Labour Supply Flashcards
Assumptions of labour supply model
- people choose to work or not work
- if they work, they can choose the number of hours
- if people are not working they will remain at hone or engage in leisure
- they choose between income and leisure
- time endowment of 168hours
- labour is homogeneous and waged
- individuals take the given wage rate
What is the standard constraint for the labour supply model?
C+Wn=WT
W=wage
n=leisure
T=time
When there is a wage change what can we decompose the total change in number of hours worked into?
Substitution effect
Income effect
Substitution effect
As wages rise, person works more and substitutes work for leisure as the opportunity cost of leisure rises
Income effect
As wages rise, person works less because their income has risen thus allowing them to spend more time on leisure activities
How can we work out the point of optimum leisure
When the utility function is a tangent to the budget constraint (MRS=MRT)
When do the substitution and income effect act in opposite directions?
When leisure is a normal good
When do income and substitution effect act in the same direction
When leisure is an inferior good
How can we derive a persons labour supply curve?
By plotting combinations of wages and hours worked in a diagram
When is the labour supply curve upward sloping?
When the substitution effect > income effect
When is the labour supply curve downward sloping?
When Income effect> substitution effect
What does a man upward sloping labour supply curve tell us?
That as wages rise the worker works more
Equation for elasticity of labour supply
Els= pdL/pdW x W/L
What is a typical value of elasticity of labour supply for men and women?
Men Els= 0.15
Women Els=1.25-5.6
Is it likely that a tax cut could lead to increased tax revenue?
No since elasticity if labour supply is very low so a decrease in taxes won’t lead to people working much more
