SummaryCh02 - S u m m ar y Individual attachment to the...

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Summary • Individual attachment to the labour market is meas- ured in two ways: first, whether an individual is working, or searching for work (the participation dimension);and second,how many hours he or she works (the hours dimension). • The microeconomic model of consumer choice can accommodate both dimensions of the labour supply decision. Consumers choose their preferred combination of income (consumption) and leisure (nonmarket time), as represented by their opportu- nity set, or budget constraint. If this optimum occurs at zero hours of work, the individual does not participate. If optimal hours are positive, the individual participates, and the marginal rate of substitution between leisure and consumption equals the wage rate. • The reservation wage is the critical wage to the participation decision: for wage rates above the reservation wage, the consumer will choose to work; for wages below, the consumer will not par- ticipate.The reservation wage is given by the mar- ginal rate of substitution between leisure and con-
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