Labor-Leisure Choice – Indifference Curves Just like the indifference curves used to derive consumer demand. Tradeoff is between leisure and all other goods measured in dollars (i. e. income). Graph by Harcourt, Slope is marginal rate
Different Preferences for Leisure Since MRS = MUL/MUY, steeper curve enjoys leisure more and flatter curve enjoys leisure less. So Person B requires more money to be willing to give up leisure than Person A does. Graph by Harcourt,
Different Budget Constraints Hours not spent at leisure can be spent in market work earning money to buy other goods, so wages are represented by slope – a higher wage is a steeper slope. Graph by Harcourt, Nonlabormarke t incom e results in a shift up of the budge t line.
Optimal Number of Hours Worked Individuals maximize utility subject to their budget constraint, so optimal hours worked is total hours available minus chosen hours of leisure. Graph by Harcourt,
A Pure Income Effect An increase in income with no change in the wage (pure income effect) shifts out the budget constraint and implies demanding more normal goods, including leisure. Move from X to Z and hours of work decline. Graph by Harcourt,
A Wage Increase (Substitution Effect Do A wage increase has both income (budget line moves out) and substitution (budget line’s slope changes) effects. Income effect -> work less (Z), Substitution effect -> work more (X). Overall effect is move from V to X (sub > inc). Graph by Harcourt,
A Wage Increase (Income Effect Domina A wage increase has both income (budget line moves out) and substitution (budget line’s slope changes) effects. Income effect -> work less (Z), Substitution effect -> work more (X). Overall effect is move from V to X (inc > sub). Graph by Harcourt,
The Reservation Wage At this wage, it is not worth giving up leisure. The slope of the indifference curve at B is the reservation wage. Only participate in the labor market when W > reservation wage. Graph by Harcourt,
The Participation Decision – Wage Chan When the wage increases beyond the reservation wage, begin to participate in the labor market (move from B to X). Graph by Harcourt,
The Participation Decision – Income Cha As income rises, tangency is at a steeper and steeper sections of the indifference curves, until the current wage is the reservation wage and individual Graph by Harcourt,
Policy Analysis – Welfare Program $200 guarantee, reduced as earn income. Program has both inc effect (budget out) -> work less (Z), and sub effect (flatter budget) -> work less (X). Clear work disincentive from this program. Graph by Harcourt,
Policy Analysis – Social Security Change time frame to year. Can earn a small amount with no loss of benefits, then are reduced as earn more until completely phased out. Here pure income effect, but if worked more without program, will also be Graph by Harcourt, substitution effect. Both imply work less.
Policy Analysis – Progressive Income Ta Proportional tax is just a wage change, but progressive tax adds curvature to the budget line. The more one works, the less of each extra dollar earned one gets to spend. Income effect is to work more (Z), but strong substitution effect to work less Graph by Harcourt,
Fixed Hours of Work Available Person A would like to work 50 hours, Person B would like to work 30 hours. If only jobs with 40 hours are available at this wage, both will be worse off – working more or less than is optimal. Graph by Harcourt,
Fixed Costs of Working Fixed time costs reduce the time available for either work or leisure so budget line moves in. Less income, less leisure, likely also less work Harcourt, Graph by (more commuting). Fixed monetary cost is pure income effect, so budget line moves in. Less income, less leisure, more work.
Household Production Graph copyright © 2003 by Pearson
HH Opportunity Frontier & Individual Bud The husband has a higher wage, so he works first to get market goods and the wife is first to produce household goods. As a household they can have more of everything.
Different HH Divisions of Labor In A the husband specializes in the market sector and the wife splits her time. In B the husband specializes in the market sector and the wife specializes in the HH sector. In C the husband
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