Lecture 1, 2, 3, 4, 5 Labor Supply Flashcards
Economic Efficiency
producing more goods and services with the same level of inputs
Market Failures
The actual pricing of productive services are not set at the efficient market level
Economic Equality
The distribution of income or wealth across people when ranked from the poorest to the richest
positive economics
tells us what will happen based on theory
normative economics
Tell us what we think should happenbased on judgement of policy objectives, effectiveness, efficiency, and equity
Employed
working paid for at least one hour a week or working unpaid for at least 15 hours a week
Unemployed
on temporary layoff from a job; have no job but actively looking for work over the past month
Not in Labor Force (NILF)
Not working and not looking for work
Labor Force
Employed plus Unemployed
Labor Force Participation Rate
Labor Force/ Population
Hidden unemployed
persons who have given up their search for work and have therefore left the labor force
Slope of indifference curve represents
Marginal rate of substitution; the rate at which a person is willing to give up some consumption for more leisure
Slope of budget constraint
price of good a/price of good b
Optimal Consumption Point
Pa/Pb = MUa/MUb
Slope of indifference curve
MUa/MUb
Budget Constraint
wh+ V
Slope of budget constraint
-w
Income Effect
you have more income so you do not need to work as many hours to be able to consume the same amount of goods.
Substitution Effect
the rate of substitution between consumption and leisure has changed so now it costs more to consume an hour of leisure.
Reservation Wage
Minimum increase in income that would make a person indifferent between living off of their nonlabor income V and working that first hour to earn w.
Endowment Point
the amount of C if all hours devoted to L, puts the individual on indifference curve Uo
How to find the aggregate supply curve
add up supply curves of individual workers
Labor Supply Elasticity
∆H/H / ∆w/w = Percentage change in hours worked/Percentage change in wage
Shape of perfectly inelastic supply curve
vertical
Shape of perfectly elastic supply curve
horizontal
Factors which influence labor supply elasticity
share of worker’s budget due to labor income, time horizon, if job is necessary to obtain other benefits, availability of close job substitutes
What does the Carnegie Conjecture say?
large inheritance decreases LFP, reduces hours
Wages (increase/decrease) over time for worker
increase
Hours (increase/decrease) over time for worker
increase as wage increases
Added Worker Effect
A secondary worker chooses to enter labor force during recession. Counter-cyclical because increase LFP when wages lower
Discouraged Worker Effect
Unemployed workers find it difficult to find jobs during recession, so they drop out of labor force. Pro-cyclical because decrease LFP when wages decrease
How does taxes affect LFP?
depends. income effect dominates - work more hours when taxes increase. substitution effect - work less hours when taxes increase
How does welfare reduce labor supply?
cash benefit for not working; high benefit reduction rates; income effect; increases reservation wage
What are some characteristics of the 1996 welfare reform?
de-link medicaid and welfare; increase eitc; power to states; work requirements; lifetime limits; reduce cash-assistance and increase non-cash assistance
EITC
federal income tax credit for low income workers that varies by earning level
