Lecture 3 Labor Supply PDF

Lecture 3 Labor Supply PDF - Labor Supply Econ 339 Labor...

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Labor Supply Econ 339 Labor Economics
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Labor Supply: Definition Individual Labor Supply = relationship between the real wage and supply of labor of an individual Aggregate Labor Supply = relationship between the real wage and the economy-wide supply of labor
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Labor Supply: Motivation There are two decisions an individual makes concerning her supply of labor Participation Decision => Does the individual work or not? Hours Decision => Given that the individual works, how many hours does he supply? Note: All decisions are based on economic incentives
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Labor Supply: Motivation If we can model the labor supply decision of an individual we can model the effect of Changes in taxes Changes in welfare programs on labor supply
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The Neo-Classical Labor Supply Model This model is very similar to the model used to derive the optimal consumption bundle in Intermediate Micro In the Labor Supply Model the trade-off is between labor (market goods) and leisure It uses preferences and a budget constraint to derive the optimal amount of hours worked Let’s look at some preferences. .
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Individual preferences Individual B is only willing to give relatively few units of consumption for a unit of leisure Low Marginal Rate of Substitution of Goods for Leisure Indifference curves are flat => Individual prefers work
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Individual preferences Individual A is willing to give up a lot of units of consumption for a unit of leisure High Marginal Rate of Substitution of Goods for Leisure Indifference curves are steep => Individual prefers leisure
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Individual prefers leisure Consumption in $ Hours of Leisure L 1 L 2 C 1 C(U B ) 2 C(U A ) 2 U B U A Individual with the steep indifference curve is willing to give up more consumption per unit of leisure => The individual prefers leisure
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The Budget Constraint C = Consumption of goods w= wage h= hours worked V=non-labor income T=hours per week available for working or leisure T-L=hours of work Cw h V = ⋅+ Labor Income Non-Labor Income
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The Budget Constraint O () Intercept Slope Cw h V T L V T V w L =⋅ + + +− ±²²²²³
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Budget Constraint Consumption in $ Hours of Leisure 110 Budget Constraint without Non-Labor Income Budget Constraint with Non- Labor Income V Vw T +⋅ wT Cw T L = ⋅+
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The Hours of Work Decision The individual chooses the indifference curve that lies furthest from the origin Utility Maximizing Hours of Work where indifference curve and budget constraint are tangent Yawn!
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The Optimal Decision Point B is unattainable Point C is attainable but MRS > absolute value of the slope of budget constraint individual is willing to give up more for an extra hour of leisure than the market offers individual is better off working less $ Leisure 110 B C D
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The Optimal Decision Point D is attainable but MRS < absolute value of the slope of budget constraint individual is willing to give up less for an extra hour of leisure than the market offers individual is better off working more $ Leisure 110 C D
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Lecture 3 Labor Supply PDF - Labor Supply Econ 339 Labor...

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