1 Topics in Labor Supply 南華大學 管理經濟學系 黃瓊玉 2011 年 10 月 23 日

2 Outline Labor supply over the life cycle Labor supply over the business cycle Husband-wife joint-decisions to supply labor Fertility

The Life Cycle Path of Wages and Hours for a Typical Worker Age Wage Rate 50 Age Hours of work 50

Labor Force Participation Rates over the Life Cycle in 2005

Hours of Work over the Life Cycle, 2005

Theoretical issues of evolutionary wages A person will work more hours when wages are higher (i.e., the substitution effect tends to dominate) The profile of hours of work over the life cycle will have the same shape as the age-earnings profile Intertemporal substitution hypothesis: people substitute their time over the life cycle to take advantages of changes in the price of leisure

Intertemporal Substitution Hypothesis There should be a positive relationship between changes in hours of work and changes in the wage rate As a worker ages, increases in the wage rate should increase hours of work

Labor supply over the business cycle Added-worker effect So-called “secondary” workers currently out of the labor market are affected by a recession because the main breadwinner becomes unemployed or faces a wage cut This implies the labor force participation rate of secondary workers has a counter-cyclical trend

Labor supply over the business cycle Discouraged worker effect Unemployed workers find it almost impossible to find jobs during a recession, so they give up searching Implies that labor force participation is pro- cyclical The discouraged worker effect dominates the correlation between labor force participation and the business cycle

Household Production Leisure includes many forms of nonmarket work, including work around the home Why do some household members specialize in the market sector and other members specialize in the household sector?

Household Production Function Consider Jack and Jill, a married couple Their household opportunity set is greater than when Jack and Jill were not married (since each can specialize in the sector where they are relatively more productive)

Jack and Jill – unmarried opportunity sets Household Goods ($) Household Goods ($) Market Goods ($) Market Goods ($)

Budget Lines and Opportunity Frontier of Married Couple G 350 F 200 Jack’s Jill’s E E Household Goods ($) 150 At point E, Jack and Jill allocate all their time to the household sector. If they wish to buy market goods, Jack gets a job because he is relatively more productive in the labor market, generating segment FE of the opportunity frontier. After he uses up all his time in the labor market, Jill then gets a job, generating segment GF of the frontier.

Who Works Where? Market Goods ($) Market Goods ($) Household Goods ($) Household Goods ($) Market Goods ($) Household Goods ($) P U U P U P

15 Increases in the Wage Rate or Household Productivity Lead to Specialization Household Goods ($) Market Goods ($) P U U P An increase in Jack’s wage moves the household from point P to point P and Jack specializes in the labor market

16 Increases in the Wage Rate or Household Productivity Lead to Specialization Household Goods ($) Market Goods ($) U P P U An increase in Jill’s marginal product in the household sector moves the household from point P to point P and Jill specializes in the household sector.

17 Fertility Malthus Theory of Fertility: as incomes rise, families want more children (focus on income effect) An increase in the price of a person ’ s time will increase the opportunity cost of rearing children when this person exits the market sector

18 The Fertility Decision Goods I/pXI/pX Number of Children P Indifference Curve 3I/pNI/pN The household’s utility depends on the number of children and on the consumption of goods. A utility-maximizing household chooses point P and has three children.

19 The Impact of Income and Prices on the Household’s Fertility U0U0 U0U0 U1U1 U1U1 P P R 43 Number of Children Goods D R Number of Children Q I/P X (a) Increase in Income(b) Increase in the price of children