Labor Supply and Elasticity

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Presentation transcript:

Labor Supply and Elasticity

Labor supply for an individual Up to now we have basically said if leisure is a normal good and if the substitution effect is bigger than the income effect of a wage change, then the supply curve for a person will be upward sloping. The intercept here is the reservation wage. Wage Reservation wage Amount of labor Although not shown here, the labor supply for a person could begin to bend backward if as the wage becomes even higher the income effect begins to dominate the substitution effect.

Market supply of labor The market supply of labor is found be simply adding (in a horizontal fashion) the labor supply of each individual. Note at low wages not all will supply labor. As the wage rises more folks are incorporated into the market curve and those already in the market may offer a greater quantity of labor supplied. The market supply curve is also upward sloping from left to right. Even if a segment of the supply has individual backward bending curves, there might be enough other folks with an increasing quantity supplied to overcome the backward bend of some.

Elasticity of labor supply. The notion of elasticity is common in economics and the general idea is we look for a measure that indicates the percentage change in a quantity given a percentage change in a price. For labor supply the price is the wage and the quantity is measured in hours of work. So the elasticity of labor supply is defined as the percentage change in the quantity of labor supplied divided by the percentage change in the wage. As an example say we have initially a wage = $10 per hour and the quantity of labor supplied = 1,900 hours and then the wage is $20 with quantity = 2,090 hours.

Elasticity The percentage change in hours is With a fraction what do we known about the size of the numerator relative to the size of the denominator if the fraction is greater than 1? = to 1? < 1? The percentage change in hours is (Later minus earlier) divided by earlier or (2090 – 1900)/1900 = 190/1900 = .1 or 10% and the percentage change in the wage is (20 – 10)/10 = 10/10 = 1 or 100% Thus the elasticity of labor supply is .1/1 = .1 Note this elasticity is a positive number. It could be negative if we truly had a backward bend to the supply. If you think in terms of absolute value, if the value of elasticity is -More than 0 but less than 1 we said the elasticity is inelastic, -Equal to 1 the elasticity is unit elastic, and -Greater than 1 the elasticity is elastic.