sponsored Pension Plan  Earnings  3/4  Flat of workers Benefit Plans  18% Defined Benefit Plans of workers  Defined  Based Plans Contribution Plans 9% of workers © 2002 McGraw­Hill Ryerson Ltd Chapter 4­19 Defined Benefit Plans  Influences retirement decision  Encourages early retirement  Discourages postponed retirement © 2002 McGraw­Hill Ryerson Ltd Chapter 4­20 Figure 4.4 Pension Benefit Accruals © 2002 McGraw­Hill Ryerson Ltd Chapter 4­21 Features  Backloading  Early/special retirement provisions  Postponed retirement provisions © 2002 McGraw­Hill Ryerson Ltd Chapter 4­22 Backloading  Benefits get larger as seniority-based wage increases  Young workers have an incentive to stay with the firm  Older workers have an incentive not to retire too soon © 2002 McGraw­Hill Ryerson Ltd Chapter 4­23 End of Chapter Four © 2002 McGraw­Hill Ryerson Ltd Chapter 4­24 ... © 2002 McGraw­Hill Ryerson Ltd Chapter 4 15 No Retirement Test Figure 4. 3 a No Retirement Test YM EO YB EP B (retirement) T © 2002 McGraw­Hill Ryerson Ltd Chapter 4 16 Figure 4. 3 b Y No Retirement Test... © 2002 McGraw­Hill Ryerson Ltd Chapter 4 17 Figure 4. 3 c Y YM No Retirement Test Partial Retirement Test D YB C YB B YB d C (retirement) T © 2002 McGraw­Hill Ryerson Ltd Chapter 4 18 Employer-Sponsored Pension... postponed retirement © 2002 McGraw­Hill Ryerson Ltd Chapter 4 20 Figure 4. 4 Pension Benefit Accruals © 2002 McGraw­Hill Ryerson Ltd Chapter 4 21 Features  Backloading  Early/special retirement