Chapter 2 Labor Supply Mc Graw-Hill Irwin Copyright

Introduction to Labor Supply • Labor facts – Men: labor force participation rates declined from 90% in 1947 to 75% in 1990. – Women: labor force participation rates rose from 32% in 1947 to 60% in 1990. – Hours worked fell from 40 to 35 per week during the same time period. 2 -2

Ch 2: 勞動力之分類 2 -3

Measurement of Unemployment 人力資源調查：名詞與定義 • 民間人口：在資料標準週內年滿十五歲。 • 勞動力（Labor Force，LF）：可以作之民間人口，包括就業者及失業者。 • 就業者（the Employed，E）：從事有酬作者，或從事十五小時以上無酬家屬作者。 • 失業者（the Unemployed，U，「狹義失業人口」）：同時具有：（１）無作；（２）隨時可以作；（３）正在尋找作或已找作在等待結果。尚包括等待恢復作者及找到職業而未開始作亦無報酬者。 2 -4

勞參率與失業率 • 非勞動力（not in the LF）：不屬於勞動力之民間人口，包括因就學、料理家務、高齡、身心障礙、想作而未找作及其他原因等而未作亦未找作者。 • 勞動參與率(labor-force participation rate)： = 勞動力/十五歲以上民間人口 • 失業率(unemployment rate)： = 失業者/勞動力 2 -5

廣義失業率 • 廣義失業人口：「狹義失業人口」加上「非勞動力中想作而未找作者」。後者：非勞動力人口中有作意願但無尋職行動之人口： Discouraged Worker（喪志勞） • 廣義失業率 = 廣義失業人口/(勞動力+喪志勞 ) 2 -6

Taiwan data: The Breakdown of the Population in 2007 Employed 1029. 4萬 Adult Population (1839. 2萬) Labor Force (1071. 3萬) Unemployed (41. 9萬) Not in labor force （767. 9萬） 2 -7 Copyright© 2003 Southwestern/Thomson Learning

Measuring the Labor Force • Current population survey (CPS) – Labor Force = Employed + Unemployed • LF = E + U • Size of LF does not tell us about “intensity” of work. – Labor Force Participation Rate • LFPR = LF/P • P = civilian adult population 16 years or older not in institutions. 2 -8

Measuring the Labor Force • Current population survey (CPS) – Employment: Population Ratio (percent of population that is employed). • EPR = E/P – Unemployment Rate • UR = U/LF 2 -9

Measuring the Labor Force • Labor force measurement relies on subjectivity and likely understates the effects of a recession. • Hidden unemployed: persons who have given up in their search for work and have therefore left the labor force. • The employment rate (E/P) can be a better measure of fluctuations in economic activity than the unemployment rate. 2 -10

Labor Force Participation Facts • Labor force participation (LFP) is greatest for all groups during the ages of 25 to 55. • LFP increases with education. • LFP has decreased for men over the age of 65 from 63% in 1900 to under 20% by 2000. 2 -11

Labor Force Participation Facts • More women than men work part-time. • More men who are high school drop outs work than women who are high school drop outs. • White men have higher participation rates and hours of work than black men. 2 -12

Average hours worked/week 1900 -2007 2 -13

臺灣地區社會發展趨勢調查(2000, 2004) 總平均＝參與該項主要活動之總時數加總/15歲及以上總人口數 2 -14

大學生平日時間之運用情形（2002年）小時/天 2 -15

Neo-Classical Model of Labor-Leisure Choice • Utility Function – Measure of satisfaction that individuals receive from consumption (C) of goods and leisure (L). – U = f(C, L) • U is an index. • Higher U means happier person. 2 -16

Indifference Curves • Downward sloping, indicating the tradeoff between consumption and leisure. • Higher curves = higher utility. • Do not intersect. • Convex to the origin, indicating that opportunity costs increase. 2 -17

Indifference Curves Consumption ($) 500 450 40, 000 Utils 25, 000 Utils 100+ 125 150 Hours of Leisure 2 -18

Differences in Preferences Consumption ($) U 1 U 0 Hours of Leisure Workers with steeper indifference curves value their leisure relatively more than workers with shallower indifference curves. 2 -19

The Budget Constraint • The budget constraint defines the worker’s opportunity set, indicating all of the consumption – leisure baskets the worker can afford. • C = wh + V – Consumption equals labor earning (wages × hours of work) plus nonlabor income (V). – As h = T – L, can rewrite C = w(T – L) + V. 2 -20

Graphing the Budget Constraint Consumption ($) w. T+V Budget Line E V 0 T Hours of Leisure 2 -21

The Hours of Work Decision • Individuals choose consumption and leisure to maximize utility. • Optimal consumption is given by the point where the budget line is tangent to the indifference curve. – At this point the marginal rate of substitution (MRS) between consumption and leisure equals the wage. – Any other consumption – leisure bundle on the budget constraint would give the individual less utility. 2 -22

Optimal Consumption and Leisure $1200 Y A $1100 P $500 U 1 U* E $100 U 0 0 110 70 40 110 Hours of Leisure 0 Hours of Work 2 -23

The Effect of a Change in Nonlabor Income on Hours of Work Consumption ($) F 1 F 0 $200 P 1 U 1 P 0 U 0 $100 E 1 E 0 70 80 110 Hours of Leisure An increase in nonlabor income leads to a parallel, upward shift in the budget line, moving the worker from point P 0 to point P 1. If leisure is a normal good, hours of work fall. 2 -24

The Effect of a Change in Nonlabor Income on Hours of Work Consumption ($) F 1 F 0 P 1 U 1 P 0 $200 $100 U 0 E 1 E 0 60 70 110 An increase in nonlabor income leads to a parallel, upward shift in the budget line, moving the worker from point P 0 to point P 1. If leisure is inferior, hours of work increase. 2 -25

More Leisure at a Higher Wage When the income effect dominates the substitution effect, the worker increases hours of leisure in response to an increase in the wage. Consumption ($) G U 1 R D Q U 0 F D P V E 0 70 75 85 110 Hours of Leisure 2 -26

More Work at a Higher Wage When the substitution effect dominates the income effect, the worker decreases hours of leisure in response to an increase in the wage. Consumption ($) U 1 G R D Q U 0 F D P V E 0 65 70 80 110 Hours of Leisure 2 -27

To Work or Not to Work? • Are the “terms of trade” sufficiently attractive to “bribe” a worker to enter the labor market? • Reservation wage: the lowest wage rate that would make the person indifferent between working and not working. – Rule 1: if the market wage is less than the reservation wage, then the person will not work. – Rule 2: the reservation wage increases as nonlabor income increases 2 -28

The Reservation Wage Consumption ($) H Has Slope -whigh Y G X UH E U 0 Has Slope -w 0 T Hours of Leisure 2 -29

Labor Supply Curve • Relationship between hours worked and the wage rate. – At wages slightly above the reservation wage, the labor supply curve is positively sloped (the substitution effect dominates the income effect). – If the income effect begins to dominate the substitution, hours of work decline as the wage rate increases (a negatively sloped labor supply curve). 2 -30

The Backward Bending Labor Supply Curve Wage Rate ($) 25 20 10 0 20 30 40 Hours of Work 2 -31

Labor Supply Elasticity • The labor supply elasticity (σ) measures responsiveness in hours worked to changes in the wage rate. – σ = Percent change in hours worked divided by the percent change in wage rate. – Labor supply elasticity less than 1 is inelastic as hours of work respond proportionally less than the change in wages. – Labor supply elasticity greater than 1 is elastic as hours of work respond proportionally more than the change in wages. 2 -32

15至 64歲已婚女性之婚前與目前作比率 (2006年) 2 -33

Labor Supply of Women • Substantial cross-country differences in women’s labor force participation rates. • Over time, women’s participation rates have increased. • In most studies on women, substitution effects dominate income effects (upward sloped labor supply curve). 2 -34

Growth in Female Labor Force Participation Rates and the Wage, Cross Countries 1960 -80 • Source: Jacob Mincer, “Intercountry Comparisons of Labor Force Trends and of Related Developments: An Overview, ” Journal of Labor Economics 3 (January 1985, Part 2): S 2, S 6. 2 -35

Derivation of the Market Labor Supply Curve from Individual Supply Curves 2 -36

Policy Application: Welfare Programs and Work Incentives • Cash grants reduce wage incentives. • Welfare programs create work disincentives. • Welfare reduces supply of labor by increasing nonlabor income, which raises the reservation wage. 2 -37

Effect of a Cash Grant on Work Incentives • A take-it-or-leave-it cash grant of $500 per week moves the worker from point P to point G, and encourages the worker to leave the labor force. Consumption ($) F P G 500 U 1 U 0 0 70 110 Hours of Leisure 2 -38

Effect of a Welfare Program on Hours of Work Consumption ($) F U 0 U 1 slope = -$10 H D slope = -$5 Q R P $500 D G E 0 70 100 110 Hours of Work 2 -39

Labor Supply over the Life Cycle • Wage rates change over the worker’s life (over the life cycle). – Wages are low when young. – Wages rise with time and peak around age 50. – Wages decline or remain stable after age 50. • The changes in wages over the life cycle are “evolutionary” wage changes that alter the price of leisure. 2 -40

Theoretical Issues of Evolutionary Wages • A person will work more hours when wages are higher (i. e. , the substitution effect tends to dominate the income effect). • The profile of hours of work over the life cycle will have the same shape as the age-earnings profile. • Intertemporal substitution hypothesis: people substitute their time over the life cycle to take advantages of changes in the price of leisure. 2 -41

Optimization over time • Max U( Ct, Ct+1, Lt+1) 2 -42

The Life Cycle Path of Wages and Hours for a Typical Worker Wage Rate Hours of work 50 Age 2 -43

Hours of Work over the Life Cycle for Two Workers with Different Wage Paths Joe’s wage exceeds Jack’s at every age. Although both Joe and Jack work more hours when the wage is high, Joe works more hours than Jack if the substitution effect dominates. If the income effect dominates, Joe works fewer hours than Jack. 2 -44

Labor Force Participation Rates over the Life Cycle in 2005 2 -45

Hours of Work over the Life Cycle in 2005 2 -46

Labor Supply Over the Business Cycle • Added-worker effect. – So-called “secondary” workers currently out of the labor market are affected by a recession because the main breadwinner becomes unemployed or faces a wage cut. – A secondary worker may choose to enter the labor force during these bad times – The labor force participation rate of secondary workers (i. e. , the added worker effect) is counter-cyclical. 2 -47

Labor Supply Over the Business Cycle • Discouraged worker effect. – Unemployed workers find it very difficult to find jobs during a recession, so they give up searching. – Discouraged workers exit the labor force during bad times. – The labor force participation rate of discouraged workers is pro-cyclical. 2 -48

Labor Supply Over the Business Cycle • The discouraged worker effect dominates the added-worker effect, especially during recessions. 2 -49

Retirement • Lifetime income is higher the longer a worker puts off retirement. • If pension benefits are constant, wage increases have a substitution and income effect, so lifetime income might not be altered. • An increase in pension benefits reduces the price of retirement, increasing the demand for leisure and encouraging the worker to retire earlier. 2 -50

The Impact of the Social Security Earnings Test on Hours of Work • The Social Security earnings test (which taxes retirees when they earn more than $17, 000 per year) generates the budget “line” that affects behavior in varying ways. • The repeal of the earnings test moves retirees to another budget line, as a result: – One retiree would not change his hours of work. – A second retiree would reduce his hours. – A third retiree might increase or decrease his hours, depending on whether substitution or income effects dominate. 2 -51

台灣生育率去年全球最低聯合報經濟日報 2010. 01. 14 • 台灣生育率逐年降低，去年更掉到全球最低！內政部最新統計，去年台灣出生率已降到千分之八點二九；每位婦女一生生育的子女數只有一人，全世界最低；比香港的一點三人、日本的一點四人還低。去年出生的新生兒只有十九萬一千人，比上一年減少七千多人。出生人數和出生率雙創台灣歷史新低，連兩年跌破廿萬人。經建會官員坦言，因為出生率跌幅高於預期，人口負成長的時間比原先預估提早十年；最快可能在民國一百零六年就將發生人口負成長。新生兒的上一代是民國70年代以前，年年出生數約在 40萬上下，新生代要面臨「19萬人要養40萬人」的沈重負擔。 2 -52

Fertility • Malthus Theory of Fertility: as incomes rise, families want more children (children are normal goods so the income effect is large). • An increase in the price of a person’s time (i. e. , an increase in the wage) increases the opportunity cost of exiting the labor market to rear children. 2 -53

The Fertility Decision Goods I/p. X P Indifference Curve 3 I/p. N The household’s utility depends on the number of children and on the consumption of goods. A utilitymaximizing household chooses point P and has three children. Number of Children 2 -54

The Impact of Income and Prices on the Household’s Fertility Good s I/PX Good s P R U 1 R Q U 1 P U 0 3 4 (a) Increase in Income D Number of Children 1 2 3 Number of Children (b) Increase in the price of children 2 -55

小孩是劣等財？（莊奕琦教授） • http: //www. publish. com. tw/new/hotissue/20050630. htm • 為何經濟發展愈好，生的愈少？ • 隨著經濟發展，資普遍增加時，婦女撫育小孩的機會成本也增加，同時教育小孩的費用亦提高（因在經濟發展進步的時代，小孩必須具備更專業的技能，接受更多的教育），凡此種種均使小孩的相對價格大幅上漲，其結果反而造成擁有小孩的數量減少。 • 如果小孩的價格持續上漲，導致消費者主觀交換率小於小孩相對價格（即市場客觀交換率），可能會造成最適小孩個數為零，亦即不生小孩。不生小孩也可以是消費者理性的選擇，不是不愛擁有小孩，而是小孩實在是一種負擔不起的昂貴奢侈財！ 2 -56

當老媽子 18年勞務值 6千多萬 2010 -06 -20 中國時報 • 《Tesco》雜誌徵詢親職專家及專業人士，計算一般媽媽自孩子出生到十八歲，所做的一切作，包括做飯、打掃、洗衣、當顧問，林林總總各項付出，如果由專門人士來做，依時薪計總共要付多少錢。專家計算了一番，認為應該值一四二萬四千五百零四英鎊（約台幣 6, 790萬元）。　媽媽當私家車司機載小孩，不管上下學、去約會或購物，如果子女得付費，那可是高達四萬四千英鎊，而且不含小費。　從小到大，媽媽替子女打掃的時間平均為一千六百小時，價值約一萬四千英鎊；媽媽當孩子的私人主廚，用在做飯的時間三百六十四小時，價值可是超過十一萬英鎊的。　媽媽花在照顧孩子的時間約為八萬八千小時，若子女得付費，那個數字約為六十萬英鎊。　 2 -57

Household Production • Leisure includes many forms of nonmarket work, including work around the home • Why do some household members specialize in the market sector and other members specialize in the household sector? 2 -58

Allocation of Weekly Hours to Various Activities, By Gender and Marital Status Market Work Household Work Personal Care Passive Leisure Other 2 -59

兩性每日約束時間分配（2000, 2004年） 2 -60

15至 64歲已婚女性每天平均料理家務時間（2006年） 2 -61

Household Production Function • Consider Jack and Jill, a married couple • Their household opportunity set is greater than when Jack and Jill were not married (since each can specialize in the sector where they are relatively more productive) 2 -62

Jack and Jill – unmarried opportunity sets Market Goods ($) 200 150 100 Household Goods ($) (a) Jack’s Budget Line 250 Household Goods ($) (b) Jill’s Budget Line 2 -63

Budget Lines and Opportunity Frontier of Married Couple At point E, Jack and Jill allocate all their time to the household sector. If they wish to buy market goods, Jack gets a job because he is relatively more productive in the labor market, generating segment FE of the opportunity frontier. After he uses up all his time in the labor market, Jill then gets a job, generating segment GF of the frontier. 350 G F 200 150 Jack’s Jill’s E E 100 250 340 350 Household Goods ($) 2 -64

Who Works Where? Market Goods ($) P U P U Household Goods ($) (a) Household Goods ($) (b) Household Goods ($) (c) 2 -65

Division of Labor in the Household • (a) The indifference curve U is tangent to the opportunity frontier at point P. Jill specializes in the household sector and Jack divides his time between the labor market and the household. • (b) Jack specializes in the labor market and Jill divides her time between the labor market and the household. • (c) Jack specializes in the labor market and Jill specializes in the household sector. 2 -66

Increases in the Wage Rate or Household Productivity Lead to Specialization Market Goods ($) An increase in Jack’s wage moves the household from point P to point P and Jack specializes in the labor market. P U P U Household Goods ($) 2 -67

Increases in the Wage Rate or Household Productivity Lead to Specialization An increase in Jill’s marginal product in the household sector moves the household from point P to point P and Jill specializes in the household sector. Market Goods ($) P U Household Goods ($) 2 -68