note8_n1 - Econ303 Household Decision on Consumption and...

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Econ303 Household Decision on Consumption and Leisure 1 Facts on labor supply in the US 1. The average hourly wage (real) in general increased from 1900 on. Hours per person stays more or less constant. Using the aggregate data, the average hourly wage is computed by the following: Average hourly wage = Total labor compensation Total hours where Total labor compensation = labor share × GDP Total hours = population × hours per person We know that in the US after the World War II, (a) GDP grows at a rate much higher than the population growth rate; (b) the labor share has been constant more or less; (c) hours per person does not change much. These facts imply that the average hourly wage must have gone up during this period. 2. The constant hours per person is the result of two offsetting forces: decreasing hours per worker and increasing proportion of population that goes to work. The way we actually compute the total hours is by the following Total hours = Employment × Hours per worker This implies that Hours per person = Employment Population × Hours per worker Even though hours per person has not changed much after the World War II, both hours per worker and employment population ratio changed quite a bit. From 1900 on, we observe a decline in hours per worker. The total number of hours worked in a week for average US workers was 54.3 at the turn of the 20th century. At the beginning of the great depression, it was 48. After the World War II, 38.8. At the beginning of the technology slowdown, right after the oil crisis, it further reduced to 38. In 1993, the average weekly hours is 37.2. The decrease of weekly hours during the first half of the twenties century is more dramatic than the second half. At the same time, the employment population ratio increased slightly after the World War II. This increase of the labor force participation of the total population is primarily driven by the large increase of the percentage of women, especially married women,
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Econ303 Household Decision on Consumption and Leisure 2 joined the labor force. The male labor force participation actually decreased during this period, mainly because the elderly men are dropping out of the labor force and also because people spend more years on schooling. The employment population ratio in 1948 was 56.6%, 83.5% for male and 31.3% for female. In 1993, the numbers was 64.5%, 71.8% and 57.7% respectively. 3. The micro data shows a positive relationship between hours worked and hourly wages. Workers with higher hourly wage put in more hours. The exception is at the high end of the wage distribution. As wage becomes very high, people actually cut back their working hours. So we have a slightly backward bending empirical labor supply curve. To explain these facts we need a model that tells us how households determine to go to work or not and if they do, how many hours they would like to work. In this section, we focus on a typical household’s choice between consumption and leisure. In our simple model, all the other aspects of household decision are ignored. In particular, we abstract away from various
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