8&9- labour supply I & II Flashcards
Time (T) equation
working hours (H) + non-working hours (N)
utility function
U = U(Y, N)
Time constraint
H = 24 - N
total income function
Y = wH + Y*
deriving labour supply
Find tangency point on IC and BC
Max U = U(Y,N) = U(wH, 24-H)
First order condition for an interior max
Key condition: MRS= -Un/Uy= -w=MRT
increase in wage on IE and SE
IE and SE increase
wage increase on IE
work less
wage increase on SE
work more
total effect of wage increase
work less, negative; IE dominates
what type of good is leisure
neither inferior nor normal, increase in Y means leisure can increase or decrease
backwards bending supply curve caused by
higher wage, different effects dominate at different portions of the supply curve
leisure as inferior, SE?, IE?, TE?
SE: H up, N down. IE: H up N down, TE: H up N down
leisure as a normal good; SE?, IE?, TE?
SE: H up, N down. IE: H down N up, TE?
leisure as normal, substitution elasticity and income elasticity?
SE > 0, IE < 0
total elasticity. =
income elasticity + substitution elasticity
overtime payments
worker gets x% premium on normal wage rate w1
progressive income tax on budget line
affects budget line (more work = higher labour income, and higher tax at certain thresholds)
fall in tax rate on labour supply
IE dominates, reduction in labour supply
upwards sloping labour supply on hrs worked
lowering tax wages = decreased hrs worked
backwards bending supply curve on hrs worked
lowering after tax wages = increased hrs worked
govt revenue from tax τ labour income is:
T= τwH[(1-τ)w]= τwH(ω)
differentiating T equation shows
shows how income tax revenue changes as tax rate increases
effects of change in marginal tax rate
govt collects more tax revenue from higher tax rate. change in tax rate alters hrs worked
can direction of change in tax rate be predicted
no, not with theory alone
income tax revenue and labour supply relationship
non-linear
some groups have higher replacement rates due to
generous UI benefits, social assistance, high marginal tax rates for groups in labour market
poverty trap
little increase in net income despite increase in gross income (due to tax and benefits reduction)
benefits and participation decision
some voluntarily unemployed (tax/benefit rates influence this)
replacement rate def
proportion of expected income from work replaced by unemployment and related welfare benefits
replacement rate =
OA / OB (income when unemployed / expected income of beginning to work)
