Labour supply (textbook) Flashcards
Beliefs about labour market
Fixed number of jobs - early retirement, or reduction in working hours generates employments options for unemployed
Wages can be arbitrarily set by policy makers - independent of law on supply and demand
Stronger job protection increases employment
Is the number of jobs fixed?
Argument: number of jobs is fixed
No reason number of jobs should be fixed
Employment rates have been increasing everywhere
When number of jobs has not been increases, it’s been decreasing - but still not fixed
No evidence of constant number of jobs over time
IF number of jobs were fixed - the increase in the number of women employed should have led to decrease in number of men employed - NOT THE CASE
Can government set wages?
Argument: wages in private sector are an independent variable - meaning they can be altered by governments - comes from belief that the labour market operates as if there were a UNIQUE employer whom labourers can ask for a pay rise (just like workers can do with her boss)
BUT: no such thing as a single employer
Wages result from market interactions between employers and workers
Wages are OUTCOME of these interactions: wages react to supply and demand for workers
Unemployment and wage growth move in opposite directions:
-increase in unemployment means decrease in wage (more options in the market, so employing labour will be cheaper)
-decrease in unemployment means increase in wage (labour is scarce, so wage growth increases - those that aren’t employed have higher reservation option - need to pay them more to incentivise them to work)
SO: dynamics of wage NOT EXOGENOUS
All government can do is introduce and adjust minimum wage - WAGE FLOOR - just prevents wage from falling further
Wage distribution not an independent variable
Does job protection increase employment?
Argument: Making it more costly for employers to fire workers increases employment
Reasoning: Higher cost of dismissal discourages layoffs
BUT need to consider that higher costs of dismissal will discourage hiring - because it will be costly for employers to reduce workforce in case things go wrong
Not clear which of the two effects will dominate:
-dismissal costs act on job destruction and job creation - depending on which of the effects dominates - they can increase, decrease or leave unemployment the same
Labour market
Market where a quantity of labour services, L, corresponding to tasks specified in an unfilled assignment or job description (vacant job), is offered in exchange for a price or remuneration - wage.
Key decisions that individuals of working age make with respect to the labour market
- Should I work (for someone else)? - labour supply
- Should I hire? - labour demand
Assume these two decisions - labour supply and labour demand decisions - are made by different types of individuals:
EITHER individual supplies labour
OR individuals buy labour
Labour supply decision
An individual will supply labour if doing so will improve their condition with respect to their non-working status
Work absorbs time - that can be devoted to leisure
Supplying labour earns wage - gives individual purchasing power
Trade off: leisure vs purchasing power -represented by IC given BC
Both leisure and consumption are normal goods
Individual will work if doing so allows them to reach a higher indifference curve than the one they are one while not working
Utility is increasing in both arguments - IC’s negatively sloped - more consumption is needed to compensate the worker for the loss of an hour of leisure
Degree of convexity of these curves is decreasing with the degree of substitutability between consumption and leisure
Wage that makes an individual indifferent between working and not working is reservation wage
Normal good
Type of good for which demand increases as income increases
Inferior good
Type of good for which demand decreases as income increases
Reservation wage
Lowest wage at which an individual will decide to work - this definition only applies when individuals can choose freely how many hours to work and how many hours to devote to leisure - not realistic
Reality: Individuals have constrained choice - leverage is in the options to work full time or part time - this is because of institutions that imposes constrains on individual’s decisions
-Yields lower level of utility than unconstrained choice
Non-labour income
Income when working zero hours
Endowment point
Refers to initial wage rate that the worker is willing and able to accept for their labour services
Represents workers reservation wage - minimum wage they are willing to accept in order to supply their labour
Income effect
If wage increases with same hours of work - income increases
If leisure is a normal good, individuals will buy more leisure, thereby reducing their number of hours of work (negatively affects supply of labour)
Generally dominates for high income earners
Important to obtain good estimates of income effect to be able to make predictions about the effect of policies altering take-home wages on labour supply
Substitution effect
If wage increases, price (opportunity cost) of leisure goes up (costs more money to have an hour of leisure)
Consumption of leisure decreases
Working hours increase
(Always positive on number of hours worked)
Generally dominates for low income earners
Longitudinal data
Observations of the same individuals at different times
