Chapter 3: Labor Supply Flashcards
is a market in which employers compete to hire workers and workers compete for jobs.
The labor market
consists of all individuals who are either employed or seeking employment in
a given area or industry.
The
labor supply side of the market
represents those individuals who are willing and able to work at different wage
rates
Labor Supply
also determines the unemployment rate.
The supply of labor
A
_______ supply can lead to higher unemployment rates, while a ______supply of labor can result in lower
unemployment rates.
higher, lower
is a key concept in labor economics that helps us analyze how workers make decisions about
how much labor they will supply to the market.
Labor supply
The key assumptions that underlie labor supply theory
include
rationality, fixed time, opportunity cost, fixed skills, perfect information, no market power and no
externalities.
refers to the amount of time that an individual is willing and able to work at a given wage rate
in a particular job or industry.
Labor supply
is a graphical representation that shows a positive relationship between wage rate
and the quantity of labor that workers are willing and able to offer.
The labor supply curve
is considered the most important
determinant of labor supply.
Wage rate
It refers to the amount of money that an employer is willing to pay a worker for
each unit of time worked, usually an hour.
Wage rate
An _________in the wage rate typically leads to an increase in the
quantity of labor supplied, while a ________in the wage rate leads to a decrease in the quantity of labor
supplied.
increase , decrease
represents the amount of labor that a single worker is willing and able to supply at
various wage rates.
Individual labor supply
It is the horizontal sum of the individual labor supply curves of all workers in that
market.
market labor supply curve.
the market labor supply curve is typically_______sloping, indicating that as the wage rate
increases, the quantity of labor supplied by workers in the market also increases.
upward
indicating that as the wage rate continues to
increase, workers begin to reduce the amount of labor they supply.
Backward Bending Labor Supply
Backward bending labor supply curve slopes from
left to right.
is the lowest wage rate at which an individual would be willing to supply labor or attract a person away
from leisure and into work.
Reservation
wage
The backward bending labor supply curve can occur for two possible reasons:
substitution effect and
income effect.
implies that as the wage rate increases, workers will substitute leisure
time with work time because they can earn more money per hour worked.
The substitution effect
suggests that when wages increase,
workers become wealthier and may choose to work fewer
hours because they can afford to
income effect
A ________of the labor supply curve represents an increase in the quantity of labor supplied at each
wage rate
rightward shift
A ________ of the labor supply curve represents a decrease in the quantity of labor
supplied.
leftward shift
Non Price determinants of labor supply
Wealth and other Income Sources.
Taste for Work.
Population and Labor Force Size.
Human capital.
Preferences and Social Norms.
Changes in Opportunities.
Migration Patterns.
The willingness to supply time to a labor market depends on income
from other sources, including prior savings, borrowing, family support, and similar sources.
Wealth and other Income Sources.
. As someone’s
wealth increases, they tend to work _______
less.
non-monetary factor, including factors like difficulty, working conditions,
and career advancement opportunities, significantly shapes labor supply.
Taste for Work.
unpleasant or unsafe working
conditions, limited advancement prospects, and overly demanding jobs can discourage workers, leading to a
_________ labor supply for those positions.
decreased
. A larger population tends to shift the labor supply curve ________as more workers are available at any
given wage; a smaller population tends to shift the labor supply curve ______
rightward , leftward.
in the form of education, skills, training, and experience, makes workers more
productive and valuable to employers.
Human capital
An increase in education and
training can shift the labor supply curve to the _______, as workers are able to supply more labor at each wage
rate due to their increased productivity
right
Some individuals may have a strong desire or motivation to work, while others may prioritize leisure
or other non-work activities.
Personal Preferences and attitude
if there is a cultural preference for leisure time, the labor supply curve may shift to the _____ as
individuals choose to work fewer hours.
left
Traditionally, women have been expected to take on more childcare responsibilities, leading to decisions to
work part-time or stay at home altogether.
What determinant
Norms
the availability of part-time or flexible work
arrangements, can affect the quantity of labor supplied at different wage rates
Changes in Opportunities
If a new job opportunity
becomes available, it could shift the labor supply curve to the ____
right.
When superior alternatives arise for workers in another labor market, the supply curve in the original labor market shifts _______ as workers move
to the new opportunities.
leftward
An influx of workers in a region
can shift the labor supply curve to the ______, while outmigration can shift the labor supply curve to the ______
right, left.
Emigration _______labor supply while immigration ______labor supply
decreases, increases
Each member of a household must determine whether
to give up a certain number of hours each day to work. That decision is the individual’s labor supply decision
and is called______
the labor-leisure trade-off.
determines how much income an individual earns per hour of work.
wage rate
Individuals can use their time in three ways:
(1) undertake market work
(2) undertake nonmarket work
(3) spend time as leisure
selling time in the labor market in
return for income;
undertake market work
using time to produce their own goods and services
undertake nonmarket work
all nonwork uses of their time.
spend time as leisure
has often been defined as free time or time not spent at work.
Leisure
It is the opportunity cost of wage.
Leisure
When
wages increase, the opportunity cost of leisure _____
rises.
refers to the overall satisfaction or well-being a person gets from both
work and leisure.
Utility
The notion that workers derive satisfaction from consuming goods and leisure is represented
by the utility function:
U = f (C, L).
transforms the person’s consumption of goods and
leisure into an index U that measures the individual’s level of satisfaction or happiness.
The utility function
The higher the level of index U, the ________the person. It is assumed that buying more goods or having
more leisure hours both increase the person’s
utility
happier
______ is locus points that illustrates
the combinations C and L that generate this
particular level of utility.
Indifference curve
Indifference
curves have four important properties
Indifference curves are downward
sloping.
▪ Higher indifference curves indicate
higher levels of utility
▪ Indifference curves do not intersect.
▪ Indifference curves are convex to the
origin.
The absolute value of the slope of an indifference curve, which is also called the
marginal rate of
substitution (MRS)
. It represents the individual’s willingness
to trade consumption for additional leisure time
MRS
defined as the change in utility resulting from an additional hour devoted to
leisure activities, holding constant the amount of goods consumed.
The marginal utility of leisure
as the change in utility if the individual
consumes one more dollar’s worth of goods, holding constant the number of hours devoted to leisure
activities
marginal utility of consumption
defines the worker’s
opportunity set, indicating all of the consumption– leisure combinations the worker can afford
The budget constraint
the individual’s ability to consume goods and
leisure is limited by both their
available time and
income.
A portion of their income, including
property income, dividends, and lottery prizes,
remains unaffected by the number of hours
worked, referred to as
“nonlabor income”
Thus, the individual’s budget constraint can be
expressed as follows:
𝐶 = 𝑤ℎ + V
where consumption equals labor earning (wages × hours of work) plus nonlabor income (V).
individuals choose consumption and leisure to
maximize utility.
A utility-maximizing worker chooses the consumption-leisure bundle given by point P, where the
indifference curve is ________to the budget line
tangent
the budget
line is tangent to the indifference
curve. In other words, the slope of
the indifference curve equals the
slope of the budget line. This implies
that
𝑀𝑈𝐿 /
𝑀𝑈𝐶
= w
