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the backward bending labour supply curve

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The backward bending labour supply curve(*)

Elsa Fontainha

Technical University of Lisbon

ISEG – Institute of Economics and Business Administration

Department of Economics

Rua Miguel Lupi, 20 1249-078 Lisboa Portugal

email:elmano@iseg.utl.pt ;Phone: +351 213925993 Fax: + 351 213922808

IATUR Conference 2003 Free University of Brussels

(*) Paper will be available on the 2003 IATUR Conference website (www.vub.ac.be/TOR/iatur ) or directly from the author elmano@iseg.utl.pt).

main topics
Main Topics
  • Labour Supply – Theoretical approaches; Backard bending supply curve and wages as explanation of labour supply and working time
  • Labour Supply and Time Use - stilyzed facts and trends
  • Empirical evidence of a backard bending labour supply curve
  • Results and discussion

The Backward Bending Labour Supply Curve - Elsa Fontainha

labour supply core subject
Labour Supply – core subject
  • The core subject of labour supply economics studies is the explanation of how and why people sell labour services ( i.e. allocate scarce time to working paid activities) throug the labour market.

The Backward Bending Labour Supply Curve - Elsa Fontainha

labour supply measurements
Labour supply measurements
  • Labour supply could be measured in different ways:
    • Actual working time(*)
    • Participation rate
    • Part time work and overtime work
  • (*)Actual working time is the result of a balance between demand (firms) and supply (active people) in different economic, demographic, social, technological, institutional, cultural, contexts. So,
    • actual working time is not a revealed preference of employed persons.
    • Measurement (and comparability) of working time are difficult

The Backward Bending Labour Supply Curve - Elsa Fontainha

labour supply explanation some theoretical approaches
Labour Supply ExplanationSome Theoretical approaches
  • Individual and static models and Extentions
    • Individual and static models ; women labour supply specif theories
    • Extension with household
    • Extension with life cycle
  • Level of analysis
    • Microeconomic
    • Macroeconomic
  • Period of analysis
    • Short run
    • Long run

The Backward Bending Labour Supply Curve - Elsa Fontainha

labour supply and labour leisure trade off is an old question
Labour supply and Labour-Leisure trade off is an old question

Adam Smith wrote at 1776:

“ The wages of labour are the encouragement of industry, which, like every other human qualities, improves in proportion to the encouragement it receives…

  • Some workmen, indeed, when they can earn in four days what will maintain themthrough the week, will be idle the other three. This, however, is by no means the case with the greater part.
  • Workmen, on the contrary, when they are liberally paid by the piece, are very apt to over work themselves,
    • and to ruin their health and constitution in a few years“

Adam Smith, The Wealth of Nations(ed.E.Cannan), Boook I (London:Methuen and Company,Ltd.,1930),p.83

The Backward Bending Labour Supply Curve - Elsa Fontainha

labour supply economic determinants in brief
Labour Supply Economic determinants- in brief

The Backward Bending Labour Supply Curve - Elsa Fontainha

wages explain labour supply
Wages explain Labour Supply
  • There are several economics explanations for labour supply, but wages and incomes are at the heart of all theories.

The Backward Bending Labour Supply Curve - Elsa Fontainha

labour market supply and demand a basic text book presentation
Labour Market – Supply and Demanda basic text book presentation

Microeconomic behaviour of supply and demand of labour is similar any other market of goods

wage

Supply

(active population)

Demand

(from firms)

Quantity of labour

The Backward Bending Labour Supply Curve - Elsa Fontainha

but work is a special kind of good
But work is a special kind of “good”…
  • And relation between labour supply (and working time) and wages could be represented by different shape curve.
  • For example:

The Backward Bending Labour Supply Curve - Elsa Fontainha

what is a backward bending labour supply curve
What is a backward bending labour supply curve?
  • is a labour supply curve that
    • instead of growing continuously as wages increase, (as other supply curve of a good, growing with price)
    • moves upwards to a certain point and then begins to go backward

The Backward Bending Labour Supply Curve - Elsa Fontainha

backard bending labour supply curve
Backard bendingLabour Supply Curve

Leisure is preferred

wage

IE >SE

Why?

Work is “preferred”

SE >IE

Labour supply

(time supplied)

The Backward Bending Labour Supply Curve - Elsa Fontainha

backbended curve why
Backbended curve. Why?
  • because some people with higher wages/incomes prefer leisure to work, or, in other words, are willing to sacrifice part of the income that they would have if they worked more hours (- work) in return for the benefits that they derive from having more time available (+ leisure).

The Backward Bending Labour Supply Curve - Elsa Fontainha

question of research
Question of research
  • This research seeks to study to what extent the Time Use Data makes it possible to analyse the trade-off between work and leisure and the backward bending supply curve.
    • with the term “work” being considered to include both paid and unpaid work.

The Backward Bending Labour Supply Curve - Elsa Fontainha

searching for the empirical evidence of a backward bending curve
Searching for the empirical evidence of a backward bending curve
  • If the behaviour associated with the backward bending curve exists, then it is expected that:
    • At individual (micro) level labour supply grows with wage until a certain wage level and after decrease with the increase of wage.
    • At aggregated (macro) similar results will appear based on cross section analysis for example between countries.
      • (In a coeteris paribus context)

The Backward Bending Labour Supply Curve - Elsa Fontainha

labour supply and time use some facts and trends in brief
Labour Supply and Time Use – some facts and trends – in brief
  • Stylised facts about Labour Supply – from Economics Studies
  • Stylised facts about working time trends – from Time Use Studies

... and “fuzzy” trends or no-trended evolutions

The Backward Bending Labour Supply Curve - Elsa Fontainha

methodology and data sources
Methodology and Data Sources
  • Descriptive analysis
  • Data Sources:
    • Eurostat and OECD
    • Time Use Surveys
    • Portuguese Time Use Survey (INE, 1999)

The Backward Bending Labour Supply Curve - Elsa Fontainha

part time work and labour supply
Part time work and Labour supply
  • Part time work increase, could be a good “proxy” indicator for labour supply decrease. How is it related with hourly wages in European Countries?
    • Some referred reasons for part time work are: sectorial structure, women participation rate and other. Leisure preference also when voluntary.

The Backward Bending Labour Supply Curve - Elsa Fontainha

wage work leisure
+WAGE =(-Work & + LEISURE )

The Backward Bending Labour Supply Curve - Elsa Fontainha

as hourly wages increase labour supply decrease
…as hourly wages increase, labour supply decrease

Does Backward bending labour supply curve exists?

Note: The results obtained for the association between overtime work relation and wage (expected as symmetric) are not so clear

The Backward Bending Labour Supply Curve - Elsa Fontainha

evidence from time use data
Evidence from Time Use Data?

* Important note: Comparability of TU data only between countries inside a box. Because lack of comparability between data above figure must be considered only as illustrative.

The Backward Bending Labour Supply Curve - Elsa Fontainha

does tu data confirm a backward bending curve
labour supply curve grows as wages increase. As other any other good, supply grows with price/wage.

(green part of the curve……..).

This behaviour occurs at low levels of hourly wages…

But work is a different “good”and labour supply curve is also different from other goods supply curves…

Labour supply curve is backard bending.WHY?

Because, at higher levels of hourly wages people prefer leisure to work, or, in other words, are willing to sacrifice part of the income that they would have if they worked more hours (LESS WORK) in return for the benefits that they derive from having more time available (MORE LEISURE).

(red part of the curve……..).

Does TU data confirm a Backward bending curve?

The Backward Bending Labour Supply Curve - Elsa Fontainha

results and discussion i
Results and discussion-I
  • preliminary results suggest the existence of a backward bending labour supply curve at macroeconomic level (the theory is developed usually at micro behaviour level)
  • As segmentation theories of labour market assume different (and sometimes simetrical) labour supply behaviour could be found.
  • the identification of the “turning point” and “reference wage” at the bb curve could be useful to a better knowledge of employers motivation and labour policy incentives

The Backward Bending Labour Supply Curve - Elsa Fontainha

results and discussion ii
Results and discussion-II
  • this type of analysis is important for a better understanding of the situation and trends of labour supply, namely involuntary and insignificant nature of part-time work and other forms of labour flexibility in Portugal and other countries with low hourly wages
  • some inconclusive results about working time and leisure trends and stylised facts (for example: using time-series and cross-section data) could be explained by this kind of labour supply curve

The Backward Bending Labour Supply Curve - Elsa Fontainha