1. Figure 1: The Capacity Curve The Piece Rate
Work
Capacity v3 v* v1
Capacity curve is f(g(.)) function. Comment on shape.
Straight lines are wage schedule. Which is higher wage?
At v* people can just about work. Creates a discontinuity
Income
Figure 1: The Capacity Curve
The Piece Rate

2. Figure 2: Labor Supply Piece Rate
At v*, labor supply jump. Aggregate labor supply will be continuous.
Aggregate
Labor Supply
Figure 2: Labor Supply

3. Figure 3: Possible Equilibria
Labor demand. If it is high, no problem. If it is low, what happens?
There is unvoluntary unemployment
``A person is unvoluntary unmeployed in a market which does employ a person very similar to him and if the latter person, by virtue of employment in this market, is distincly better off than him’’.
Figure 3: Possible Equilibria

4. Figure 4: Effect of Non-Labor Income on the Capacity Curve
Two capacity curve with two different non-labor income (e.g. income from assets, or transfers). Who is richer? Person to the left.
Who is more likely to be employed?
Employment Income
Figure 4: Effect of Non-Labor
Income on the Capacity Curve

5. Figure 5: Distribution of Land
Owned
Effect of land distribution in this economy.
This is a picture of land distribution, with people ranked from left to right
(m people are landless).
Individuals Ranked
By Land Owned
Figure 5: Distribution of
Land

6. Figure 6: Effective Reservation Wage Piece Rate
Labor supply curve : minimum wage at which someone can (or want to) work).
What is the curve for willingness and for capacity?
Willingness: curve that starts below. Increasing in wealth
Capacity: curve that starts above. Decreasing in wealth
Line in bold: labor supply curve.
Individuals Ranked
By Land Owned
Figure 6: Effective
Reservation Wage

7. Aggregate Labor Supply/
Piece
Rate
Piece
Rate
Aggregate labor supply on the right: at very low wage, nobody works, then the landed are progressively brought in.
Depending on labor demand, there are different types of equilibria:
-full employment
-part of the landless are unemployed
-all of the landless and part of the landed are unemployed.
Food for thoughts:
-what would happen if income could be redistributed?
-what would happen if poor people could borrow?
-what if poor people could enter long term employment contracts?
-what if there were a minimum living wage (financed by a tax on labor income).
Next slide: Introduce simple dynamics in the mode to see how it can generate multiple equilibria.
Individuals Ranked
By Land Owned
Aggregate Labor Supply/
Labor Demand
Figure 7: Type of Equilibria

8. Figure 1 y0 y1 y2 y3 Income from Work
Use the capacity curve to introduce a relationship between inherited income and income from work.
Case 1: everybody converges. No poverty trap. y0 y1 y2 y3
Inherited
Income
Figure 1

9. Figure 2 y4 y5 y3 y2 y1 y0 Income from Work
Case two: no multiple equilibria, everybody is poor
y4 y5 y3 y2 y1 y0
Inherited
Income
Figure 2

10. Figure 3 Income from Work Case two:
-Multiple Equilibria. Where you start from determine where you end up.
Poverty trap.
It is critical that the curve intersects the 45 degree line from below. Otherwise there is no poverty trap.
Inherited
Income
Figure 3