Chapter 2: Labour supply

1
Lecture 2

• Chapter 2 Labour supply
• Labour force participation
• Review of individual choice
• Income-leisure choice model (started)

2
Labour Force Participation

• Labour Force definitions
• Population Labour Force Not in the Labour
  Force
• Labour Force Employed Unemployed
• Labour Force Participation Rate Labour Force /
  Population.
• Some common abbreviations
• Population POP
• Labour Force LF, Not in the Labour Force
  NILF
• Employed E, Unemployed U
• Labour Force Participation Rate LFPR
• Labour Force Survey LFS

3
Labour Force Participation (contd)

• Distinctions between states not so clear
• e.g., When is full-time student in the labour
  force?
• If employed (full-time or part-time)
• If looking for work it depends
• If looking for a part-time job, then considered
  unemployed so part of labour force
• If looking for a full-time job, considered not in
  the labour force

4
Labour Force Participation (contd)

• Some current figures for Canada (seasonally
  adjusted data from June 2004, LFS)
• LF 17,286,100 LFPR 67.5, E 16,031,500
• Based on above numbers what was population in
  Canada?
• 25.6 million. (17,286,100/0.675)
• See http//www.statcan.ca for latest LFS

5
Labour Force Participation (contd)

• Male-female differences in LFPR
• Males 73.2, Females 62.1 (June 2004, S.A.)
• Male-female LFPR difference narrowing
• 1980 1990 2000
• M78.6 76.9 72.7
• F50.3 58.5 58.9
• Diff 28.3 pp 18.4 pp 13.8 pp

6
Labour Force Participation (contd)
Source, BGR, Figure 2.2, page 35
7
Labour Force Participation (contd)

• Why rise in female labour force participation?
• Changing attitudes towards women in the workplace
• Increasing educational attainment of women
• Increasing work opportunities for women
• Decrease in fertility rate

8
Labour Force Participation (contd)

• Why fall in male labour force participation?
• As female participation rate has risen, need for
  married males to work has decreased
• Reduced retirement age
• Rising life expectancy

9
Labour supply (hours)

• In addition to the size of the labour force, the
  hours dimension is important too
• E x weeks/year x days/week x hrs/day hrs/yr
• The typical work week in Canada has fallen over
  last century
• from about 59 hrs/week in 1901 to 39 in 1981 (in
  manufacturing)
• Seems inconsistent with the upward sloping labour
  supply curve.

10
Utility Theory and Individual Choice

• Economists have an answer to the question of why
  people behave as they do self interest.
• Individuals consumption choices depend upon
• The pleasure you get from consuming something
• The price of purchasing something
• Utility
• the pleasure or satisfaction that one gets from
  consuming a good or service
• Goal for rational individuals maximize their
  utility (subject to constraints)

11
Utility Theory (contd)

• Assumptions regarding utility
• More is (usually) better
• Additional utility from consuming more eventually
  diminishes
• People can rank all bundles of goods
• Transitivity

12
A Map of Indifference Curves
Chocolate bars (per week)
20
C
16
A
12
B
8
4
0
2 4 5 6 8 10 12 14 16 18 20 22
Cans of pop (per week)
13
Indifference Curves (contd)
Chocolate bars (per week)
20
The marginal rate of substitution (MRS) How much
of good Y willing to give up to get one more unit
of good X
16
A
12
Example MRS (at B) ?Y/ ?X (2-4)/5-4
-2 2
B
4 2
C
0
2 4 5 6 8 10 12 14 16 18 20 22
Cans of pop (per week)
14
Indifference Curves (contd)
Chocolate bars (per week)
20
Slope -4
Diminishing marginal rate of substitution Compare
MRS (absolute value of slope) as get more of
good X (e.g., 4 vs 2)
16
A
12
B
8
Slope -2
C
4
D
2
0
3 4 6 7
Cans of pop (per week)
15
Indifference Curves (contd)
Chocolate bars (per week)
20
Indifference curves cant cross! (for same
individual)
16
C
12
A
B
8
U2
4
U1
2
0
3 4 6 7
Cans of pop (per week)
16
The Income (Budget) Constraint
Chocolate bars (per week)
Example Income is 40 / week Chocolate bars 4
each Pop 2 per can
20
Y Income / Price per chocolate bar 40 /
4 10
10
Income PXX PYY
X Income / Price per pop can 40 / 2 20
0
2 4 6 8 10 12 14 16 18 20 22
Cans of pop (per week)
17
The Income Constraint (contd)
(X1, Y1) (0, Income/ PY) (X2, Y2) (Income/ PX
, 0) Slope ?Y / ?X (Y2 Y1 )/( X2 X1 )
(0 - Income/ PY)/(Income/PX 0) (-
Income/ PY )/ (Income/PX) (-
Income/PY)(PX/Income) - PX/ PY
Y
Y Income / PY
Income PXX PYY
X Income / PX
0
X
18
The Income Constraint (contd)
Slope has become more negative -PX2 / PY lt
-PX1/PY
Y
Y Income / PY
Income PX1X PYY
Income PX2X PYY
X1 Income / PX1
0
X
X2 Income / PX2
19
Consumer optimum
Y

• At optimum
• Slope of income constraint
• Slope of utility curve
• PX / PY -MRS
• ? PX / PY MRS

D
Income/PY
B
A
C
YC
Income PXX PYY
0
XC
Income/PX
X
20
Income-leisure choice model

• Income-leisure choice model is used to represent
  an individuals choice of hours worked given
  preferences for leisure and wage rate
• In model, time is divided among two things work
  or leisure
• Is time not performing paid work really leisure?

21
ILC model (contd) Preferences

• Two goods
• consumption
• leisure
• Represented by indifference curves
• Indifferent between various combinations of
  consumption and leisure

22
ILC model (contd) Preferences
Indifference Curve
Consumption per day ()
A

Absolute value of slope of Indifference Curve
gives Marginal Rate of Substitution
B
C
Utility level 1


Leisure (hours/day)
23
ILC model (contd) Preferences
Indifference Curve
Consumption per day ()
A

B



C
D
Utility level 1

Leisure (hours/day)
24
ILC model (contd) Preferences
Indifference Curve A Likes Leisure
Consumption per day ()





Leisure (hours/day)
25
ILC model (contd) Preferences
Indifference Curve B Low Value on Leisure
Consumption per day ()





Leisure (hours/day)
26
ILC model (contd) Preferences
Indifference Curves
Consumption per day ()
A

A2
B

Utility level 2


C
D
Utility level 1

Leisure (hours/day)
27
ILC model (contd) Constraints
Income Constraints
Income per day ()
Example 10 non-labour income Can earn wage of
8 per hour Can work 0 hours per day, 4 hours per
day, or 8 hours per day

C
IF YN 74



B
IP YN 42

A
YN 10
Leisure (hours/day)
24 0
20 4
16 8
Work (hours/day)
28
ILC model (contd) Constraints
Income Constraints
2WT
Income per day ()

WT






Leisure (hours/day)

T



29
ILC model (contd) Optimum
Indifference Curves and Income Constraint
Income per day ()

U3
U2
U1
WT


A

Wh


Slope -W

Leisure (hours/day)

T
l



h
30
ILC model (contd) Optimum
Indifference Curves and Income Constraint
Income per day ()

U1
Slope MRS
WT
C


A

Wh


Slope -W

B
Leisure (hours/day)

T
l



h
31
Reservation Wage
Slope -WReservation
Income per day ()

U0







T


Leisure (hours/day)


32
Reservation Wage Person Works
Slope -WReservation
Income per day ()
Slope -W

WT
U1
U0





A

Wh
T



h
Leisure (hours/day)


33
Reservation WagePerson doesnt work
Slope -WReservation
Income per day ()

U0



Slope -W


WT


T


Leisure (hours/day)


34
Comparative Statics
Effect of Nonlabour Income on Labour Supply
Income per day ()

Leisure as a Normal Good
U3
U2
WTYN

U1
WT

A
B




YN
Leisure (hours/day)

T
l1
l2
h2



h1
35
Comparative Statics (contd)
Effect of Nonlabour Income on Labour Supply
Income per day ()

Leisure as an Inferior Good
U2
WTYN

U1
B
WT

A




YN
Leisure (hours/day)

T
l1
l2


h1

h2
36
Comparative Statics (contd)
Effect of Wage Increase on Labour Supply
Income per day ()

Less Leisure - Works More
U2
W2T

U1
B
W1T
Slope -W2

A



Slope -W1

Leisure (hours/day)

T
l1
l2


h1

h2