H_07_05_ Labor markets

H_07_05_ Labor markets - HEALTH ECONOMICS Handout 7 The...

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Unformatted text preview: HEALTH ECONOMICS Handout 7 The Labor Markets in Health Care Physician labor is an input to the production of health. In many cases, physicians are also entrepreneurs, directors of a “firm” that produces health care. Physicians Hours of work. Labor supply differs from normal factor supply in that labor is supplied by individuals as opposed to firms. In this instance we are treating the physician as the input, but notice that in the case of physicians, the individual is in many cases also the “firm”. Derivation of the labor supply curve is done using the following simple “trick”. There are 24 hours in the day. Time not spent working is leisure time. Physicians “pay” for leisure by not working and forgoing income. Hence leisure can be thought of as a consumption good and we can figure out demand for leisure much as we figured out our demand for Twinkies. The opposite of the demand for leisure is the supply of labor. For example, if we want to consume 14 hours of leisure a day if the wage is $60 an hour, then we are willing to supply 10 hours of labor if the wage is $60 an hour. Simply put, we can convert any demand curve for leisure into a supply curve for labor because at any wage, the supply of labor is 24 minus the demand for leisure. THE DEMAND FOR LEISURE In driving the demand for leisure, the budget constraint looks somewhat different than you are used to because it always crosses the hours axis at 24 hours (if you consume all leisure the most you can have is 24 hours). The budget constraint hits the other axis (AOG) at 24*wage/price of other goods: (24*wage) is income. See graph 2. The wage/p is the real wage. O th e r G o o d s 2 4 W P 1 2 2 4 L e is u r e H o u r s A change in the wage rotates the budget constraint. Graph 3 illustrates the substitution effect associated with an increase in the wage (holding the price of other goods constant). O th e r G o o d s L e is u r e H o u rs A B Note there is a substitution effect and an income effect. The total effect is the sum of the two. Note that the substitution effect is always such that an increase in the wage would cause a decrease in leisure consumption (i.e. an increase in labor supply). O t h e r G o o d s...
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H_07_05_ Labor markets - HEALTH ECONOMICS Handout 7 The...

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