Nonparticipation and other examples in the labor market

Starting at point A, if the person thinks of “buying” Nonparticipation - not in the labor market income The flat budget line implies the amount of inc. given up for one more unit of leisure is low. Note: 1)nonlabor income is available 2) Wage is relativiely low I1 I2 I3 I4 A hours 24 Starting at point A, if the person thinks of “buying” another unit or leisure, the amount they are willing to pay is higher than what they have to pay. So they buy another unit. This moves the person down to a point of all leisure.

Starting at a the person has utility I1 Starting at a the person has utility I1. They would give up ac to get one more unit of leisure and be as happy. But they only have to give up ab. The individual takes another unit of leisure and is happier for it Nonparticipation - not in the labor market income I1 I2 I3 I4 a b c A hours 24 Analogy time: say you are truly willing to give up $10 for something. But you only have to give up, say $5. You do it and are happier.

So, for the person on the previous slide, the wage in the market is so low that the individual is willing to give up income and take leisure up to the point that they do not work at all.

The wage implied by this budget is tangent to the Reservation wage The wage implied by this budget is tangent to the indiff. curve at the 24 leisure point. This is the highest wage at which the individual chooses not to work. A wage just a wee bit higher would be the lowest wage at which the individual would work. You could say the reservation wage is the value of leisure because if the wage is higher, then leisure will be given up.

Let’s consider a retirement plan that pays individual a certain amount - provided they do not work any hours. Their budget is the horizontal line at a. At various wage rates we see how much leisure the individual would have with the same income as in retirement. a If the indiff. curves are relatively steep, as in graph, people retire. They are willing to give up much income in exchange for more leisure. If indiff. curves are relatively flat, (workaholics, remember)people may work, even at lower total pay compared to retirement income.

Standard workday - 8 hour shift and underemplolyent income Say a company will only let employees work 8 hour days. Point a has 16 hours of leisure and thus 8 hours of work. The person involved would like less leisure, but can not get to point b because of the employer restriction. This implies the worker is underemployed. b a leisure

Point a has 16 hours of leisure, the amount an employer may Standard workday - 8 hour shift and uoveremploymentt Point a has 16 hours of leisure, the amount an employer may require. The person involved would like more leisure. This implies the worker is overemployed. a b

Premium pay versus straight pay You may be familiar with the concept of getting paid time and a half if you work overtime. This is called premium pay. This changes the budget line to have a kink like below:

Premium pay versus straight pay Once the person decides how much they want to work given the overtime pay, we can think of another pay scheme that gives them one wage for all hours, but they could have same pay as with the overtime scheme. At point a the individual has a certain income level and this could occur from either budget line. a

Under the overtime payment plan the person wants to work Premium pay versus straight pay Under the overtime payment plan the person wants to work amount implied by point a. If a standard one rate is paid, the person could work the same hours and receive the same pay, but they find it better to work less. The employer would have to a b offer a really high wage and thus income to get the worker to work as much as under the overtime pay scheme.