Chapter 4. The Labor Mkt & LFP Labor market supply and demand elasticity LFP trends Using labor mkt. to explain LFP trends Labor market supply and demand elasticity LFP trends Using labor mkt. to explain LFP trends

I. Labor market labor supply decisions by individuals, HH labor demand decisions by firms labor supply decisions by individuals, HH labor demand decisions by firms

Labor Supply relationship between wages and hours worked 16 hours : market work (H) nonmarket work or leisure (L) relationship between wages and hours worked 16 hours : market work (H) nonmarket work or leisure (L)

assumeassume work is a disutility don’t like it, BUT do it for $ to buy stuff consumption & leisure are good like to buy stuff like to enjoy stuff work is a disutility don’t like it, BUT do it for $ to buy stuff consumption & leisure are good like to buy stuff like to enjoy stuff

tradeofftradeoff more hours worked, more $ to buy stuff, but less time for leisure more hours worked, more $ to buy stuff, but less time for leisure

C = consumptionH = hours workedL = hours for leisure H = 16 - LI = nonearned income C = (w)(H) + I w = wage C = (w)(16 - L) + I tradeoff between consumption & leisure

L C C = (w)(16 - L) + I I 16 16w + I

changes in the wage (w) how does it affect the choice between C and L? income effect higher wages increase income do more of what you like increase C and L decrease H how does it affect the choice between C and L? income effect higher wages increase income do more of what you like increase C and L decrease H

substitution effect higher wages make L more expensive L now relatively more expensive than C increase in C, decrease in L increase in H substitution effect higher wages make L more expensive L now relatively more expensive than C increase in C, decrease in L increase in H

total effect of increase in w C increases, total effect on H unclear if substitution effect >income effect H increases C increases, total effect on H unclear if substitution effect >income effect H increases

labor supply H w S labor

change in labor supply if nonearned income changes (I) changing preferences for C, L nonearned income changes (I) changing preferences for C, L

Labor Demand derived demand depends on the demand for the product produced derived demand depends on the demand for the product produced

how much to hire? cost of additional labor (wage) vs. value of additional labor cost = or < value cost of additional labor (wage) vs. value of additional labor cost = or < value

what is value of labor? increase in output from hiring additional unit of labor marginal product of labor MPL value of increase in output = price x MPL = MRP increase in output from hiring additional unit of labor marginal product of labor MPL value of increase in output = price x MPL = MRP

exampleexample Kinkos 1 copier copies cost 8 cents each Kinkos 1 copier copies cost 8 cents each

MPLMPL declines as worker/hr increases why? only 1 copier so adding workers only works for awhile law of diminishing returns declines as worker/hr increases why? only 1 copier so adding workers only works for awhile law of diminishing returns

Kinkos & hiring hire 1st worker? $8 > $5 YES hire 2nd worker? $5.60 > $5 YES hire 3rd worker? $2.40 < $5 NO hire 1st worker? $8 > $5 YES hire 2nd worker? $5.60 > $5 YES hire 3rd worker? $2.40 < $5 NO

if wage = $7 hire only 1 worker if wage = $2 hire 3 workers if wage = $7 hire only 1 worker if wage = $2 hire 3 workers

labor demand H w3 $2 2 $5 1 $7 D labor

labor demand will increase if kinkos gets more copiers (more capital) workers become more skilled increase MPL & MRP price of copies rise increase MRP kinkos gets more copiers (more capital) workers become more skilled increase MPL & MRP price of copies rise increase MRP

Elasticity of Labor Supply how sensitive is H to changes in w? 10% change in w if H changes by > 10% labor supply is elastic wrt wages if H changes by < 10% labor supply is inelastic wrt wages how sensitive is H to changes in w? 10% change in w if H changes by > 10% labor supply is elastic wrt wages if H changes by < 10% labor supply is inelastic wrt wages

H w S elastic w1 H1 w2 H2

H w S inelastic w1 H1 w2 H2

how sensitive is H to changes in I ? increases in nonearned income will decrease H (only an income effect) how sensitive is H to changes in I ? increases in nonearned income will decrease H (only an income effect)

II. Trends in LFP (revisited) recall that male LFP is declining female LFP is rising recall that male LFP is declining female LFP is rising

Men Women

So we must explain rising female LFP, falling male LFP biggest increases for married women women w/ children biggest decreases for older men less educated men rising female LFP, falling male LFP biggest increases for married women women w/ children biggest decreases for older men less educated men

III. Using the Labor Mkt. use labor supply & labor demand explain changes in LFP market for male labor market for female labor use labor supply & labor demand explain changes in LFP market for male labor market for female labor

male labor market if male LFP has fallen then: either labor demand has fallen OR labor supply has fallen OR both if male LFP has fallen then: either labor demand has fallen OR labor supply has fallen OR both

H w S D H* D’

H w S D H* S’

female labor market if female LFP has risen then: labor demand has risen OR labor supply has risen OR both if female LFP has risen then: labor demand has risen OR labor supply has risen OR both

H w S D H* D’

H w S D H* S’

male LFP what caused demand to fall?  decline in demand for labor in manufacturing, mining, timber sectors  most workers in these sectors are men  most workers in these sectors do not have college education (high school or less) what caused demand to fall?  decline in demand for labor in manufacturing, mining, timber sectors  most workers in these sectors are men  most workers in these sectors do not have college education (high school or less)

 substitution of female labor for male labor  not likely:  occupation segregation suggest that female labor will not substitute for male labor very well  labor demand for men is much less elastic than female labor demand  substitution of female labor for male labor  not likely:  occupation segregation suggest that female labor will not substitute for male labor very well  labor demand for men is much less elastic than female labor demand

what caused labor supply to fall? rising real wages rising pension, disability benefits both mean early departure from labor force rising real wages rising pension, disability benefits both mean early departure from labor force

Female LFP what caused labor demand to rise? a general rise in labor demand economic growth increases in MPL a rise in labor demand in clerical, service sector what caused labor demand to rise? a general rise in labor demand economic growth increases in MPL a rise in labor demand in clerical, service sector

rise in female education level increase MPL why? skilled labor more in demand socially acceptable families have resources to educate sons and daughters rise in female education level increase MPL why? skilled labor more in demand socially acceptable families have resources to educate sons and daughters

why did labor supply rise? nonmarket production: increase in availability of substitutes & in efficiency ex: childcare, convenience food, microwaves less time IS spent on nonmarket work nonmarket production: increase in availability of substitutes & in efficiency ex: childcare, convenience food, microwaves less time IS spent on nonmarket work

family/demographic changes fewer children later age of marriage higher divorce rate family/demographic changes fewer children later age of marriage higher divorce rate

falling male wages slow real wage growth for men in 1970s, 80s increase labor supply of married women falling male wages slow real wage growth for men in 1970s, 80s increase labor supply of married women

Which are most important? female LFP pre 1970: demand-side reasons since: divorce, male wages male LFP early retirement (supply) female LFP pre 1970: demand-side reasons since: divorce, male wages male LFP early retirement (supply)

Does our model tell the whole story? economic model may leave some things out social attitudes dividing time between just market and nonmarket work economic model may leave some things out social attitudes dividing time between just market and nonmarket work

ElasticityElasticity labor demand is inelastic w.r.t. wages firms do not have large hiring response to changing wages true for men and women labor demand is inelastic w.r.t. wages firms do not have large hiring response to changing wages true for men and women

labor supply elasticity women’s labor supply MORE elastic than men’s (wages) women more likely to leave labor force if wages too low women more likely to enter labor force if wages attractive women’s labor supply MORE elastic than men’s (wages) women more likely to leave labor force if wages too low women more likely to enter labor force if wages attractive

women’s labor supply inelastic with respect to childcare costs cost is not as important as quality? women’s labor supply inelastic with respect to childcare costs cost is not as important as quality?