Labor Supply (Lectures 2 and 3).

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Presentation transcript:

Labor Supply (Lectures 2 and 3)

Textbook reading Borjas, Chapter 2 Ehrenberg & Smith, Chapters 6 and 7. Cahuc & Zylberberg, Chapter 1.

Additional readings Eissa & Liebman (QJE, 1996): “Labor Supply Response to the Earned Income Tax Credit.” González (AEJ: Policy, 2013): “The Effects of a Universal Child Benefit on Conceptions, Abortions, and Early Maternal Labor Supply”

Motivation: Why study labor supply? The study of labor supply will help us answer questions such as: Why has female labor force participation increased so much in recent decades? Why have hours of work per week declined? Do welfare programs affect incentives to work? Do income tax rates affect hours of work? Why do household members specialize in labor market or household production?

The basic static model The worker’s preferences The budget constraint How much to work

Comparative statics (i) What if nonlabor income changes?

Comparative statics (ii) What if the wage changes? Income and substitution effects

The employment decision The reservation wage

The labor supply curve The relationship between hours of work and the wage rate. Individual versus aggregate.

Labor supply elasticity The % change in hours of work associated with a 1% change in the wage rate.

Labor supply elasticity for men Empirical results and problems

Labor supply of women Large increases in FLFP in many countries during the past few decades. Related to wage increases? To declines in reservation wages? Related to lower fertility? To technological changes in household production?

Welfare programs and work incentives Cash grants versus earned income tax credits.

Labor supply over the life cycle The life cycle path of wages and hours. The intertemporal labor supply elasticity. Transitory vs. permanent wage changes.

Labor supply over the business cycle The added worker effect and the discouraged worker effect.

Retirement Choosing the optimal retirement age. Wage changes versus pension benefit changes. Kinks in benefit schedules.

Household production Household “commodities”. The household production function. The division of labor in the household.

Fertility The fertility decision The impact of income and prices

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