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19 income eects on labour supply a higher wp means

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Unformatted text preview: f consump-on. •  The model works best to fit the data when the underlying shocks to A are long las-ng but less than fully permanent. 17 VariaEons in Labour Input •  We now allow for a variable supply of labour, Ls –  Two reasons: First, to explain short ­term varia-ons in labor input L. Second, changes in real GDP will reflect varia-ons in L as well as the direct effects from changes in technology level. –  More labour supplied means less leisure -me for the family. –  Assume that households also like more leisure -me. –  As with consump-on and saving, the choice of Ls involves subs-tu-on and income effects. 18 •  The subs-tu-on effect for leisure and consump-on (within the same -me period) –  Consider the household budget constraint: –  If the household chooses to work one more hour and thereby has one less hour of leisure, the extra w/P of real wage income pays for w/P more units of consump-on. –  Therefore, the household can subs-tute one less hour of leisure for w/P more units of consump-on. –  If w/P rises, the household gets a beNer deal by working more because it gets more consump-on for each extra hour worked. –  Since the deal is beNer, we predict that the household responds to a higher w/P by working more. –  A higher w/P raises the quan-ty of labour supplied, Ls. –  Higher real wage makes leisure -me more expensive compared to work (or consump-on) – i.e., subs-tute away from the object that got more expensive. A higher real wage rate raises the quan-ty of labor su...
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