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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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