chapter 4. the labor mkt & lfp labor market supply and demand elasticity lfp trends using labor...
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Chapter 4. The Labor Mkt & LFPChapter 4. The Labor Mkt & LFPChapter 4. The Labor Mkt & LFPChapter 4. The Labor Mkt & LFP
• Labor market
• supply and demand
• elasticity
• LFP trends
• Using labor mkt. to explain LFP trends
• Labor market
• supply and demand
• elasticity
• LFP trends
• Using labor mkt. to explain LFP trends
I. Labor marketI. Labor marketI. Labor marketI. Labor market
• labor supply• decisions by individuals, HH
• labor demand• decisions by firms
• labor supply• decisions by individuals, HH
• labor demand• decisions by firms
Labor SupplyLabor SupplyLabor SupplyLabor Supply
• relationship between wages and hours worked
• 16 hours :• market work (H)• nonmarket work or leisure (L)
• relationship between wages and hours worked
• 16 hours :• market work (H)• nonmarket work or leisure (L)
assumeassumeassumeassume
• work is a disutility• don’t like it, BUT• do it for $ to buy stuff
• consumption & leisure are good • like to buy stuff• like to enjoy stuff
• work is a disutility• don’t like it, BUT• do it for $ to buy stuff
• consumption & leisure are good • like to buy stuff• like to enjoy stuff
tradeofftradeofftradeofftradeoff
• more hours worked,
• more $ to buy stuff,
• but less time for leisure
• more hours worked,
• more $ to buy stuff,
• but less time for leisure
C = consumption H = hours worked L = hours for leisure
H = 16 - LI = nonearned income
C = (w)(H) + I
w = wage
C = (w)(16 - L) + I
tradeoff between consumption & leisure
changes in the wage (w)changes in the wage (w)changes in the wage (w)changes in the wage (w)
• how does it affect the choice between C and L?
• income effect• higher wages increase income• do more of what you like• increase C and L• decrease H
• how does it affect the choice between C and L?
• income effect• higher wages increase income• do more of what you like• increase C and L• decrease H
• substitution effect• higher wages make L more
expensive• L now relatively more expensive
than C• increase in C, decrease in L• increase in H
• substitution effect• higher wages make L more
expensive• L now relatively more expensive
than C• increase in C, decrease in L• increase in H
total effect of increase in wtotal effect of increase in wtotal effect of increase in wtotal effect of increase in w
• C increases,
• total effect on H unclear
• if substitution effect >income effect• H increases
• C increases,
• total effect on H unclear
• if substitution effect >income effect• H increases
change in labor supply ifchange in labor supply ifchange in labor supply ifchange in labor supply if
• nonearned income changes (I)
• changing preferences for C, L• nonearned income changes (I)
• changing preferences for C, L
Labor DemandLabor DemandLabor DemandLabor Demand
• derived demand• depends on the demand for the
product produced
• derived demand• depends on the demand for the
product produced
how much to hire?how much to hire?how much to hire?how much to hire?
• cost of additional labor (wage)
• vs.
• value of additional labor
• cost = or < value
• cost of additional labor (wage)
• vs.
• value of additional labor
• cost = or < value
what is value of labor?what is value of labor?what is value of labor?what is value of labor?
• increase in output from hiring additional unit of labor• marginal product of labor• MPL
• value of increase in output
= price x MPL
= MRP
• increase in output from hiring additional unit of labor• marginal product of labor• MPL
• value of increase in output
= price x MPL
= MRP
exampleexampleexampleexample
• Kinkos
• 1 copier
• copies cost 8 cents each
• Kinkos
• 1 copier
• copies cost 8 cents each
Workers/hr output MPL MRP wage0 0 $51 100 100 $8 $52 170 70 $5.60 $53 200 30 $2.40 $54 210 10 $0.80 $5
MPLMPLMPLMPL
• declines as worker/hr increases
• why?
• only 1 copier• so adding workers only works for
awhile
• law of diminishing returns
• declines as worker/hr increases
• why?
• only 1 copier• so adding workers only works for
awhile
• law of diminishing returns
Kinkos & hiringKinkos & hiringKinkos & hiringKinkos & hiring
• hire 1st worker?• $8 > $5 YES
• hire 2nd worker?• $5.60 > $5 YES
• hire 3rd worker?• $2.40 < $5 NO
• hire 1st worker?• $8 > $5 YES
• hire 2nd worker?• $5.60 > $5 YES
• hire 3rd worker?• $2.40 < $5 NO
• if wage = $7• hire only 1 worker
• if wage = $2• hire 3 workers
• if wage = $7• hire only 1 worker
• if wage = $2• hire 3 workers
labor demand will increase iflabor demand will increase iflabor demand will increase iflabor demand will increase if
• kinkos gets more copiers• (more capital)
• workers become more skilled• increase MPL & MRP
• price of copies rise• increase MRP
• kinkos gets more copiers• (more capital)
• workers become more skilled• increase MPL & MRP
• price of copies rise• increase MRP
Elasticity of Labor SupplyElasticity of Labor SupplyElasticity of Labor SupplyElasticity of Labor Supply
• how sensitive is H to changes in w?
10% change in w
• if H changes by > 10%• labor supply is elastic wrt wages
• if H changes by < 10%• labor supply is inelastic wrt wages
• how sensitive is H to changes in w?
10% change in w
• if H changes by > 10%• labor supply is elastic wrt wages
• if H changes by < 10%• labor supply is inelastic wrt wages
• how sensitive is H to changes in I ?• increases in nonearned income
will decrease H• (only an income effect)
• how sensitive is H to changes in I ?• increases in nonearned income
will decrease H• (only an income effect)
II. Trends in LFP (revisited)II. Trends in LFP (revisited)II. Trends in LFP (revisited)II. Trends in LFP (revisited)
• recall that• male LFP is declining• female LFP is rising
• recall that• male LFP is declining• female LFP is rising
LFP Rates 1950-2002
0
20
40
60
80
100
1950 1960 1970 1980 1990 2000
LF
P r
ate
Men 16+ Women 16+
Men
Women
Male LFP by Age 1950-2002
0
20
40
60
80
100
1950 1960 1970 1980 1990 2000
20-24 25-34 35-44 45-54 54+
Male LFP by Marital Status 1970-2000
0
20
40
60
80
100
1970 1975 1980 1985 1990 1995 2000
single married other
Female LFP by Marital Status 1970-2000
0
20
40
60
80
100
1970 1975 1980 1985 1990 1995 2000
single married other
Married Female LFP
0
20
40
60
80
100
1970 1980 1985 1990 1995 2000
married w/children married w/ children <6
So we must explainSo we must explainSo we must explainSo we must explain
• rising female LFP, falling male LFP
• biggest increases for • married women• women w/ children
• biggest decreases for• older men• less educated men
• rising female LFP, falling male LFP
• biggest increases for • married women• women w/ children
• biggest decreases for• older men• less educated men
III. Using the Labor Mkt.III. Using the Labor Mkt.III. Using the Labor Mkt.III. Using the Labor Mkt.
• use labor supply & labor demand• explain changes in LFP
• market for male labor
• market for female labor
• use labor supply & labor demand• explain changes in LFP
• market for male labor
• market for female labor
male labor marketmale labor marketmale labor marketmale labor market
• if male LFP has fallen then:• either labor demand has fallen• OR• labor supply has fallen• OR• both
• if male LFP has fallen then:• either labor demand has fallen• OR• labor supply has fallen• OR• both
female labor marketfemale labor marketfemale labor marketfemale labor market
• if female LFP has risen then:• labor demand has risen• OR• labor supply has risen• OR• both
• if female LFP has risen then:• labor demand has risen• OR• labor supply has risen• OR• both
male LFPmale LFPmale LFPmale LFP
what caused demand to fall? decline in demand for labor in
manufacturing, mining, timber sectors most workers in these sectors are men most workers in these sectors do not
have college education (high school or less)
what caused demand to fall? decline in demand for labor in
manufacturing, mining, timber sectors most workers in these sectors are men most workers in these sectors do not
have college education (high school or less)
substitution of female labor for male labor not likely: occupation segregation suggest that
female labor will not substitute for male labor very well
labor demand for men is much less elastic than female labor demand
substitution of female labor for male labor not likely: occupation segregation suggest that
female labor will not substitute for male labor very well
labor demand for men is much less elastic than female labor demand
what caused labor supply to fall?what caused labor supply to fall?what caused labor supply to fall?what caused labor supply to fall?
• rising real wages
• rising pension, disability benefits
• both mean early departure from labor force
• rising real wages
• rising pension, disability benefits
• both mean early departure from labor force
Female LFPFemale LFPFemale LFPFemale LFP
what caused labor demand to rise?
• a general rise in labor demand• economic growth• increases in MPL
• a rise in labor demand in clerical, service sector
what caused labor demand to rise?
• a general rise in labor demand• economic growth• increases in MPL
• a rise in labor demand in clerical, service sector
• rise in female education level• increase MPL
• why?• skilled labor more in demand• socially acceptable• families have resources to educate
sons and daughters
• rise in female education level• increase MPL
• why?• skilled labor more in demand• socially acceptable• families have resources to educate
sons and daughters
why did labor supply rise?why did labor supply rise?why did labor supply rise?why did labor supply rise?
• nonmarket production:• increase in availability of
substitutes & in efficiency• ex: childcare, convenience food,
microwaves• less time IS spent on nonmarket
work
• nonmarket production:• increase in availability of
substitutes & in efficiency• ex: childcare, convenience food,
microwaves• less time IS spent on nonmarket
work
• family/demographic changes• fewer children• later age of marriage• higher divorce rate
• family/demographic changes• fewer children• later age of marriage• higher divorce rate
• falling male wages• slow real wage growth for men in
1970s, 80s• increase labor supply of married
women
• falling male wages• slow real wage growth for men in
1970s, 80s• increase labor supply of married
women
Which are most important?Which are most important?Which are most important?Which are most important?
• female LFP• pre 1970: demand-side reasons• since: divorce, male wages
• male LFP• early retirement (supply)
• female LFP• pre 1970: demand-side reasons• since: divorce, male wages
• male LFP• early retirement (supply)
Does our model tell the whole Does our model tell the whole story?story?Does our model tell the whole Does our model tell the whole story?story?
• economic model may leave some things out• social attitudes• dividing time between just market
and nonmarket work
• economic model may leave some things out• social attitudes• dividing time between just market
and nonmarket work
ElasticityElasticityElasticityElasticity
• labor demand is inelastic w.r.t. wages• firms do not have large hiring
response to changing wages• true for men and women
• labor demand is inelastic w.r.t. wages• firms do not have large hiring
response to changing wages• true for men and women
labor supply elasticitylabor supply elasticitylabor supply elasticitylabor supply elasticity
• women’s labor supply MORE elastic than men’s (wages)• women more likely to leave labor
force if wages too low• women more likely to enter labor
force if wages attractive
• women’s labor supply MORE elastic than men’s (wages)• women more likely to leave labor
force if wages too low• women more likely to enter labor
force if wages attractive
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