Labor Supply Lecture 1 PDF

Labor Supply 1 / 83 In this lecture, we will: ▶ See how people make choices between consumption and leisure ▶ Understand how the labor supply curve results from the combination of substitution effects and income effects ▶ Learn what the wage elasticities of labor supply a...

Labor Supply 1 / 83 In this lecture, we will: ▶ See how people make choices between consumption and leisure ▶ Understand how the labor supply curve results from the combination of substitution effects and income effects ▶ Learn what the wage elasticities of labor supply are ▶ Learn the principles guiding the econometrics of labor supply and the main empirical results ▶ Provide an overview of the results of macro- and micro-empirical studies on labor supply elasticities 2 / 83 Table of contents Introduction Facts about labor supply A first look at empirical empirical evidence The neoclassical theory of labor supply Basic model - The choice between consumption and leisure Empirical aspects of labor supply Estimation of structural parameters of labor supply mo dels Main results in the literature Summary and conclusion 3 / 83 The labour market is a market like any other workers supply labour services firms demand labour services the wage is the price of labour equilibrium quantities are employment and unemployment …but it is also a different market because labour is special It is invariably much more heavily regulated than any other market:  unions  employment protection regulations  unemployment insurance  taxes  minimum wages The labour market is integrated with all other markets Firms produce using capital and labour Firms buy labour on the labour market and rent capital on the capital market Firms sell their products (goods or services) on the product market Our focus will be on the functioning of the labour market But we will also study how the functioning of capital and product markets affects the labour market The Alaskan Labor Market: Theory Earnings ($) S0 w1 w0 D1 D0 Employment E0 E1 Introduction (1) ▶ Understanding the drivers of labour supply is essential for policy makers and government revenue (e.g. setting tax and benefit levels) ▶ Labor is the main factor of production representing 2/3 of value added ▶ People are free to decide if and how much they are willing to work 9 / 83 Introduction (2) ▶ Actually over the last century we have observed a significant increase in the labor force in the United States and Europe ▶ As an individual disposes a limited amount of time, (s)he has to choose to allocate between paid work and leisure ▶ Wage constitutes an important factor in the choice, and so tax and benefit systems as well ▶ Labor supply depends on trade-offs within family because it is the counterpart of the “household production” 10 / Labour Market Status (ILO definition) NO INACTIVE INACTIVE (discouraged) Available to start work this week? NO YES Looked for work in YES UNEMPLOYED the reference week?  Procedure for identifying the broad usual principal activity status of individual priority cum major time criterion Labour Force Participation Rate, Worker Population Ratio and Unemployment Rate (UPSS, aged 15+) (Rural and Urban Combined), 1983–2024 https://www.epw.in/journal/2024/50/review-labour-and- employment/indias-growth-and-employment-patterns.html Labour Force Participation Rate (UPSS, Aged 15+), by Gender 1983–2024 https://www.epw.in/journal/2024/50/review-labour-and- employment/indias-growth-and-employment-patterns.html  Status of Employment (UPSS, Aged 15+), 2000–24 https://www.epw.in/journal/2024/50/review-labour-and- employment/indias-growth-and-employment-patterns.html The theory of labour supply Theory of labour supply 24 hours in a day Time endowment = 16 hours? (we must sleep!) How do we allocate this time between leisure labour at home (we ignore it for now) in the market The theory of labour supply Time endowment = leisure (L) + labour supply (H) Labour supply = time endowment - leisure Labour supply = demand of leisure We will treat leisure just like a normal good and we will apply standard consumption theory: preferences price of consumption good (wage, opportunity cost) wealth (financial and real wealth) The choice between labour and leisure Two goods: 1. leisure 2. consumption goods Budget constraint consumption goods are bought with the revenues obtained from selling leisure  the more you work the more you can consume but the less leisure you can enjoy  Preferences over consumption and leisure Individuals have preferences over consumption and leisure Preferences are described by “maps” of indifference curves: combinations of leisure and consumption associated to the same level of utility (indifferent) Indifference curves of an individual Properties of the indifference curves 4 properties: curves closer to the origin are associated with lower levels of utility (B>A) the are negatively sloped they are convex (scarce goods are valued more) they are parallel (never cross) Convexity of indifference curves (Y4-Y3)=(Y2-Y1) but (H4-H3)