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Unformatted text preview: Lecture 5 Endogenizing Labor ECN/APEC 7240 V  2 Endogenizing Labor Thus far we have always assumed that households supply labor inelastically. One unit of time corresponds to a fortyhour work week. We endogenize the labor choice by assuming leisure is also a good that households value. The household has one unit of time to allocate between labor and leisure. One unit of time now corresponds to a 24hour day. ECN/APEC 7240 V  3 Household Problem The household maximizes subject to  = ) 1 , ( t t t t N C u E t t t t t t K R N W K C + = + + 1 t t t t K N A K F ) 1 ( ) , (  + = t C 1 t N ECN/APEC 7240 V  4 Leisure Bound In general, the constraint that labor be nonnegative can be problematic. There can be corner solutions. In a lifecycle model, endogenous retirement is possible, as is delayed entry to the work force. In this representative agent model, there is no output if N t = 0. In equilibrium, we can ignore corner solutions. ECN/APEC 7240 V  5 The Bellman Equation We can formulate the households problem recursively. The Bellman equation is subject to ]  ) ' ), , ( ' , ' ( [ ) 1 , ( max ) , , ( , ' , A A A K K K V E N C u A K K V a a N K C a + = K A K R N A K W K C a a ) , ( ) , ( ' + = + C 1 N ECN/APEC 7240 V  6 FirstOrder Conditions Euler equation: Optimal laborleisure tradeoff: ]  ) ' 1 , ' ( ) ' ), , ( ' ( [ ) 1 , ( A N C u A A K K R E N C u C a a C = ) , ( ) 1 , ( ) 1 , ( A K W N C u N C u a C L = ECN/APEC 7240 V  7 Balanced Growth Path We need extrinsic variables to grow at the same rate g . Intrinsic variables remain constant. N is also intrinsic....
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 Spring '10
 Kutler
 Microeconomics

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