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Midterm Review_AAP-09_B&W

to clarify possible confusion when wages rise

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Unformatted text preview: herefore, the labor supply curve of an individual worker is Therefore, assumed to be upward sloping 25 Individual Labor Supply (cnt.) cnt.) To clarify possible confusion: • When wages rise permanently, permanently The income and substitution effects are still there The income substitution But in this case, the income effect is for now and the But and future So we think of it as a wealth effect So wealth effect It is the present value of all future income increases It It is represented as a shift in the labor supply curve It shift • Empirically higher permanent income results in lower labor supply 26 Aggregate Labor Supply • The aggregate labor supply curve is also aggregate upward sloping (by the earlier assumption) • When w ↑, currently working people work more, and people not in the labor force are enticed to work Recent estimates suggest that the overall wage Recent elasticity of labor supply is high ~ 3.0 27 Labor Market Equilibrium • Classical (full employment) labor market equilibrium is at the intersection of the labor supply and demand curves Labor Demand = Labor Supply Labor...
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