2. Labour Supply Flashcards
Marginal utility of leisure
The amount utility increases by when leisure is increased by one unit
Marginal utility of consumption
The amount utility is increased by when consumption is increased by one unit
MRS
Marginal rate of substitution. It is the slope of the utility function
What does the convexity of the utility function imply?
Diminishing MRS
Equation for budget constraint
C= wT+ V-wL
At the equilibrium for budget constraint and the utility function what is true?
MRS=w. The rate at which a person is willing to give up leisure for consumption is equal to the wage
How does an increase in non- labour wage affect leisure?
It typically increases leisure if we assume leisure is a normal good
After an increase in wage, when will someone work less and consume more leisure?
When their income effect >substitution effect
After an increase in wages when will someone work more and consume less leisure?
When their income effect < substitution effect
If we have a corner solution and MRS>W what happens?
The person doesn’t work at all
If we have a corner solution and MRS
They will work
Describe a typical individual’s labour supply curve
As wage increases, so does hours worked until a point where hours worked begins to decrease
Elasticity of labour supply equation
Ó= (Change in h)/(Change in W) x W/h
When is labour supply upward sloping?
When substitution effect>income effect
When is labour supply curve downward sloping?
When income effect> substitution effect
If the elasticity of labour supply is zero what does the LS curve look like?
It is vertical since it is perfectly inelastic
Intertemporal substitution hypothesis (ISH)
People substitute their time over their life cycle to take advantage of changes in price of leisure
What is the usual estimate of the elasticity of labour supply for men and women?
- -0.1 in men
* thought to be positive for women
Why is it hard to estimate the elasticity of labour supply?
- the wage isn’t exogenous
- what period should hours be measured over?
- measurement error in survey data
- division bias
- average vs marginal wages
- missing data and selection bias
What is a good example of a natural experiment for elasticity of labour supply?
Taxi drivers in New York
What is the correlation between unemployment and labour supply? Why might this happen?
They are negatively correlated. Could be because of discouraged worker effect
What effect does the welfare programme have?
- it has a disincentive effect
- it raises the reservation wage
- it lowers the net wage
How does the welfare programme affect the low paid?
- they face higher marginal tax rates, which can be made higher by the reduction in benefits in kind
- reduction in their real wages
What is an alternative to the welfare programme?
In work benefits or earned income tax credits
