© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-1 Labour Supply Over the Life-cycle Chapter Four Created by: Erica Morrill, M.Ed Fanshawe College

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-2 Chapter Focus Labour supply patterns Lifetime planning and wage elasticity Labour supply over the lifetime Fertility and womens labour supply decisions Retirement

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-3 Figure 4.1 Labour Force Participation Profiles Men participation increases in twenties peak at declining at retirement age participation of older men has declined since 1971

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-4 Figure 4.1 Labour Force Participation Rates Women data more complicated to interpret society/economic factors influence womens participation rates generally shaped like mens participation slower entry into labour market has been rising since 1971

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-5 Dynamic Life Cycle Models A model based on the assumption that individuals plan out their lifetime supply of labour given their expected economic environment (specifically wages and other income)

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-6 Dynamic Life Cycle Model Basic Assumptions: preferences over consumption and leisure today and in the future maximize utility function optimize consumption an leisure in each period of time given expected lifetime budget constraint

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-7 Figure 4.2 Dynamic Life Cycle Wage Changes Two profiles Illustrates how wages first increase and then decline blip represents a temporary one-time wage increase at t

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-8 The Dynamic Life Cycle Model in Context Substitution and income effects differ depending on permanent or temporary wage change anticipated or unanticipated wage change Labour supply response will differ depending on the source of the wage increase

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-9 Figure 4.2 Dynamic Life Cycle Wage Changes A B Permanent wage difference B C Evolutionary wage change associated with aging C D Evolutionary wage change associated with aging

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-10 Fertility and Childbearing Important in understanding womens labour supply Variables affecting fertility decision income cost of child price of related goods tastes and preferences technology advances consumption vs. nonmarket time

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-11 Income Positive relationship between income and the desired number of children Contraceptive knowledge and the cost of having children tend to be related to the income variable Difficult to separate the pure effect income on decision

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-12 Price and Cost of Children The demand for children is negatively related to the price or cost of having children The main cost is income foregone by spouse potential earnings can have both an income and substitution effect on decision to have children

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-13 Price of Related Goods Dramatic changes in private costs can impact the decision to have children A rise in the price of complementary goods would reduce desired number of children Fall in price (public subsidies) could encourage larger family sizes

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-14 Retirement Decisions and Pensions An area of increasing concern Retirement could imply: leaving the labour force reducing hours worked moving to a less difficult job Impacts social policy Concerns of solvency of pension funds

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-15 Retirement Theoretical Determinants of Retirement mandatory age wealth and earnings health and the nature of work and the family pension plans

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-16 Figure 4.3 a No Retirement Test YMYM YBYB EPEP EOEO B T No Retirement Test (retirement)

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-17 Figure 4.3 b No Retirement Test YMYM YBYB B T Full Retirement (retirement) 0 Y

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-18 Figure 4.3 c No Retirement Test YMYM YBYB B T Partial Retirement Test (retirement) 0 Y C D C d YBYB YBYB

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-19 Employer-Sponsored Pension Plan Earnings Based Plans 3/4 of workers Flat Benefit Plans 18% of workers Defined Contribution Plans 9% of workers Defined Benefit Plans

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-20 Defined Benefit Plans Influences retirement decision Encourages early retirement Discourages postponed retirement

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-21 Figure 4.4 Pension Benefit Accruals

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-22 Features Backloading Early/special retirement provisions Postponed retirement provisions

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-23 Backloading Benefits get larger as seniority-based wage increases Young workers have an incentive to stay with the firm Older workers have an incentive not to retire too soon

© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-24 End of Chapter Four