1. Copyright © 2009 Pearson Education, Inc. 6- 1 Topic 3. Chapters 6 & 7 Supply of Labor

2. Copyright © 2009 Pearson Education, Inc. 6- 2 Labor Force Participation Rates (LFPR)  Population (P) = Employment (E) + Unemployment (U) + Out of labor force (O)  LFPR = {(E+U) / P}*100  Unemployment Rate (UR) = {U/(E+U)}*100

3. Copyright © 2009 Pearson Education, Inc. 6- 3 Table 6.1: Labor Force Participation Rates of Females in the United States over 16 Years of Age, by Martial Status, 1900-2005 (percentage)

4. Copyright © 2009 Pearson Education, Inc. 6- 4 Table 6.2: Labor Force Participation Rates for Male in the United States, by Age, 1900-2005 (percentage)

5. Copyright © 2009 Pearson Education, Inc. 6- 5 Table 6.3: Labor Force Participation Rates of Women and Older Men, Selected Countries, 1965-2004 (percentage)

6. Copyright © 2009 Pearson Education, Inc. 6- 6 Figure 6.1: An Individual Labor Supply Curve Can Bend Backward

7. Copyright © 2009 Pearson Education, Inc. 6- 7 Figure 6.2: Two Indifference Curves for the Same Person

8. Copyright © 2009 Pearson Education, Inc. 6- 8 Figure 6.3: An Indifference Curve

9. Copyright © 2009 Pearson Education, Inc. 6- 9 Figure 6.4: Indifference Curves for Two Different People

10. Copyright © 2009 Pearson Education, Inc. 6- 10 Figure 6.5: Indifference Curve and Budget Constraint

11. Copyright © 2009 Pearson Education, Inc. 6- 11 Exercise 1: How to Draw a Budget Constraint (and an optimal choice of labor supply)? 1.You can supply up to 16 hours of labor a day. Your current hourly wage rate is $8 per hour (and no other income). Draw your budget line. 2.Draw an indifference curve showing that your optimal daily labor supply at this wage is 9 hours.

12. Copyright © 2009 Pearson Education, Inc. 6- 12 Figure 6.6: The Decision Not to Work is a “Corner Solution”

13. Copyright © 2009 Pearson Education, Inc. 6- 13 Exercise 2. How to Draw a Budget Constraint with an increase in non-labor income 1.You can supply up to 16 hours of labor a day. Your current hourly wage rate is $8 per hour (and no other income). Your rich aunt gives you $36 every day as an allowance; 2. Draw a budget constraint and an indifference curve showing that your optimal daily labor supply at this wage decreased from 9 hours to 8 hours.

14. Copyright © 2009 Pearson Education, Inc. 6- 14 Figure 6.7: Indifference Curves and Budget Constraint (with an increase in nonlabor income)

15. Copyright © 2009 Pearson Education, Inc. 6- 15 Exercise 3: How to Draw a Budget Constraint with an increase in wage? 1.You can supply up to 16 hours of labor a day. Your current hourly wage rate is $8 per hour (and no other income) and you work 8 hours per day. Your wage increases to $12 per hour. Amend the budget constraint 2. Draw an indifference curve showing that your optimal daily labor supply at the new wage increases from 8 hours to 11 hours.

16. Copyright © 2009 Pearson Education, Inc. 6- 16 Figure 6.8: Wage Increase with Substitution Effect Dominating

17. Copyright © 2009 Pearson Education, Inc. 6- 17 Figure 6.9: Wage Increase with Income Effect Dominating

18. Copyright © 2009 Pearson Education, Inc. 6- 18 Figure 6.10a: Wage Increase with Substitution Effect Dominating: Isolating Income and Substitution Effects

19. Copyright © 2009 Pearson Education, Inc. 6- 19 Figure 6.10b: Wage Increase with Substitution Effect Dominating: Isolating Income and Substitution Effects

20. Copyright © 2009 Pearson Education, Inc. 6- 20 Figure 6.10c: Wage Increase with Substitution Effect Dominating: Isolating Income and Substitution Effects

21. Copyright © 2009 Pearson Education, Inc. 6- 21 Figure 6.12: Reservation Wage with Fixed Time Costs of Working

22. Copyright © 2009 Pearson Education, Inc. 6- 22 Figure 6.13: Budget Constraint with a Spike

23. Copyright © 2009 Pearson Education, Inc. 6- 23 Figure 6.14: Income and Substitution Effects for the Basic Welfare System

24. Copyright © 2009 Pearson Education, Inc. 6- 24 Figure 6.15: The Basic Welfare System: A Person Not Choosing Welfare

25. Copyright © 2009 Pearson Education, Inc. 6- 25 Figure 6.16: The Welfare System with a Work Requirement

26. Copyright © 2009 Pearson Education, Inc. 6- 26 Example 6.6: Wartime Food Requisitions and Agricultural Work Incentives

27. Copyright © 2009 Pearson Education, Inc. 6- 27 Figure 6.17: Earned Income Tax Credit (Unmarried, Two or More Children), 2006

28. Copyright © 2009 Pearson Education, Inc. 6- 28 Other Examples  Overtime pay  Moonlighting

29. Copyright © 2009 Pearson Education, Inc. 6- 29 LFPR and economy  Added worker hypothesis: in the face of falling family income, the number of family members increases. Increase LFPR and overestimate UR  Discouraged worker hypothesis: stress the importance of the reduction in market opportunities. Decrease LFPR and underestimate UR  Evidence: Discouraged > Added

30. Copyright © 2009 Pearson Education, Inc. 6- 30 LFP Revisited  w* (reservation wage=slope of indifference curve)  w (market wage=slope of budget constraint) then work  w* > w then do not work, and vice versa  Explain the trend of female LFPR (Table 6.2) using w* and w (education, affirmative action, fertility, divorce rate, technological change, etc)

31. Copyright © 2009 Pearson Education, Inc. 6- 31 Factors affecting the distribution of works in a household  Wage rate  Number of young kids  Substitution of mother’s time (baby sitting, A plus program, washing machines, etc.)  Sudden increase in non-labor income  The future value of kids/spouse

32. Copyright © 2009 Pearson Education, Inc. 6- 32 Table 7.1: Weekly Hours Spent in Household Work, Paid Work, and Leisure Activities by Men and Women over Age 18, 2005

33. Copyright © 2009 Pearson Education, Inc. 6- 33 Figure 7.1: Household Time and Income Are Substitutes in the Production of Commodities Sally Consumes

34. Copyright © 2009 Pearson Education, Inc. 6- 34 Table 7.2: Labor Force Participation Rates and Full-Time Employment, Mothers of Young Children, by Age of Child, 2006

35. Copyright © 2009 Pearson Education, Inc. 6- 35 Figure 7.2: Home versus Market Productivity for a Partner

36. Copyright © 2009 Pearson Education, Inc. 6- 36 Figure 7.3: Life-Cycle Allocation of Time

37. Copyright © 2009 Pearson Education, Inc. 6- 37 Table 7.3: Assumed Social Security Benefits and Earnings for a Hypothetical Male, Age 62 (yearly wage = $40,000; Interest rate = 2%; life expectancy = 17 years)

38. Copyright © 2009 Pearson Education, Inc. 6- 38 Figure 7.4: Choice of Optimum Retirement Age for Hypothetical Worker (based on data in Table 7.3)

39. Copyright © 2009 Pearson Education, Inc. 6- 39 Figure 7.5: Labor Supply and Fixed Child-Care Costs: A Parent Initially Out of the Labor Force

40. Copyright © 2009 Pearson Education, Inc. 6- 40 Figure 7.6: Labor Supply and Fixed Child-Care Costs: A Parent Initially Working for Pay

41. Copyright © 2009 Pearson Education, Inc. 6- 41 Figure 7.7: Budget Constraints Facing a Single Parent before and after Child Support Assurance Program Adopted

42. Copyright © 2009 Pearson Education, Inc. 6- 42 Figure 7.8: A Single Parent Who Joins the Labor Force after Child Support Assurance Program Adopted