1. Nonparticipation and other examples in the labor market

2. Starting at point A, if the person thinks of “buying”
Nonparticipation - not in the labor market
income
The flat budget
line implies the
amount of inc.
given up for one
more unit of
leisure is low.
Note:
1)nonlabor
income is
available
2) Wage is
relativiely low
I1 I2 I3 I4 A
hours 24
Starting at point A, if the person thinks of “buying”
another unit or leisure, the amount they are willing to pay is higher than what they have to pay. So they buy another unit. This moves the person down to a point of all leisure.

3. Starting at a the person has utility I1
Starting at a the person has utility I1. They would give up ac to get one more unit of leisure and be as happy. But they only have to give up ab. The individual takes another unit of leisure and is happier for it
Nonparticipation - not in the labor market
income
I1 I2 I3 I4 a b c A
hours 24
Analogy time: say you are truly willing to give up $10 for something. But you only have to give up, say $5. You do it and are happier.

4. So, for the person on the previous slide, the wage in the market is so low that the individual is willing to give up income and take leisure up to the point that they do not work at all.

5. The wage implied by this budget is tangent to the
Reservation wage
The wage implied by this
budget is tangent to the
indiff. curve at the 24
leisure point. This is the
highest wage at which the
individual chooses not to
work.
A wage just a wee bit
higher would be the lowest
wage at which the
individual would work.
You could say the reservation wage is the value of leisure because if the wage is higher, then leisure will be given up.

6. Let’s consider a retirement plan that pays individual a certain
amount - provided they do not
work any hours. Their budget
is the horizontal line at a.
At various wage rates we see
how much leisure the individual
would have with the same
income as in retirement. a
If the indiff. curves are relatively steep, as in graph, people
retire. They are willing to give up much income in
exchange for more leisure. If indiff. curves are relatively flat, (workaholics, remember)people may work, even at lower total pay compared to retirement income.

7. Standard workday - 8 hour shift and underemplolyent
income
Say a company will only let employees work 8 hour days. Point a has 16 hours of leisure and thus 8 hours of work. The person involved
would like less leisure, but can not get to point b because of the employer restriction. This implies the worker is
underemployed.
b a
leisure

8. Point a has 16 hours of leisure, the amount an employer may
Standard workday - 8 hour shift and uoveremploymentt
Point a has 16 hours of leisure,
the amount an employer may
require. The person involved
would like more leisure. This
implies the worker is
overemployed.
a b

9. Premium pay versus straight pay
You may be familiar with the concept of getting paid time and a half if you work overtime. This is called premium pay. This changes the budget line to have a kink like below:

10. Premium pay versus straight pay
Once the person decides how much they want to work given the overtime pay, we can think of another pay scheme that gives them one wage for all hours, but they could have same pay as with the overtime scheme.
At point a the individual has a certain
income level and this could occur from
either budget line. a

11. Under the overtime payment plan the person wants to work
Premium pay versus straight pay
Under the overtime payment
plan the person wants to work
amount implied by point a.
If a standard one rate is paid, the
person could work the same
hours and receive the same pay,
but they find it better to work
less.
The employer would have to
a b
offer a really high wage and thus income to get the worker to work as much as under the overtime pay scheme.