Chapter 7 - Chapter 7 Additional Topics in Labor Supply:...

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Chapter 7 Additional Topics in Labor Supply: Household Production, The Family and The Life Cycle
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Introduction “Static” model of Chapter 6 is not a complete depiction of how we allocate our time We extend the basic model to consider: The long run Retirement Decisions Household joint-decisions to supply labor
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Labor supply over the life cycle Wage rates change over the worker’s life cycle Wages are low when young Wages rise with time and peak around age 50 Wages decline or remain stable after the age of 50 Change in wage over the life cycle is an “evolutionary” wage change altering the price of leisure
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Theoretical issues of evolutionary wages A person will work more hours when wages are higher (i.e., the substitution effect tends to dominate) The profile of hours of work over the life cycle will have the same shape as the age-earnings profile Intertemporal substitution hypothesis: people substitute their time over the life cycle to take advantages of changes in the price of leisure
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The Life Cycle Path of Wages and Hours for a Typical Worker Age Wage Rate 50 Age Hours of work 50
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Intertemporal Substitution Hypothesis There should be a positive relationship between changes in hours or work and changes in the wage rate As a worker ages, increases in the wage rate should increase hours of work
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Hours of Work over the Life Cycle for Two Workers with Different Wage Paths Age Jack t * t * Joe Wage Rate Hours of Work Joe (if substitution effect dominates) Joe (if income effect dominates) Joe’s wage exceeds Jack’s at every age. Although both Joe and Jack work more hours when the wage is high, Joe works more hours than Jack only if the substitution effect dominates. If the income effect dominates, Joe works fewer hours than Jack.
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Labor Force Participation Rates over the Life Cycle in 2005 30 40 50 60 70 80 90 100 15 25 35 45 55 65 Age Labor force participation rate Male Female
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Hours of Work over the Life Cycle, 2005 500 1,000 1,500 2,000 2,500 15 25 35 45 55 65 Age Annual hours of wo Male Female
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Chapter 7 - Chapter 7 Additional Topics in Labor Supply:...

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