Presentation Transcript

1. Introduction to Labor Supply Labor facts Men: labor force participation rates declined from 80% in 1900 to 72% in 2009. Women: labor force participation rates rose from 21% in 1900 to 59% in 2009. Hours worked fell from 40 to 34 per week during the same time period.
2. Current population survey (CPS) Labor Force = Employed + Unemployed LF = E + U Size of LF does not tell us about “intensity” of work. Labor Force Participation Rate LFPR = LF/P P = civilian adult population 16 years or older not in institutions. Measuring the Labor Force
3. Measuring the Labor Force Current population survey (CPS) Employment: Population Ratio (percent of population that is employed). EPR = E/P Unemployment Rate UR = U/LF
4. Labor force measurement relies on subjectivity and likely understates the effects of a recession. Hidden unemployed: persons who have given up in their search for work and have therefore left the labor force. The employment rate (E/P) can be a better measure of fluctuations in economic activity than the unemployment rate. Measuring the Labor Force
5. Labor Force Participation Facts Labor force participation (LFP) is greatest for all groups during the ages of 25 to 55. LFP increases with education. LFP has decreased for men over the age of 65 from 63% in 1900 to under 22% by 2009.
6. More women than men work part-time. More men who are high school drop outs work than women who are high school drop outs. White men have higher participation rates and hours of work than black men. Labor Force Participation Facts
7. Average weekly hours of work of production workers, 1900-2010
8. Labor Force Participation Rates by GenderUS, 1950–2010
9. Participation rate in Taiwan by gender
10. Trend of participation rate It is common that participation rate for men has been decreasing over time, while women’s participation rate has been increasing. One limitation of the participation rate as a labor supply index is that it does not illustrate hours worked or full time / part time works. These distinctions are particularly important for females.
11. Participation rates in various countries
12. Participation rates in various countries Women’s participation rate differs significantly across countries. Variation in men’s participation rate is relatively small.
13. Reasons for not participating Taiwan
14. Reasons for not participating One limitation of unemployment rate is that it does not suggest the number or the proportion of discouraged workers. In the case of Taiwan, we cannot observe any sharp jump in the number of non-participating individuals during recession periods 2001-2 and 2008-2009.
15. Unemployment Rates for the Civilian Labor Force, US1946–2009
16. Unemployment rate in Taiwan by gender
17. Unemployment rate in various countries
18. Unemployment and Long-Term Unemployment, Selected European and North American Countries, 2007
19. Employment Distribution by Major Nonfarm SectorUS, 1954–2010
20. Nominal and Real Hourly Earnings, U.S. Nonsupervisory Workers in the Private Sector, US, 1980–2009
21. Relationship among Wages, Earnings, Compensation, and Income
22. Static Labor Supply Model Designed to describe how individuals make decisions about whether to work, and how much to work Useful for discussing responses to changes in labor market conditions or policies Stood the test of time – discussion goes back to 1930
23. Setup: Preferences Preferences for leisure (time spent not working), and consumption (of items purchased) Individuals maximize utility:max U(C,L,X) Where C is consumption, L is leisure (any time spend not working), and X are individual attributes (such as number of children, family and cultural background)
24. Utility 0 Consumption Preferences assumed to take ‘usual’ form: quasi-concave. This means both leisure and consumption exhibit diminishing marginal returns Utility 0 Leisure
25. MRS= = -slope of indiff curve U=U*(L,C,X) These preferences lead to indifference curves with diminishing marginal rates of substitution Consumption 0 Leisure
26. Setup: Constraints Let’s discuss model in terms of hours per week Suppose the maximum number of hours available to work / week is 80: T = 80 Individuals earn w for each hour worked Individuals can buy C for $1 per unit Individuals have some income, even without working
27. The Budget Constraints C = Y + w(T-L) (or) C +wL= Y + wT C is consumption Y is non-market income W is hourly wage rate T is maximum time (= 80) H is hours worked Y + wT = ‘full income’ How much you could consume if you worked as much as possible H=(T-L)<=T Can’t work more than 80 hours / week
28. On a Graph: C =Y + w(T-L) wT+Y slope = -w Y Leisure T 0
29. w40+Y w20+Y Y 40 60 T 0 Full-time / Part-time C =1(H=40)wH + Y, or 1(H=20)wH + Y, or Y C =Y + w(T-L) wT+Y slope = -w Y Leisure T 0
30. slope = -w(1-taxrate) w(1-taxrate)T+Y Y Leisure T 0 Tax on wage income C =Y+w(1-taxrate)(T-L ) C =Y + w(T-L) wT+Y slope = -w Y Leisure T 0
31. slope = -w Y Leisure T 0 Welfare C =Y + w(T-L) wT+Y slope = -w welf Y Leisure T 0
32. slope = -w Y Y+LC 0 Labour Costs (e.g. Daycare, transportation) C =Y + w(T-L) wT+Y slope = -w Y Leisure T 0
33. slope = -wot slope = -wnt Y 40 T 0 Kinks (e.g. Overtime) C =Y + w(T-L) wT+Y slope = -w Y Leisure T 0
34. Solving the Model
35. U1 U2 Slope=-W R Slope= -WR Corner Solution A=E0 Y R’ T Equilibrium of Nonparticipant U0 Market Wage less than the reservation wage Income 0 Leisure
36. U2 U1 U0 Interior Solution E0 Indifference curve tangent To budget constraint W0h0+YN R R’ l0 Equilibrium of a Participant Income Market wage exceeds the reservation wage YN T 0 Leisure
37. Y2 35 T 0 An Increase in Nonlabour Income on Supply leads to an increase in leisure if leisure is a normal good C =Y1 + w(T-L) C = Y2 + w(T-L) wT+Y1 Y1 40 T 0
38. Y2 45 T 0 An Increase in Nonlabour Income on Supply leads to an increase in leisure if leisure is an inferior good C =Y1 + w(T-L) C = Y2 + w(T-L) wT+Y1 Y1 40 T 0
39. The Effect of an Increase in Nonlabour Income on Labour Supply Normal goods ­ income leads to­ consumption of leisure (decrease in labour supply) Inferior goods­income leads to¯ consumption of leisure (increase in labour supply) Typically we assume leisure is a normal good
40. 3 things happen when an individual’s wage increases from w1 to w2 The ‘cost’ of leisure rises, relative to consumption: incentive to work more (substitution effect) At previous wealth level expressed as consumption, Y+w1T, the total amount of consumption or leisure that can be purchased is lower at new ‘costs’: C+w2L (1st income effect) New wage increases wealth to Y+w2T, increasing wealth (2nd income effect)
41. New Optimal L, after all adjustments L2 1) The substitution effect: L1 to L2 C +w1L=Y +w1 (T-L) U = U1 C +w2L=(Y+sub) +w1 (T-L) U = U1 wT+Y1 L1 T 0 L1 T 0
42. 1st Inc. Effect L3 2) The 1st Income Effect: L2 to L3 (hold wealth constant) C +w2L=(Y+sub) +w1 (T-L) U = U1 C +w2L=Y +w1 (T-L) L2 L1 T L2 L1 T 0 0
43. 2nd Inc. Effect L4 3) The 2nd Income Effect: L3 to L4 (the endowment effect) C +w2L=Y +w1 (T-L) C +w2L=Y +w2 (T-L) L3 L2 L1 T L3 L2 L1 T 0 0
44. 3 things happen when an individual’s wage increases from w1 to w2 The ‘cost’ of leisure rises, relative to consumption: incentive to work more (substitution effect) At previous wealth level expressed as consumption, Y+w1T, the total amount of consumption or leisure that can be purchased is lower at new ‘costs’: C+w2L (1st income effect) New wage increases wealth to Y+w2T, increasing wealth (2nd income effect)
45. The Slutsky Equation Describes Substitution Effect and Combined Income Effect Sub.Effect 1stInc.Effect 2ndInc.Effect
46. The Slutsky Equation Sub.Effect Combined Inc.Effect
47. If Leisure Normal Good:The Slutsky Equation implies individuals are more likely chance to reduce work for those working lots, and vice versa L1 L2 T 0 L2 L1 T 0
48. To Summarize so far: Changes to an individual’s leisure/income budget constraint affect the relative cost of leisure versus consumption and/or overall potential income Leisure is typically assumed a normal good The size of the overall income effect depends on how much an individual works before the change You should become completely familiar with drawing labour supply budget constraints under particular assumptions and anticipating large or small changes in labor supply from changes in these assumptions
49. Who are the unemployed? Model assumes individuals choose freely a combination of consumption and leisure, given wage rate Individual faces only one wage, that never changes All unemployment is voluntary
50. What if only options are part-time work, or nothing? Wants to work Lj Ex. of Someone under-employed Involuntary unemployed Can only work Lx At least better than LA
51. What if only options are full-time work or nothing? Can only work Lx Ex. of Someone over-employed Wants to work LK At least better than LA
52. What is involuntary unemployment? Involuntary unemployment occurs when a person is willing to work at the prevailing wage yet is unemployed. Involuntary unemployment is distinguished from voluntary unemployment, where workers choose not to work because their reservation wage is higher than the prevailing wage. OrleyAshenfelter’s view: “A worker is involuntarily unemployed if she has identical preferences and skills as other workers and yet is unable to find the number of hours work that others have both chosen and managed to find”.
53. Why is unemployment viewed as a social concern? Outcomes unequal: some able to choose optimal leisure/consumption bundle, others not “Why don’t you accept the work available at lower wage rates?” “Why don’t all other similarly situated workers have to do the same?” It is this constraint on choice in the labor supply model imposed on some, but not all similar workers that defines involuntary unemployment
54. You are offered w2 : your utility would be higher if you were offered w1 40 0 Involuntary unemployment Other workers with same preferences and skills offered w1 40w1 40w2 40 0 0 0
55. What’s missing in this discussion? Why would some workers with same skills be offered one wage, and others a different wage? Perfect competition suggests differential should go away We will come back to this later… (for now, consider reading Ashenfelter (1978)
56. Labor Supply Curve Relationship between hours worked and the wage rate. At wages slightly above the reservation wage, the labor supply curve is positively sloped (the substitution effect dominates the income effect). If the income effect begins to dominate the substitution, hours of work decline as the wage rate increases (a negatively sloped labor supply curve).
57. The Backward Bending Labor Supply Curve Wage Rate ($) 25 20 10 Hours of Work 0 40 20 30
58. Labor Supply Elasticity The labor supply elasticity (σ) measures responsiveness in hours worked to changes in the wage rate. σ = Percent change in hours worked divided by the percent change in wage rate. Labor supply elasticity less than 1 is inelastic as hours of work respond proportionally less than the change in wages. Labor supply elasticity greater than 1 is elastic as hours of work respond proportionally more than the change in wages.
59. Labor Supply of Women Substantial cross-country differences in women’s labor force participation rates. Over time, women’s participation rates have increased. In most studies on female labor supply, the substitution effect dominates the income effect for women, implying an upward sloped labor supply curve.
60. Source: Jacob Mincer, “Intercountry Comparisons of Labor Force Trends and of Related Developments: An Overview,”Journal of Labor Economics 3 (January 1985, Part 2): S2, S6. Growth in Female Labor Force Participation Rates and the Wage Cross Countries, 1960-1980
61. Policy Application:The Earned-Income Tax Credit The EITC should increase labor force participation of nonworkers of targeted groups. The EITC encourages some non-workers to start working and never encourages a worker to quit working. The EITC produces an income effect. Hours worked should change.
62. The EITC and the Budget Line Consumption ($) F G Net wage is 21.06% below the actual wage 33,178 H 17,660 Net wage equals the actual wage J 14,490 13,520 Net wage is 40% above the actual wage 10,350 E Hours of Leisure 110
63. Estimating Labour Supply Responses, take 1 Typical model: hoursi = B0 + B1wi + B2Xi + ei But a $2 change in the wage rate might be a large change for some and a small change for others. Better way…
64. Labour Supply elasticity measures the percentage change in time worked from a percentage change in wages
65. Estimating Labor Supply Responses, take 2
66. Is there omitted variables bias?
67. Problems with estimating supply elasticity Unobserved skills, locations, tastes… These factors could be related both to wages and hours Can’t take log of 0 Another threat is “simultaneous bias”.
68. A more useful approach:
69. One example of natural experiment In 1986, a reform of personal income tax system in the United States reduce tax rates from 50% to 28% for families with taxable incomes over $170,000. The change was sudden. The IE and SE combined is ambiguous. One study compared labor supply increases, from 1984 to 1990, for married women in the 99th and 90th percentiles.
70. One example of natural experiment It found that the labor force participation rate for women in the 99th percentile rose by 19.4 percent and that, if working, their hours of work rose by 12.7 percent during that period. In contrast, both labor force participation and hours of work for women at the 90th percentile rose only by about 6.5 percent.
71. Application: Earned Income Tax Credit (EITC) The EITC program makes income tax credits available to low-income families with at least one worker. A tax credit of $1 reduces a person’s income taxes by $1, and in the case of the EITC, if the tax credit for which workers qualify exceeds their total income tax liability, the government will mail them a check for the difference. Thus, the EITC functions as an earnings subsidy, and because the subsidy goes only to those who work, the EITC is seen by many as an income maintenance program that preserves work incentives. In the US, it is now the largest cash subsidy program directed at low-income households with children.
72. Estimating the effect of EITC Eissa and Liebman – QJE 1996 The EITC tops off work for low income individuals, up to a certain amount Substantial expansion of EITC for single women with children in 1986
73. Single moms with incomes between 11,000 and 15,432 became eligible for first time 1986 change affected single parents only 15,432 11,000 6,500 5,000 0 L
74. Estimate average labor supply effect from introducing program
75. Difference Single Mothers Can we simply compare average hours before and after? Average Hours worked EITC before 86 reforms EITC after 86 reforms Any factors that lead to change in hours will be attributed to reform change
76. Alternative approach: compare change in hours for one group affected by reform and change in hours for another group not affected by reform Difference after change Average Hours worked Single women, no children Difference before change Single Mothers EITC before 86 reforms EITC after 86 reforms Estimate effect from ‘difference in the differences’ Since hours worked increased for group not affected by the same amount, estimate no effect from reform.
77. What Eissa and Liebman Find
78. Main Findings EITC reforms increased single parent’s labor supply by 2.8 percentage points, and more for those with less than high school education No evidence that reforms decreased hours worked among single parents already working
79. Application: (Un)Employment Insurance in Canada Must have worked minimum 420 – 700 hours in same job (12 to 20 weeks at 35 hours per week) Can receive EI from 14 weeks to 45 weeks, depending on unemp. rate in region Basic benefit rate is 55% of average insured earnings, up to maximum $413 per week ($21,476 annual rate). This amount is taxable income.
80. Other points Can’t get EI if voluntarily quit job without just cause Can’t get EI if fired from job If start new, long-term job (PT or FT), must notify by law, and payments stop Otherwise, payments end after 45weeks, or EI maximum amount eligible paid
81. Graphical Analysis of UI Assume wage $500 per week UI is 55% of previous annualized earnings, no maximum Must work at least 10 weeks to qualify Ignore contributions for now
82. slope = -225 Budget constraint with UI $26,000 slope = -500 Y 52 weeks 0 42
83. Sub. Effect induces less work Supply would go down if leisure normal good New Optimization with UI for someone working $26,000 slope = -225 slope = -500 Y 42 52 weeks 0
84. UI induces some to work b/c earn more money for same hours worked New Optimization with UI for someone not working $26,000 slope = -500 Y 42 52 weeks 0 22
85. Some problems with this analysis Can’t choose whether receive UI or not – must be laid off by employer This creates incentive to co-ordinate with employer – pay me less and lay me off over and over again (increases utility) Does not take into account costs – UI contributions about 3% of salary for employer and 3% for employee
86. Is UI worth it? Like insurance problem Probability of losing job for 52 weeks: 2% UI contributions 10% of salary UI Benefit: 6,435 for one year Utility U = CL Wage is 500 per week Budget Constraint without UI: C+500L = 500*52
87. Expected Utility without UI MRS = w when C*/L* = 500 C*=500L* C* + 500L* = 26,000 C* = 13,000 L* = 26 Utility if don’t lose job = 338,000 Utility if lose job = 0 (52*0) = 0 Expected Utility = .98*338,000 + 0 = 331,240
88. Expected Utility with UI MRS = w when C*/L* = 500(1-.1) = 450 C*=450L* C* + 450L* = 450*52 = 23,400 C* = 11,700 L* = 26 Utility if don’t lose job = 304,200 Utility if lose job = 52*(6,435) = 334,620 Exp. U = .98*304,200 + .02*334,620 = 304,808
89. Compare E(Utility with UI) vs. E(Utility without) Since 331,240 > 304,808, prefer not to participate in UI
90. Who gains and who loses from EI? Max: 1-Pr(lose job)U(C,L) + Pr(lose job)U(UI(w),T) Subject to: C+w(1-t)L = w(1-t)T If E(Utility with UI) > E(Utility without), gain from UI Benefits of UI depend on probability of losing job, and fraction of total annualized wage paid while not working Costs of UI depend on contribution rate
91. Who gains and who loses from EI? The lower the probability of losing job, the lower the gain from UI (incentive to ‘manipulate’ probability) The lower the UI benefit, the lower the gain The higher the contribution rate, the lower the gain
92. Labor Supply over the Life Cycle Wage rates change over the worker’s life (over the life cycle). Wages are low when young. Wages rise with time and peak around age 50. Wages decline or remain stable after age 50. The changes in wages over the life cycle are “evolutionary” wage changes that alter the price of leisure.
93. Theoretical Issues of Evolutionary Wages A person will work more hours when wages are higher (i.e., the substitution effect tends to dominate the income effect). The profile of hours of work over the life cycle will have the same shape as the age-earnings profile. Intertemporal substitution hypothesis: people substitute their time over the life cycle to take advantages of changes in the price of leisure.
94. The Life Cycle Path of Wages and Hours for a Typical Worker Wage Rate Hours of work Age Age 50 50
95. Hours of Work over the Life Cycle for Two Workers with Different Wage Paths Joe’s wage exceeds Jack’s at every age. Although both Joe and Jack work more hours when the wage is high, Joe works more hours than Jack if the substitution effect dominates. If the income effect dominates, Joe works fewer hours than Jack.
96. Labor Force Participation Rates over the Life Cycle in 2010
97. Hours of Work over the Life Cycle in 2010 (need figure 2-21)
98. Labor Supply Over theBusiness Cycle Added-worker effect. So-called “secondary” workers currently out of the labor market are affected by a recession because the main breadwinner becomes unemployed or faces a wage cut. A secondary worker may choose to enter the labor force during these bad times The labor force participation rate of secondary workers (i.e., the added worker effect) is counter-cyclical.
99. Discouraged worker effect. Unemployed workers find it very difficult to find jobs during a recession, so they give up searching. Discouraged workers exit the labor force during bad times. The labor force participation rate of discouraged workers is pro-cyclical. Labor Supply Over the Business Cycle
100. The discouraged worker effect dominates the added-worker effect, especially during recessions. The Labor Force Participation Rate is procyclical Labor Supply Over the Business Cycle
101. Retirement Lifetime income is higher the longer a worker puts off retirement. If pension benefits are constant, wage increases have a substitution and income effect, so lifetime income might not be altered. An increase in pension benefits reduces the price of retirement, increasing the demand for leisure and encouraging the worker to retire earlier.
102. The Impact of the Social Security Earnings Test on Hours of Work The Social Security earnings test (which taxed retirees when they earned more than $17,000 per year) generated the budget “line” that affects behavior in varying ways. The repeal of the earnings test moved retirees to another budget line, as a result: One retiree would not change his hours of work. A second retiree would reduce his hours. A third retiree might increase or decrease his hours, depending on whether substitution or income effects dominate.
103. The Impact of the Social Security Earnings Test on Hours of Work Conclusions: (1) Overall, the theory suggests that elimination of the Social Security earnings test is unlikely to substantially increase labor supply among retirees. (2) The empirical evidence confirms the theoretical explanations: the labor supply effects of the repeal tended to be small.