Chapter4-up - Click to edit Master subtitle style IIB The...

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Unformatted text preview: Click to edit Master subtitle style IIB The Labor Market and Labor Force Participation Trends Labor market supply and demand elasticity LFP trends Using labor market to explain LFP trends Learning outcomes for this chapter I. Labor market labor supply decisions by individuals, HH labor demand decisions by firms Labor Supply (decision to work) relationship between wages and hours worked Assume 16 hours/day allotted to : market work (H) nonmarket work or leisure (L) true leisure + nonmarket work + combination of first two Assume work is a disutility dont like it, BUT do it for $ to buy stuff consumption & leisure are good like to buy stuff like to have time to enjoy stuff Tradeoff more hours worked, more $ to buy stuff, but less time for leisure C = consumption H = hours worked L = hours for leisure H = 16 - L I = nonearned income C = (w)(H) + I w = wage C = (w)(16 - L) + I tradeoff between consumption & leisure H + L = 16 We can draw a picture of the choice set L (hours) C ($) C = (w)(16 - L) + I I 16 16w + I The Choice Set (16, I) endowment point Changes in Wage (w) how does a change in the wage affect the labor supply decision? How does it effect the choice between C and L? consider an increase in wages (w) there are two effects to a change in wages income effect substitution effect Income Effect higher wages increase income do more of what you like increase C and L decrease H Substitution Effect higher wages make L more expensive L now relatively more expensive than C increase in C, decrease in L increase in H total effect of increase in w C increases, total effect on H unclear if substitution effect > income effect H increases labor supply H w Slab or w* reservation wage labor supply w H w* w SE>IE SE=IE SE<IE change in labor supply if nonearned income changes (I) changing preferences for C, L changes in population example: increase in # of college graduates # of workers w S D L* S Increase in labor supply: falling wages rising unemployment Labor Demand derived demand depends on the demand for the product being produced by the workers. How much to hire? cost of additional labor (wage) Vs. value of additional labor cost < or = value What is value of labor? increase in output from hiring additional unit of labor marginal product of labor MPL value of increase in output = price x MPL = MRP (marginal revenue product) Example Kinkos 1 copier copies cost 8 cents each Workers/hr output MP L MRP wage $5 1 100 100 $8 $5 2 170 70 $5.60 $5 3 200 30 $2.40 $5 4 210 10 $0.80 $5 MPL declines as worker/hr increases why?...
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This note was uploaded on 04/05/2011 for the course ECON 350 taught by Professor Kilborne during the Spring '10 term at Grand Valley State University.

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Chapter4-up - Click to edit Master subtitle style IIB The...

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