So work less putting the income and substitution eects

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Unformatted text preview: the lottery makes a person wealthier, so a person will both consume more goods and take more leisure; this is a pure income effect ◮ In other words, leisure is a normal good for most people. ◮ So work less. Putting the Income and Substitution Effects Together ◮ In the case of an increase in the real wage, which effect will dominate – the income effect or the substitution effect? This an empirical issue. ◮ In general, as countries become wealthier and their citizen earn higher wages, their citizen supply less labor. ◮ ◮ Backward-bending labor supply curve. But in the short run the substitution effect dominates. As we said, this implies an upward sloping supply curve for labor. The aggregate labor supply curve ◮ The aggregate labor supply curve is the sum of the labor supplied by everyone in the economy. ◮ The aggregate labor supply schedule specifies how many units of labor households would hypothetically wish to provide at any given prevailing current wage, holding all other variables constant. ◮ Aggregate labor supply slopes upward. In general, workers are willing to supply more man-hours at a higher real wage. ◮ A main determinant of labor supply is demographics (working age population, immigration, fertility) ◮ An outward shift in the labor supply curve means that households wish to provide more labor than previously at every hypothetical wage level. The aggregate labor supply curve The labor supply curve shifts out when: ◮ lifetime wealth decreases ◮ increase in the working age population The labor supply curve shifts in when: ◮ lifetime wealth increases ◮ decrease in the working age population Note that one possible source of an increase in lifetime wealth is an increase in a worker’s expected future wages. Labor market equilibrium ignoring unemployment The hours demanded by firms and the hours workers supply reach equality at the intersection of the labor demand and labor supply curve denoted (w , N ). Why? ¯¯ ◮ If w < w firms wish to hire more workers tha...
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This document was uploaded on 01/30/2014.

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