Chapter 4-1 Labour Supply: the Life-cycle Model and the Leisure- Choice Model with Home Production Chapter Four Modified from the slides created by: Erica Morrill

Chapter 4-2 Chapter Focus  Labour supply patterns  Labour supply over the lifetime  Fertility and women’s labour supply decisions  Retirement  Leisure-Choice with Home Production

Chapter 4-3 Figure 4.1 Labour Force Participation Profiles  Men  participation increases in twenties  peak at  declining at retirement age  participation of older men has declined since 1971

Chapter 4-4 Figure 4.1 Labour Force Participation Rates  Women  data more complicated to interpret  society/economic factors influence women’s participation rates  generally shaped like men’s participation  slower entry into labour market  has been rising since 1971(as seen in the diagram)

Chapter 4-5 Life Cycle Models A model based on the assumption that individuals plan out their lifetime supply of labour given their expected economic environment (specifically wages and other income)

Chapter Period Life Cycle Model  Basic Assumptions:  preferences over consumption and leisure today and in the future (C1,C2,L1, L2)  maximize utility function, U(C1,L1)+V(C2,L2)  optimize consumption an leisure in each period of time given expected lifetime budget constraint: P1C1+P2C2=w1(T- L1)+w2(T-L2). [note: discount rate=0]

Chapter 4-7 Optimal Conditions:  U_{L1} / U_{C1}=w1  V_{L2}/ V_{C2}=w2  U_{C1}/ V_{C2}=P1/P2=1 (assuming that P1=P2=1.  U_{L1}/V_{L2}=w1/w2  In sum, (1) MU for C are equal across periods, (2) MU for L between periods is equal to the relative wage ratio, and (3) MRS between C and L in each period is equal to wage rates.

Chapter 4-8 The 2-Period Life Cycle Model  Substitution and income effects as wages change  Implication: If w2<w1 (which is often the case), then L1<L2. He/She works longer hours with savings carried over to period 2.

Chapter 4-9 Leisure-Choice Model with Home Production  Housework should be viewed as work, not leisure  The model can be used to understand woman’s labor market participation rates.  Three activities: Leisure, Hours at Work, and Hours performing home production

Chapter 4-10 Model Specifications  Maximize U(X,L)  Constraints: (1) C_m=wN+v; (2) T=L+H+N; (3) X=C_h+C_m; C_h=f(H).  Where X=total consumption; L=leisure; T=total time available; C_h=home goods; C_m=market goods; H=hours performing home production; N=hours performing market production ; f=home production function

Chapter 4-11 Figure 4.4 Solution YMYM T L 0 Y A B YBYB Budget Line: TAB Y M Solution: B leisure: 0a Hours at work: ab Work at home: bT ab

Chapter 4-12 Implication: Labour Supply, Fertility and Childbearing  Important in understanding women’s labour supply in their time allocations  Variables affecting women’s labour supply (or fertility decision): wage increase and technical advancement

Chapter 4-13 Retirement  Theoretical Determinants of Retirement  mandatory age (65)  wealth and earnings  health and the nature of work and the family  pension plans

Chapter 4-14 Pension Plans  Employer-sponsored Pension Plan  Canada/Quebec Pension Plan (CPP or QPP)  Old Age Pension

Chapter 4-15 Figure 4.3 a No Retirement Test (Canada) YMYM YBYB EPEP EOEO B T (retirement)

Chapter 4-16 Figure 4.3 b Full Retirement Test YMYM YBYB B T (retirement) 0 Y

Chapter 4-17 Figure 4.3 c Partial Retirement Test (USA) YMYM YBYB B T (retirement) 0 Y C D C d YBYB YBYB

Chapter 4-18 Effects of Pension Plans  Influences retirement decision  Encourages early retirement  Discourages postponed retirement

Chapter 4-19 End of Chapter Four