Labour Supply Flashcards
What is the budegt constraint for labour supply?
C = V + wh
V= non-labour income, w = wage, h = hours worked
h = T-L (T=total time, L = leisure)
C = (wT + V) - wL
Show the utlity maximising diagram for individuals.
intercept = wT + V
slope = -w
optimality: w = MUL / MUc
How does an increase in non-labour income affect the labour market?
- parallel shift in budget line
- depends on if leisure is a normal good
- Generally assume labour is normal therefore leisure will rise if V increases.
How does labour supple change ith an increase in the wage rate?
Pivot at endowment
If dont work, then there is no change
Income and sub effects
How can you find the reservation wage (graphically)?
Explain the backwards bending labour supply curve.
Changing the wage rate has different effects on the amount of labour depending on what wage youre currently on
In low wage ranges substituion effect dominates income effect so labour rises
In high wage ranges the INcome effect is dominant and therefore any further increase in wage will decrease labour
How do you calculate the elasticity of labour supply?
σ = % change in hours
% change in wage
If |σ| > 1 then labour is elastic
Explain the household budget line
- Non-labour time includes HH jobs such as chores
- Two individuals have different productivity in the HH
- The more productive in the labour market will enter first
- The less labour productive individual will use their time for household commodities unless the other has spent all their time on labour
What are some of the causes of female labou rmarket participation and its changing level?
- Kinked HH budget line somewhat expplains long term trends
- Real wage increase for women has increased incentives to enter the labour market more recently
- Decreased value of HH production due to smaller families and improved home technology
- Changing social attitudes have also contributed
Discuss the empirical regression for labour supply
Looking into the regression: hj =ßwj + &Vj + others
- Theory is ambiguous for sign of ß
- & should be negative if leisure is a normal good
Summary of findings:
Men: elasticity= -0.1, sub eff. = 0.1, inc effect = -0.2
negative elasticity, inelastic, but large diffs in population
Women: Elasticity = 0.2
What are the challenges for finding reliable empirical evidence for labour supply?
- What time span should be used?
- Measurement error in hours, wages and non labour income
- No data for unemployed individuals
- Reverse causality - Non labour income depends on past income
What are some reliable examples of effects of increased wages on labour participation rates?
- Imbens et al (2001) - lottery winners reduce labour supply. Reduction is greater the larger the winnings
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Ashenfelter et al. (2010) - New york taxi’s
- 17% increase in fairs, increase wages for drivers
- use no. of miles per driver as an estimate of participation
- After the fair prices rose, miles dropped
- wage elasticity calculated to be -0.19
- Income effect was dominant
What is the theory of the US EITC?
Aim of the US Earned Income Tax Credit was to increase labour market participation for women.
- A mother in a household with two children can claim 40% of tax for any income below $14k
- Credit falls as wage increases
- Wage will have increased for non workers and should increase participation
How did the EITC work in reality?
- Implemented in 1986
- Saw a 2.4% increase in female participation (up to 75.3%)
- But this could have been due to something else
- Diff in diff analysis:
- Control group = unmarried women
- Impact of reform on control = 0%
- Diff-in-diff estimate = 2.4%
