Labour Market Decisions: Supply of Labour

Chapter 8: Labour Market Decisions of Households: The Supply of Labour

• The chapter discusses the supply of labour by households.
• Key concepts include human capital, normal goods, income effect, substitution effect, reservation wage rate, marginal tax rate, economic rent, and demogrant.
• Factors influencing an individual's decision to participate in the labor force and supply labor are explored.
• The derivation of individual and market supply curves for labor in an occupation is described.
• The difference between a change in supply and a change in quantity supplied is explained.
• Conditions under which an individual's labor supply curve bends backward are identified.
• Wage rate elasticity of labor supply and its application in various occupations are discussed.
• Analyzing work disincentives associated with non-employment income is part of the discussion.
• The impacts of immigration and emigration on labor supply curves for different occupations and worker migration patterns are examined.
• Defining human resources by skills, education etc. is described as human capital
• Labor supply is considered human capital.

The Work/Leisure Tradeoff

• Individuals can either work or enjoy leisure.
• Opportunity cost of work is leisure.
• Leisure is a normal good—more desired with increased income.

Leisure Activities

• Leisure covers non-market work (e.g., household chores), consumption time (e.g., enjoying goods and services purchased), and idleness (e.g., rest and relaxation).

Demand for Leisure

• The demand for leisure is influenced by income and wealth.
• A positive income effect correlates with more leisure time.
• Income effect (supply): The change in hours caused by a change in income: Negative effect on supply
• Substitution Effect: As the wage rate increases the price of leisure increases, so leisure hours decrease. This results in a positive effect on work.

Factors Influencing the Decision to Work

• Age, life cycle issues
• Reservation wage rate (lowest acceptable wage)
• Mandatory retirement
• Fertility and family size
• Investment in education
• Non-employment income, e.g., inheritance, demogrants, benefits, subsidies

Types of Non-Employment Income

• Inheritance
• Demogrant
• Welfare benefits
• Employment insurance
• Subsidized daycare

Individual Labor Supply Curve

• A graph showing the relationship between the wage rate and the number of work hours.
• At low wages, individuals are not willing to work many hours.
• As wages increase, the opportunity cost of not working increases.

Backward-Bending Supply Curve for Labor

• At a certain point, the individual might choose to purchase more leisure.
• The slope of the supply curve becomes negative at this point.
• The substitution effect dominates at low wage rates but the income effect takes over at high wage rates .

What is the Price of Leisure?

• "Price of leisure" is the wage rate for the time not worked (the opportunity cost).

Wage Rate Elasticity of Labour Supply

• The coefficient describes the percentage change in labor supply in response to a percentage change in the wage rate.

Impact of Tax on the Decision to Work

• Marginal tax rates affect work decisions.
• Higher marginal tax rates often result in a disincentive to work more hours.

Market Supply Curve for Labor

• Sum of individual labor supply curves for a particular occupation.
• Generally an upward-sloping curve.

Changes in Supply

• Increased supply of labor due to: more trained workers, reduced barriers to entry, and increased immigration.

Changes in the Quantity Supplied of Labor

• Movements along the supply curve represent changes in the quantity supplied, not the supply itself.
• Changes in wages cause movements along the supply curve.

The Impact of Migration on the Labor Supply Curve

• Immigration increases labor supply.
• Emigration decreases labor supply; can cause a "brain drain".

Economic Rent

• Wage received above the reservation wage.

Chapter 9: Labour Market Decisions of Firms (Micro) Demand for Labour

• Focuses on labor demand from the firm's perspective.
• Important terms : derived demand, law of diminishing returns, short-run and long-run distinction, marginal productivity of labor, marginal revenue product, scale effect, substitution effect ,quasi-fixed labour costs.
• Explains how the demand curve for a specific occupation shifts.
• Discusses factors that influence wage elasticity of demand and productivity in Canada.
• Explores types of quasi-fixed labor costs and their influence on hiring decisions.
• Demand for labour is derived
• Demand is influenced by productivity (education and experience).
• Demand is a function of the market price perception of the service

Demand Curve for Labour

• Short-run: at least one factor cannot change

• Law of Diminishing returns (LDR): a point is reached in the short run where there is less contribution to total output

• Marginal Product of Labor (MPL): the contribution of the next worker to total output

The Decision to Hire

-Compare MRP(Extra revenue) to MC(extra costs)

• Hire if MRP is greater than the wage rate.

Shifts in the Demand Curve

• Scale effect: change in number of employees hired because of changes in the amount of product sold -Increased productivity increases the demand for labour. Demand for labour can increase because of an increase in demand for final goods and services. Price of substitute goods. Price of complementary goods.

The Market Demand for Labour

• overall demand can change because of changes in demand for goods and services and changes in the prices of substitute and complementary goods

Using Wage Elasticity of Labour Demand

Wage Elasticity of Labour Demand

• Inelastic: percentage change in quantity demanded by firms is less than the percentage change in wages
• Elastic: percentage change in quantity demanded by firms is greater than the percentage change in wages

Wage Elasticity of Labour Demand

• Depends on: percentage of labor costs in total costs, number of substitutes for labor, price elasticity of product/service

Cross Elasticity of Demand

• Changes in wages in one occupation can affect demand in another.
• Substitution vs Complementary effect.
• Coefficient defined as percentage change in quantity demanded for occupation A ÷ percentage change in wage rate for occupation B

Labour Productivity

• Output per worker.
• Productivity increase with more effective workers.

Productivity Growth - Macro Influences

• Structure of the economy (manufacturing vs. services).
• Economic conditions (recession vs. expansion).
• Government policies (fiscal policy).

Productivity Growth - Micro Influences

• Scale of business operations (large firms).
• Management techniques affect staff motivation, use of better tools and equipment.

Productivity Growth - Micro/Macro

• Combination of micro and macro factors.
• Quality and quantity of capital influence employee productivity.
• Labor force characteristics (age, health, education, skill training) impact productivity.

Quasi-Fixed Labour Costs

• Costs of hiring employees not related to work hours.
• Examples include hiring costs, training costs, and opportunity costs (lost production).

This quiz covers Chapter 8 on the labour market decisions of households, focusing on the supply of labor. Key concepts such as human capital, wage elasticity, and factors influencing labor force participation are explored. It also examines market supply curves and the effects of non-employment income on work incentives.