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AJ 499 O1 spring 2020Writing assignment 3. Chapter 12.docx

The document outlines several economic concepts related to education, labor economics, and wage differentials. It discusses theories of education such as the human capital and signaling models, examines how wages differ across working environments, and explores the implications of competition in labor markets. Additionally, it highlights the factors influencing labor demand, including market structures and individual preferences in wage and safety trade-offs.

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AJ 499: O1 spring 2020 Writing assignment 3. Chapter 12 can be very useful to complete this assignment. Please submit to my email [email protected] on or before March 27th 2020. Write a short paper (2-4 pages) about domestic violence and how certain aspects of being in those situations can further impact lives. ECON 370 - Chapter 9 - Labour Economics Maggie Jones Why do people obtain education? Why do people obtain education? I Our discussion of labour supply has focused on the quantity aspect
I extensive margin: do individuals provide labour at all? I intensive margin: how much labour to provide? I So far we have ignored the quality dimension I quality encompasses education, training, labour market information, mobility, and health Why do people obtain education? I Two prevailing theories: I Becker (1964): Human Capital Model I investments are made in human resources to improve productivity and hence earnings I Spence (1974): Signalling Model I education is used to signal or “sort” workers of di↵ ering abilities Human Capital Model Human Capital Model I Education enhances productivity I Costs are incurred now because of the expectation of future benefits
I costs: I benefits: Human Capital Model I Decision rule: go to school if the benefits exceed the costs I Model is a simplification in that it only considers: I investment components (ignores consumption components) I private components (ignores social components) Return to Schooling Return to Schooling Age-Earnings Profile by Education I Environment consists of 3 levels of schooling I Each level of education is associated with an age-earnings profile I None = < High School =) enter workforce at age 16 and earn Ynone I HS = High School Degree =) enter workforce at age 18 and earn Yhs
I PS = Post-Secondary Degree =) enter workforce at age 22 and earn Yps I Assume Ynone,t < Yhs,t < Yps,t 8t I Education is costly: tuition, books, opportunity costs Age-Earnings Profile by Education Assumptions I No psychic utility/costs from education I hours of work are fixed I expected income is known for each level of education I individuals can borrow or lend at rate r Age-Earnings Profiles by Education E ar ni ng s Age
Signaling Model Signaling Model I Education does not increase productivity I Workers are still rewarded for productivity, but their productivity varies according to their underlying ability I Employers do not know underlying ability, so must use “signals” to infer productivity I In this sense, imperfect information is embedded in the signaling model I Individuals know their productivity and employers wages and choose education to maximize their utility
ECON 370 - Chapter 8 - Labour Economics Maggie Jones Compensating Wage Differentials I Our discussion thus far has mostly assumed that workers are homogenous I One of the implications of this assumption is that wages will be the same for these workers I In reality the wages of di↵ erent members of the population di↵ er substantially I We’re going to shift focus to understand some of the ways in which wage di↵ erentials can arise Compensating Wage Differentials I Workers may be equally productive but face di↵ erent working environments for which they receive di↵ erent compensation I Adam Smith outlined 5 principals that result in di↵ erential compensation
I agreeableness or disagreeableness of employments themselves I easiness and cheapness or di�culty and expense of learning them I constancy or inconstancy of employment in them I small or great trust which must be reposed in those who exercise them I probability or improbability of success in them The Firm Single Firm’s Isoprofit Schedule I We will begin by focussing on wage di↵ erentials that arise due to compensation for risk of injury or illness I Trace out firm’s isoprofit schedule to obtain all the combinations of wages and “safety” (or any job attribute) that generate a given level of profits I Both wages and providing a safe work environment are costly and must be traded-o↵ accordingly I firm can provide more safety and maintain the same level of profits if it can reduce wages I Firm exhibits a diminishing marginal rate of transformation between wages and safety
w ag e safety Different Firms with Different Safety Technologies I Higher isoprofit schedules correspond to lower profits I The shape of the isoprofit schedule is determined by the underlying safety technology I di↵ erent firms can have di↵ erent abilities to provide safety at a given cost w ag e safety Different Firms with Different Safety Technologies I The outer limits of the two isoprofit schedules are known as
the market envelope curve I They display the maximum compensating wages that will be o↵ ered in the market for various levels of safety I Note that in a competitive equilibrium, firms earn 0 profits so that I1 = I2 = 0 The Worker Single Individual’s Preferences I Define an individual’s preferences over wages and safety I These preferences can be represented by an indi↵ erence curve I ICs exhibit a diminishing marginal rate of of substitution between wages and safety I When safety is “scarce” the individual will give up a large amount of wages for an incremental change in safety I When safety is “plentiful” the individual is less inclined to give up wages w ag e safety
Differences in Risk Preferences I Individuals may di↵ er across their “riskiness” I e.g., risky individual does not need to be paid a much higher wage to accept a lower level of safety I less risky individual needs to be paid a higher wage in order to accept a lower level of safety w ag e safety Equilibrium with Single Firm, Single Individual Equilibrium with Single Firm, Single Individual
w ag e safety Equilibrium with Many Firms and Individuals w ag e safety Equilibrium with Many Firms and Individuals I Risk averse individuals sort themselves into safer firms/industries/occupations I Risky individuals sort into less safe firms/industries/occupations that pay high wages I Set of tangencies between isoprofit and indi↵ erence schedules outline the wage-safety locus I slope of the wage-safety locus gives the change in the wage premium that the market yields for di↵ erences in the risk of
the job I given that compensating wages are required for reductions in safety, the only restriction on the slope of the wage-safety locus is that it is negative Effects of Safety Regulations Effects of Safety Regulations w ag e safety Effects of Safety Regulations w ag e safety Effects of Safety Regulations w
ag e safety Single Firm’s Isoprofit Schedule I Referring to the previous graph, we see that the firm’s isoprofit schedules exhibit a diminishing marginal rate of transformation I At s = 0 the firm provides no safety. It can therefore increase safety relatively cheaply. I Once safety increases substantially, it becomes more costly for the firm to provide increased levels of safety Different Firms with Different Safety Technologies I Firm 1: safety is costly to implement (e.g. dangerous industries like mining or logging) I Firm 2: safety is cheap to implement (e.g. o�ce job) I Outer edge of isoprofit schedules represents the market envelope curve (a.k.a. the employer’s o↵ er curve) Equilibrium with Single Firm, Single
Individual I In the previous graph we assume perfect competition I Firm will operate on IP schedule such that profits are equal to 0 given the safety technology that the firm faces I Consumer will try to reach maximum utility (indi↵ erence curve) given that the firm is restricted to making 0 profits Equilibrium with Many Firms, Many Individuals I We imagine 3 firms: I A - least safe (costly to increase safety) I B - middle ground I C - most safe (cheap to increase safety) I And 3 workers: I i - riskiest (don’t have to pay much higher wages to accept less safety) I ii - middle ground I iii - risk averse (have to compensate them a lot for them to be willing to accept lower safety) I Equilibrium: risky workers will sort into less safe firms and receive higher wages and risk averse workers will sort into more safe firms and accept lower wages
Effects of Safety Regulations I The previous graph represents a situation where safety regulations don’t improve the well-being of the individual I We assume the firm operates in perfect competition and let sR represent the minimum level of safety mandated by the government Effects of Safety Regulations I The previous graph represents a situation where utility doesn’t decline in response to an increase in safety I We assume the firm is not operating in perfect competition, so that profits are greater than 0 I If the firm makes profits, then to pay for an increase in safety, the firm can dip in to profits I This is likely unrealistic in reality ECON 370 - Chapter 7 - Labour Economics Maggie Jones
Wages and Employment in a Single Labour Market I Chapter 7 puts the supply and demand of labour together to examine equilibrium wages and employment I We will start by assuming output markets and labour markets are perfectly competitive I Workers sell labour on an individual basis I We begin with the single firm’s decision problem, then move to the market–e.g. “occupation”, “industry”, “region”, etc.–the level of aggregation that determines wages I We then examine the implication of relaxing the perfect competition assumption The Competitive Firm’s Interaction with the Market W ag
e Employment W ag e Employment W ag e Employment The Competitive Firm’s Interaction with the Market I One problem with the previous analysis is that it assumes that the firm can actually get all the labour it needs at a given wage I In the short run this may not always be the case (although in the long run it is more realistic) I E.g. the firm may have to raise wages in the short run to attract workers W ag e
Employment W ag e Employment Implications of Competitive Markets I Wages are equalized across homogeneous workers and homogeneous firms I No involuntary unemployment I No queues to work In reality, we may have imperfect competition, imperfect information, risk and uncertainty, or a long-run relationship between firms and workers Imperfect Competition in the Product Market Imperfect Competition in the Product
Market I If the industry is competitive in the product market, then the industry demand for labour is obtained by aggregating all labour demand curves I If the firm is a monopolist in the product market, then their labour demand curve IS the industry labour demand curve I Under perfect competition, the firm sets MPN ⇥ P = w⇤, where w⇤ is determined in the market (assumes MR = P) I The monopolist sets MPN ⇥ MR = w⇤ I as monopolist expands output, MPN AND MR decline W ag e Employment Imperfect Competition in the Product Market I Note that there is no reason that the monopolist should a↵ ect the market wage I As long as there is a large number of other firms (possibly in other industries) drawing from the labour market, the
monopolist will not a↵ ect wages I Thus, the monopolist will continue to act as a wage-taker, as was the case under competitive markets Imperfect Competition in the Product Market I However, it doesn’t always appear to be the case that monopolists act as wage-takers I monopolists may earn profits and workers may be part of a union that collectively bargain for profits to be split among employees I monopolists may be larger firms where monitoring is costly, and thus a “premium” is paid to workers to prevent shirking Imperfect Competition in the Labour Market Imperfect Competition in the Labour Market I It may be the case that the firm is the only firm purchasing labour in a given market
I In this case, the firm has market power in the labour market, in a similar way that we think about market power in a product market I Monopsonists can be either perfectly discriminating or non-discriminating I perfectly discriminating = everyone paid reservation wage I non-discriminating = if you increase the wage to attract more workers, you have to increase the wage of existing workers, too Imperfect Competition in the Labour Market I Both types of monopsony result in an upward sloping labour supply schedule I Perfectly discriminating: I Average cost and marginal cost curves flatter I Non-discriminating: I Average cost and marginal cost curves steeper Example: Discriminating vs Non-Discriminating N w TCd TCnd ACd ACnd MCd MCnd 1 5
2 10 3 15 4 20 W ag e Employment Imperfect Competition in the Labour Market I Firm will max profits by hiring labour until MC = MRPN I discriminating monopsonist: wage determined by intersection of MC and MRPN I non-discriminating monopsonist: wage determined by point on AC curve that corresponds to N associated with intersection of MC and MRPN I di↵ erence between MRPN and w has been called measure of monopolistic exploitation
Working with Supply and Demand Working with Supply and Demand I We can use our tools of labour supply and demand is to “simulate” the e↵ ects of a policy change on equilibrium employment and wages I This requires a functional form for labour supply and demand I NS = f(W ; X) I ND = g(W ; X) I W, NS, ND are endogenous variables (meaning they are determined by the system) I Z, X are exogenous variables (meaning they are determined outside the system) I Solving the system requires a market clearing condition, NS = ND, from which we can derive w⇤ and N⇤ Working with Supply and Demand
ECON 370 - Chapter 5 - Labour Economics Maggie Jones Demand for Labour in Competitive Labour Markets Demand for Labour in Competitive Labour Markets I The principles that determine the demand for any factor of production can be applied to study the demand for labour I We consider the short run as a period of time during which one or more factors of production cannot be varied I The long run is then the period during which the firm can adjust all of its inputs Demand for Labour in Competitive Labour Markets I The demand for labour refers to the firm’s decision of how much labour to employ at each wage I This decision will depend on the firm’s:
I objectives: to maximize profits I constraints: demand in product markets, supply conditions in factor markets, production function I in the short run, this includes having at least one factor of production whose quantities are fixed I Our goal will be to derive the theoretical relationship between labour demand and the market wage, holding all else constant Demand for Labour and Market Types I The amount of labour demanded will depend on the structure of the product and labour markets I Product markets (firms sell their output here): I Perfect Competition* I Monopolistic Competition I Oligopoly I Monopoly I Labour markets (firms purchase one of their inputs here): I Perfect Competition* I Monopsonistic Competition I Oligopsony I Monopsony Perfect Competition in Product and Labour Markets I Product markets:
I large number of sellers I sellers produce a homogeneous product I sellers and buyers have perfect information I no barriers to entry I Labour markets: I large number of workers I workers are homogeneous I workers and employers have perfect information I no barriers to entry I Implication is both a horizontal demand in the product market as well as a horizontal supply in labour market Demand for Labour in the Short-Run Demand for Labour in the Short-Run I We will consider a firm that produces output Q using inputs of capital K and labour N I The firm turns capital and labour into a product according to the production function: Q = F(K, N) (1) I In the short run, capital is fixed at K0 (i.e. it can be treated like a constant) I Then the production is just a function of N I firms can either adjust N by changing the number of people
employed or by changing the number of hours it requires Demand for Labour in the Short-Run I Demand in the short-run is derived from examining short-run output and employment decisions I Two decision rules follow from profit maximization I firm will operate if it can cover variable costs (fixed costs treated as sunk costs) I if the firm operates, it should produce quantity Q⇤ that sets marginal revenue (MR) equal to marginal costs (MC) I If the firm is a price taker, the marginal revenue of another unit sold is the prevailing market price (MR = P) I Under perfect competition, the firm cannot influence the market wage, and so the marginal cost of an additional unit of labour as input is the prevailing wage (MC = W) Marginal and Average Product of Labour Marginal and Average Product of Labour vs Employment Q
ua nt ity Employment Marginal Revenue Product and Average Revenue Product I Firms only care about quantity because it relates to revenue I Marginal Revenue Product of Labour: additional revenue due to additional worker I Average Revenue Product of Labour: average revenue per worker MRPN and ARPN vs. Employment $ Employment Deriving Labour Demand I Two key points arise from firms profit maximizing under perfect competition I Operate if total revenue exceed total variable costs I If producing, produce quantity at which marginal revenue =
marginal cost MRPN = MCN Deriving Labour Demand W ag e Employment Demand for Labour in the Long-Run Demand for Labour in the Long-Run I In the long-run, firms can vary all their inputs I both K and N now choice variables I Decisions are examined in two stages
I minimum-cost of K and N to produce any output I given cost minimization, choose profit-maximizing level of output Q I Starting point I isoquants: combinations of capital and labour required for a given output I iso-cost curve: combinations of capital and labour the firm can purchase given their market price for a given expenditure level Isoquants C ap ita l Labour Isoquants I As with utility functions, isoquants exhibit diminishing marginal rates of technical substitution I as one input becomes scarce it’s harder to substitute away from it
I Di↵ erent technologies may have di↵ erent substitutability across inputs I 1 broom per employee cleaning sidewalks - adding 10 brooms without any additional workers doesn’t increase output I self-checkout machines are highly substitutable for cashiers Isocost Lines C ap ita l Labour Isocost Lines I The profit maximizing firm will choose the cheapest level of K and N that yields the output Q0 I i.e., choose the combination of K and N on isoquant Q0 that lies on the isocost line closest to the origin Cost Minimization C ap
ita l Labour Cost Minimization I Tangency point between isoquant and isocost lines yields the point at which the marginal rate of technical substitution is equal to the market rate of substitution: I In the short run, the marginal product of labour is equal to the wage I In the long run, the relative marginal product of labour is equal to the relative wage Deriving Labour Demand in the Long-Run I Labour demand tells us how firms change the amount of labour they employ in response to changes in the wage I Deriving labour demand simply amounts to varying the wage in our isoquant-isocost framework Labour Demand in the Long-Run C
ap ita l Labour Labour Demand in the Long-Run I Implication is that in the long-run, demand for labour is downward sloping I As wages increase, demand for labour falls, output declines I Why does the firm decide to lower output? Profit Maximizing Output Levels Pr ic e Output Pr ic e Output Costs, Capital, and the Wage Rate
I Total costs may increase or decrease as wages increase I lower quantity produced decreases total costs I higher wage increases total costs I Capital may also increase or decrease as wages increase I Labour will always decrease I Costs and capital depend on: I substitution e↵ ect: how much of the cheaper input does the firm substitute for labour I scale e↵ ect: how much does the firm reduce quantity produced in response to cost increase Substitution and Scale Effects I Substitution e↵ ect: I capital becomes cheaper (relative to labour) I firm substitutes away from labour and towards capital I N falls, K increases, C increases I Scale e↵ ect: I firm reduces scale of operation I K falls, N falls, C falls Scale and Substitution Effects C ap ita l
Labour Short vs. Long-Run Demand for Labour Short vs. Long-Run Demand for Labour I Short-run I capital is fixed I =) no substitution between capital and labour I =) no substitution e↵ ect I Long-run I firm can choose both inputs I substitution and scale e↵ ects work to reduce labour demand (in event of wage increase) I Together, this means an increase in the wage will lead to a larger e↵ ect on labour demand in the long-run compared to the short-run Elasticity of Labour Demand Elasticity of Labour Demand
I Demand for labour is a negative function of the wage rate I implication: factors that increase the wage will reduce demand for labour I e.g., union wage demand, wage parity scheme, minimum wage, equal pay, fair-wage legislation, extension legislation I In reality, the magnitude of the firm’s response to a wage change depends on its elasticity of demand for labour I Elasticity of demand is a↵ ected by the availability of substitute inputs, the elasticity of supply of substitute inputs, the elasticity of demand for output, and the ratio of labour cost to total cost Inelastic vs. Elastic Demand for Labour W ag e Employment W ag e Employment Availability of Substitute Inputs
I Labour demand will be inelastic when (e.g.) capital is not easily substituted for labour W ag e Employment I More substitutable inputs mean there is a large substitution e↵ ect and a larger change in labour demand Availability of Substitute Inputs A↵ ected by: I Underlying technology: can only use labour for a given process I Institutions: union does not allow for non-union workers, di�culty borrowing from lending institution, etc. I Time: in the long-run substitutes are more likely to become available Elasticity of Supply of Inputs I Alternative inputs also a↵ ected by changes in the price of input W ag e
Employment W ag e Employment I If wage ", firm will substitute towards capital, demand for capital shifts out I More inelastic supply of substitutes =) more inelastic demand for labour Elasticity of Supply of Inputs A↵ ected by: I Availability of resources - if resources of alternate input are plentiful, they will more easily adjust I Technological innovation - as innovations occur, technology underlying production may change and a↵ ect elasticity I Number of producers Elasticity of Demand for Output W ag e
Employment W ag e Employment W ag e Employment W ag e Employment Elasticity of Demand for Output I The size of the scale e↵ ect is determined by the elasticity of demand for the product I An inelastic demand for output leads to an inelastic demand for labour I Wage increase is e↵ ectively passed on to consumers in the form of higher prices
Elasticity of Demand for Output I The size of the scale e↵ ect is determined by the elasticity of demand for the product I An inelastic demand for output leads to an inelastic demand for labour I Wage increase is e↵ ectively passed on to consumers in the form of higher prices Elasticity of Demand for Output A↵ ected by: I Nature of the commodity - some commodities more or less necessary (e.g. think of gasoline compared to something like a fan) I Availability of substitutes in output market (e.g. a firm producing coca-cola may face an elastic demand for coca-cola if, in response to a price change, individuals can substitute towards pepsi) I Income of consumers in the product market (high income earners are generally less sensitive to price changes) Share of Labour Costs in Total Costs I Share of labour costs measures the extent to which labour is an important component of total cost
I Demand for labour will be inelastic if labour is a small portion of total cost I firm won’t have to cut output by as much because the cost from the wage increase will be small I E.g., construction craftworkers, airline pilots, employed professionals Changing Demand Conditions, Globalization, and Offshoring Changing Demand Conditions, Globalization, and Offshoring I We can use our insights from labour demand theory to think about how Canadian firms make employment decisions in an increasingly globalized world I outsourcing: delegation of specific elements of internal production to external entity (e.g., a professor asking a research assistant to do data entry) I o↵ shoring: delegation of specific elements of internal production to external foreign entity (e.g., a professor (or lazy/clever domestic research assistant) sending data entry work to a foreign country)
The Impact of Trade on a Single Labour Market: Short-Run I Scenario: Canadian firms compete with foreign firms for the same product I Product market conditions will a↵ ect output at Canadian firms, which in turn a↵ ects labour demand I In the short run, increased competition lowers the price of goods =) MRPn # I If the Canadian wage remains constant, then employment will fall The Impact of Trade on a Single Labour Market: Short-Run Pr ic e Output W
ag e Employment Offsetting Factors: Short Run I Wage could decrease I Marginal productivity could increase The Impact of Trade on a Single Labour Market: Long-Run I Scenario: Canadian firms compete with foreign firms for the same product I Product market conditions will a↵ ect output at Canadian firms, which in turn a↵ ects labour demand I However, in the long-run, we can think of Canadian labour as being one labour input into a production technology that draws on labour from other countries I Just as firms can substitute capital for labour in the long-run, they can also substitute foreign labour for domestic labour The Impact of Trade on a Single Labour Market: Long-Run
Fo re ig n_ L ab ou r Domestic_Labour The Impact of Trade on a Single Labour Market: Long-Run I Implications are that Canadian firms will substitute towards cheaper foreign labour I Not always the case: I foreign labour has to be a substitute for domestic labour I if foreign and domestic labour are close substitutes then the substitution e↵ ect (# domestic labour) may o↵ set the scale e↵ ect (" domestic labour) I relative productivity of domestic versus foreign labour matters I focusing on labour costs alone is unwise as no firm would hire purely foreign workers if the productivity of foreign workers is too low
Compensation Costs (% of Canada) Compensation Costs (% of Canada) � Productivity, Hourly Compensation, Unit Labour Costs in Manufacturing Trends in Labour Costs and Productivity Canada relative to USA (base year (1989) ECON 370 - Minimum Wages and Employment Maggie Jones Minimum Wages Across Canada $13.85 $13.00 $13.46
$12.71 $15.00 $12.50 $11.65 $14.00 $11.32 $11.50 $11.40 $11.55 $12.25 YUKON NUNAVUT NORTHWEST TERRITORIES NEWFOUNDLAND AND LABRADOR PRINCE EDWARD ISLAND NOVA SCOTIA NEW BRUNSWICK QUEBEC
ONTARIO MANITOBA SASKATCHEWAN ALBERTA BRITISH COLUMBIA MINIMUM HOURLY WAGE RATES AS OF OCTOBER 1ST, 2019 RETAIL COUNCIL OF CANADA RetailCouncil.org Minimum Wages and Employment I In Canada: I Set by provinces and territories I Highest: Alberta $15.00/hr I Lowest: Nova Scotia $11.55/hr I Interprovincial/international industries are under federal jurisdiction I In the United States I Set by local, state, and federal governments I Employers generally have to pay the highest out of the three minimum wages
Minimum Wages and Employment I One of the largest debates in labour economics revolves around the employment e↵ ects of raising the minimum wage I According to the theory of the firm, we expect wage increases to be accompanied by a decline in employment I Empirical evidence does not always suggest this is the case Card and Krueger I In April, 1992, New Jersey increased the minimum wage from $4.25/hr to $5.05/hr I Card and Krueger compare changes in employment in the fast food industry in New Jersey to that in Pennsylvania over the same time period I No evidence of reduced employment ECON 370 - Chapter 3 - Labour Economics
Maggie Jones Labour Supply and Public Policy Public Policy I Canada’s provincial and federal governments implement a number of social programs designed to alleviate poverty I transfer programs I unemployment insurance I welfare programs I child care subsidies I About 10% of GDP is spent on income maintenance schemes Income Maintenance Programs Public Policy I Objective of these programs is to alleviate poverty I universal: e.g., transfer everyone a fixed income (most expensive type of program) I targeted: e.g., transfer enough to low-income individuals so that they make at least as much as the poverty line
I In any income maintenance program we are concerned about the disincentive e↵ ects on labour supply Types of Income Maintenance I Transitory income shocks: temporary decline in income I e.g. being laid o↵ I unemployment insurance I e.g. workplace injury I worker’s compensation I Permanent income shocks: long-term decline in income I e.g. permanent injury or disability I disability benefits I e.g. discouraged worker I welfare programs after unemployment insurance is exhausted I Returning to work: individual’s who have been out of the labour force but plan to return I e.g. having children I child care subsidies Types of Income Maintenance I It turns out there are a number of di↵ erent types of income maintenance programs that may have di↵ ering e↵ ects on a
worker’s labour supply choice I demogrants, welfare, negative income taxes, wage subsidies, earned income tax credits, employment insurance, disability payments, worker’s compensation, child care subsidies I We will focus on static partial equilibrium e↵ ects I we will ignore dynamic (over time) e↵ ects and general equilibrium (over the economic system) e↵ ects Demogrants Demogrants I Income grants tied to specific demographic characteristics (e.g., age, gender, etc.) I Example: Universal Child Care Benefit (before it became the Canada Child Benefit) paid $160/month for each child under 6 and $60 per month for each child between 6 and 18 Demogrants In co m e Leisure
Welfare Welfare I Sometimes called “social assistance” or “income assistance” I Financed in part by the federal government but administered by provinces I Payments to non-participants of the labour force; amounts typically based on needs of the family (e.g. family size, city, etc) Welfare Welfare In co m e Leisure Welfare
I Potential solutions to disincentive e↵ ects: I Decrease payment amounts I Increase market wage I Reduce implicit tax I Alter preferences Negative Income Tax Negative Income Tax I Guaranteed income plan plus an implicit tax rate applied to labour market earnings Y = G + (1 � t) ⇥ W Negative Income Tax In co m e Leisure
Wage Subsidies and Refundable Tax Credits Wage Subsidies and Refundable Tax Credits I Alternative to taxing earnings, per-hour wage is supplemented by government I Essentially can be viewed as an increase in the wage rate, which e↵ ectively induces an income and substitution e↵ ect. Wage Subsidies and Refundable Tax Credits In co m e Leisure Wage Subsidies and Refundable Tax Credits I Work incentives tend to be better under wage subsidy
compared to negative income tax because the income and substitution e↵ ects work in opposite directions I Disadvantage is that it is not helpful for people who legitimately cannot work I Often wage subsidies are targeted to low-income people I In Canada we have a program called the Working Income Tax Benefit I received in the form of tax breaks after you fill out income tax forms Working Income Tax Benefit I Implemented in three phases I phase-in: wage subsidy proportional to earnings I flat range: constant subsidy at max wage subsidy I phase-out: negative income tax as earnings reach highest level Working Income Tax Benefit Working Income Tax Benefit In co m e
Leisure Employment Insurance Employment Insurance I Changes budget constraint faced by individuals I Incentive e↵ ects often di↵ er based on individual attachment to the labour market I Assumption: if individuals want to increase (or decrease) labour supply they can I E.g. 60% of weekly pay for up to 20 weeks, requires a min. of 14 weeks Employment Insurance 0 10 0 20 0 30 0
40 0 50 0 In co m e 0 10 20 30 40 50 Weeks Leisure 0 10 0 20 0 30 0 40 0 50 0 In
co m e 0 10 20 30 40 50 Weeks Leisure Labour Income Benefits Total Income Disability Benefits and Worker’s Compensation Disability Benefits and Worker’s Compensation I Social assistance programs designed to compensate individuals who legitimately cannot work I Work incentives are less of a concern when designing disability benefit and worker’s compensation programs I There are still instances when we might be concerned about disincentive e↵ ects I The type of program implemented will depend on the nature of the disability or injury
I Depending on the type of disability/injury, the individual’s budget constraint and preferences will be a↵ ected di↵ erently Disability Benefits and Worker’s Compensation I Ways in which individual labour supply may be a↵ ected by disabilities and injuries: I partially disabling injury could a↵ ect time allocated to the labour force, but may not a↵ ect performance I other disabilities may a↵ ect productivity (wages) but not time devoted to the labour force I some disabilities may require expensive medical expenditures I it is also possible for a disability to a↵ ect an individual’s preferences over their labour-leisure allocations Time Constraints In co m e Leisure Productivity
In co m e Leisure Medical Expenses In co m e Leisure Preferences In co m e Leisure Disability Benefits and Worker’s Compensation I As we saw previously, di↵ erent policies will have di↵ erent e↵ ects on labour supply
I Worker’s compensation* I Disability pension entitlements I Long-term disability insurance I Court awards Worker’s Compensation Worker’s Compensation I Designed to soften the negative e↵ ects of a temporary disability/injury on wages I Consider the case where an individual is compensated up to two thirds of the loss of income I Idea is that as the individual is forced to reduce their labour supply, the negative impact on wages is not as severe Worker’s Compensation In co m e Leisure Child Care Subsidy
Child Care Subsidy I We often think of child care as a fixed cost incurred by the household I Several types of child care subsidies available (e.g. from in-class discussion readings) I Imagine a program designed to subsidize child care for those who are employed I cost incurred only if individual works Child Care Subsidy In co m e Leisure Child Care Subsidy In co m e Leisure
Child Care Subsidy In co m e Leisure ECON 370 - Chapter 2 - Labour Economics Maggie Jones Labour Supply: Individual Attachment to the Labour Market Labour Supply I Is supply upward sloping? I Intuitively it makes sense that higher wages generate an “incentive” e↵ ect, wherein people are incentivized to work more when the wage increases I This may not always be the case (we will see why/where) I Concept that people will work more when wages are higher is
still at the heart of the study of labour supply I We will study how this a↵ ects the decision to work (extensive margin) and how much to work (intensive margin) Extensive Margin: To Participate or Not Labour Force Participation I labour force participation decision: to participate in paid labour market activities or not I as opposed to: unpaid work in the home, volunteer work, education, retirement I has implications for the size and composition of the labour force I a↵ ects unemployment, economic growth, occupation and gender composition I these, in turn, a↵ ect relative wages, unionization, daycare, equal pay, etc. The Labour Force I potential labour force: everyone who is eligible who participates in labour market activities
I eligible: civilian non-institutional population, �15 years old, excluding the territories and Indian reserves I labour force: those in the “potential labour force” who are in the labour force I employed: those in the labour force who did any work during the survey period, or those in the labour force who were ill or on strike, but otherwise would have been working, during the survey period I unemployed: those in the labour force who are not employed, but are seeking work Participation vs. Unemployment I labour force participation rate: fraction of eligible population who is in the labour force I unemployment rate: fraction of those in the labour force that are unemployed How does the LFP change? Labour Force Participation Rate Over Time
Labour Force Participation Rate Across Countries Labour Force Participation Rate Across Countries LFPR vs.Per Capita Log GNI Intensive Margin: How Much to Participate Hours Worked I The “hours worked” decision encompasses more than just how many hours to work I hours per day, days per week, weeks per year I In the short-run, hours of work are relatively fixed I Occupation choice, flexible working hours, additional part- time jobs, allow hours worked to be more variable than we may assume
Distribution of Hours Worked Basic Income-Leisure Model Labour Supply Model I We want to represent an individual’s choice of hours worked, given their market opportunities and the value they place on non-market activities I We will assume that individuals do the best they can (optimize) with the time they have (constraints) given their individual preferences I Our model is grounded in the canonical consumer theory model Preferences I Starting point is to provide a framework for modelling individual preferences I We will assume there are two goods I Consumption goods: things you can buy in the market I Leisure: time spent doing all non-labour market activities
(household work, education, etc.) I Preferences can be graphically represented by indi↵ erence curves which depict all the potential combinations of consumption and leisure that yield the same utility C on su m pt io n Leisure C on su m pt io n Leisure C on su m
pt io n Leisure Constraints I We assume individuals want to reach the highest indi↵ erence curve subject to the constraints they face I Money I Time (which e↵ ectively equals money in this framework) I Let price of consumption good be P so that the value of consumption is P ⇥ C I Ignore savings =) income equals the value of consumption I Allows us to transfer our consumption-leisure framework to an income-leisure framework I Understanding the constraints agents face helps us to determine the set of feasible income-leisure combinations from which the consumer can choose In co m e
Leisure In co m e Leisure In co m e Leisure Consumer’s Optimum I Putting together the individual’s budget constraint and preferences (i.e. indi↵ erence curves) yields the consumer’s optimal allocation of labour/income-leisure I in other words, the individual’s labour supply In co m
e Leisure In co m e Leisure I Let’s consider the individual’s decision to work when faced with specific wage rates I When MRS > wage the individual will not work I When MRS < wage the individual will increase hours until MRS = wage I E.g. Suppose you value one hour of leisure at $10. Someone o↵ er’s you $8 to complete a task that requires an hour of your time. Would you complete this task? In co m e Leisure
Reservation Wage I This analysis illustrates the idea at the core of the reservation wage I The wage rate at which the individual is indi↵ erent between working and not working (labour and leisure) I It equals the slope of the individual’s indi↵ erence curve at 0 hours worked (T) Comparative Statics Comparative Statics I We are now equipped with the basic framework required to analyze how individual’s will respond to changes in the underlying economic environment I changing non-labour income I changing the wage rate I First we need to consider how the purchase of leisure will be a↵ ected by changes in income if leisure is a: I normal good: " income ! " demand for leisure I inferior good: " income ! # demand for leisure
I Whether leisure is normal or inferior depends entirely on preferences (most empirical evidence points to leisure being normal) Changing Non-Labour Income In co m e Leisure In co m e Leisure Changing Wages Increasing the wage rate has two opposing e↵ ects: I income e↵ ect: for each hour of work the individual can buy more goods including leisure. If leisure is a normal good this means the “purchase” of more leisure and a decline in the number of hours worked. I substitution e↵ ect: return to work is greater so the
individual may choose to work more in response to a wage hike. The opportunity cost of leisure has increased, i.e. we have a shift in the relative price of leisure (it is more expensive). The individual will increase the number of hours worked. The overall e↵ ect depends on whether the income or substitution e↵ ect dominates. In co m e Leisure Changing Wages Note that increasing the wage can never cause people to not participate in the labour force. That is, LFP will not decrease because of increases in the wage rate. Individuals can always reach higher indi↵ erence curves, and will not choose the lower IC
that will lead to no participation. Increasing the wage could result in labour force participation among people who otherwise would not participate. In this sense, increases in the wage rate cannot decrease LFP, but could potentially increase it. Wage Elasticities of Supply I uncompensated elasticity: %�hours %�wage I compensated elasticity: %�hours attributed to substitution e↵ ect %�wage The Individual Labour Supply Curve Individual Labour Supply
I Using our leisure-income model, we can examine how varying the wage rate will a↵ ect individual’s optimal labour-leisure choice in order to map out their labour supply. I i.e., how much labour would the individual supply at each value of the wage? I 0 hours until the wage = reservation wage I substitution e↵ ect dominates at low initial levels of the wage I income e↵ ect dominates as individual becomes wealthier I At low wages the individual has an abundance of needs that higher wages can help address. As wages rise and these needs are met, the individual does not need as much extra money and can begin to reduce labour supply. Individual Labour Supply Curve In co m e Leisure In co m e Leisure
Barriers in the Labour Market I Assumption underlying our model is that individuals can choose any labour-leisure combination given their budget constraint and preferences. I In practice this may not be realistic. I e.g. suppose you wish to work 35 hours per week, but your employer requires 40 I e.g. suppose you wish to work 12 hours per day, but your store is only open for 8 I It turns out that we can incorporate these barriers into our basic income-leisure model. Moonlighting & Underemployment In co m e Leisure Overemployment In co
m e Leisure ECON 370 - Chapter 4 - Labour Economics Maggie Jones Labour Supply Over the Life Cycle Labour Supply Over the Life Cycle I So far we have assumed that individuals do not consider the future when they are making current labour supply decisions I can be an unrealistic way to think about decision making I This chapter considers labour supply schedules when individuals consider their entire life I Are labour supply schedules of men and women the same over time? I What do we have to change in our labour supply framework when considering the life cycle?
I How have labour-saving technologies affected the evolution of female labour supply? Male Labour Force Participation Female Labour Force Participation Labour Force Participation Over the Life Cycle I We will focus on understanding whether the observed labour force patterns over the life cycle can be explained by changes in the economic environment in a way predicted by theory I We will consider three additional life cycle phenomena that warrant individual attention I women’s fertility decisions I the decision to retire I the school-work decision A Dynamic Model of Labour Supply A Dynamic Model of Labour Supply
I Individuals plan out their lifetime labour supply, given their expected lifetime economic environment I Starting point: I individuals live and potentially work for N periods I no uncertainty regarding future economic variables I prefs are defined over consumption and leisure in every period u = U(C1, C2, . . . , CN, l1, l2, . . . , lN ) I budget constraints defined over all periods C1 + C2 + · · · + CN = W1 ×H1 + W2 ×H2 + · · · + WN ×HN Income and Substitution in the Dynamic Framework I Income and substitution effects are more complicated in the dynamic framework I We will consider three types of changes in a simplified framework: I permanent unanticipated wage increase (A-B) I evolutionary anticipated wage increase (B-C) I transitory unanticipated wage increase (C-D) Dynamics of Life Cycle Wage Changes *Note: each wage change is supposed to represent the same magnitude
Income and Substitution in the Dynamic Framework I permanent unanticipated wage increase (A-B): this type of wage change leads to standard income and substitution effects. I evolutionary anticipated wage increase (B-C): the anticipated wage change is factored into the individual’s decision making at the beginning of period 1. This means there will be no immediate income effect, rather the income effect is spread over the life cycle. The individual will still see a substitution effect as their wage increases. I transitory unanticipated wage increase (C-D): this will yield a substitution effect at time t and a small income effect spread over the life cycle. Fertility and Childbearing Fertility and Childbearing I Clearly, from our previous diagram, fertility is an important determinant of female labour supply I But the arrival of children is not a random occurrence I Many individuals make their decision of when to have children based on economic considerations and do so in a forward looking manner
I Starting point is the Becker/Mincer model: I applies the principles of consumer theory to the decision to have children I children are a “good” that are “consumed” Fertility and Childbearing Several factors may affect a woman’s fertility decisions that we can consider in the context of our dynamic labour supply model I Income I Cost of children I Price of related goods I Tastes and preferences I Technology Income and Fertility I Theoretically positive relationship between children and income I assumption: children are a normal good I problem: income correlated with other things, like knowledge of contraception, opportunity cost of having children I often we see a negative relationship between income and fertility I Income effect: higher income =⇒ more children
I Substitution effect: higher income usually correlated with higher wages =⇒ higher opportunity cost of having children I Once potential earnings have been accounted for, empirical evidence suggests that yes, children are like normal goods Cost of Children I Not surprisingly, if the price of having children increases, the number of children should decrease I Price includes many things: I food, clothing, housework associated with raising a child I forgone income I As we saw previously, an increase in the potential earnings of wives leads to both an income and substitution effect of having children Price of Related Goods I Complementary goods: medical expenses, daycare, education, etc. I A rise in the price of any complementary good should decrease the number of children Tastes and Preferences
I Over time we have seen large changes in attitudes towards women’s employment, religion, family planning, contraception, etc. I These can all be viewed as changing preferences for children - in this case, they would lead to a reduction in family size I Increased educational attainment may also change preferences by changing the set of “alternative goods”, e.g. travel, entertainment, etc. Technology I Decrease in family size: contraceptive devices, medical advances (vasectomies, tubal ligation), reduction in infant mortality I Increase in family size: medical advances that decrease risks of pregnancy, processed food and diapers The Decision to Retire The Decision to Retire I The decision (typically among older workers) not to participate in the labour force I can mean leaving the labour market, reducing hours worked, moving to a less onerous job
I can be a gradual process or a discrete change in employment I Micro level effects: I financial status, psychological state I Macro level effects: I unemployment, labour force participation, private savings Factors Affecting Decision to Retire I Mandatory retirement age I typically in North America, age 65; individuals are not actually forced to leave the labour market I variability across jobs, provinces, countries I Wealth and earnings I wealth: income effect I earnings: income and substitution effect I Health and the nature of work and the family: I poor health can lead to early retirement I shift from blue collar to white collar jobs may increase lifetime employment I decline of extended family, rise in dual income families, deinstitutionalization of health care Social Support Programs
I In Canada there are 3 main types of pension programs: I Universal Old Age Security I Canada/Quebec Pension Plan (CPP/QPP) I Employer sponsored occupational pension plans I Individuals can also save on their own through RRSPs Universal Old Age Security I Financed by general tax revenue I Demogrant paid to those 65+ I Max monthly benefit as of June 2016 for a single person: $570.52 I benefits reduced for high earners (expected to save) I May be supplemented by a Guaranteed Income Supplement (up to $773.60) Social Insurance Pension: Canada/Quebec Pension Plan I Financed by compulsory employer and employee contributions through payroll tax I Benefits related to contributions based on payroll tax applied to past earnings, but funds come from payments from current workforce I Max monthly benefit in June 2016: $1093 I Virtually universal participation
Employer-Sponsored Occupational Pension Plans I Financed by employer, sometimes with employee contributions I Benefits depend on type of plan I Covered 32% of LF and 38% of paid workers in 2013 Labour Supply Over the Life CycleA Dynamic Model of Labour SupplyFertility and ChildbearingThe Decision to Retire ECON 370 - Chapter 1 - Labour Economics Maggie Jones The Canadian Labour Market At home exercise: 1 Go to Stats Canada Census Profile, 2016: https://www12.statcan.gc.ca/census-recensement/2016/ dp-pd/prof/details/page.cfm?Lang=E&Geo1=PR&Code1=01& Geo2=&Code2=&SearchText=Canada&SearchType=Begins& SearchPR=01&B1=All&TABID=1&type=0
2 Examine how these ratios look for median income in 2016 Variation in Earnings I Variation in earnings is due to both wages and hours worked I These are two of the fundamental outcomes studied by labour economists I Hours worked are typically modelled as a choice by individuals regarding their optimal labour supply I Our discussion of wages will be grounded in the competitive labour markets model The Competitive Labour Market The Supply and Demand Model: Workhorse of Labour Economics I Fundamental outcomes: employment and wages
I We can use tools from previous economics classes to study quantity and prices in the labour market I Quantity = employment (how much to work) I Prices = wages (what is the price of work) I This comes together in the neoclassical supply and demand model I assumptions about how buyers and sellers respond to prices and other factors I assumptions about how buyers and sellers interact, and how the market determines levels and terms of exchange Wages & Employment in a Competitive Labour Market I Labour supply curve depicts the amount of labour individuals would like to sell at each wage rate (workers’ side) I Labour demand curve depicts the amount of labour firms would like to hire at each wage rate (firms’ side) I Equilibrium given by intersection of supply of and demand for labour and generates a wage and level of employment I In a competitive labour market we assume workers and firms take wages as given and then make decisions based on their supply and demand functions
Wages & Employment in a Competitive Labour Market W ag es Employment Implication 1: Wages will equalize in markets with homogeneous workers & jobs W ag es Employment W ag es Employment Implication 2: I Absence of involuntary unemployment (i.e., you would like to work but can’t find work at the going wage)
I In equilibrium, no workers who are currently unemployed would WANT to work at the going rate Implication 3: I No queues or rationing (all jobs are equally satisfactory) Do Implications Align With Reality?

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AJ 499 O1 spring 2020Writing assignment 3. Chapter 12.docx

  • 1.
    AJ 499: O1spring 2020 Writing assignment 3. Chapter 12 can be very useful to complete this assignment. Please submit to my email [email protected] on or before March 27th 2020. Write a short paper (2-4 pages) about domestic violence and how certain aspects of being in those situations can further impact lives. ECON 370 - Chapter 9 - Labour Economics Maggie Jones Why do people obtain education? Why do people obtain education? I Our discussion of labour supply has focused on the quantity aspect
  • 2.
    I extensive margin:do individuals provide labour at all? I intensive margin: how much labour to provide? I So far we have ignored the quality dimension I quality encompasses education, training, labour market information, mobility, and health Why do people obtain education? I Two prevailing theories: I Becker (1964): Human Capital Model I investments are made in human resources to improve productivity and hence earnings I Spence (1974): Signalling Model I education is used to signal or “sort” workers of di↵ ering abilities Human Capital Model Human Capital Model I Education enhances productivity I Costs are incurred now because of the expectation of future benefits
  • 3.
    I costs: I benefits: HumanCapital Model I Decision rule: go to school if the benefits exceed the costs I Model is a simplification in that it only considers: I investment components (ignores consumption components) I private components (ignores social components) Return to Schooling Return to Schooling Age-Earnings Profile by Education I Environment consists of 3 levels of schooling I Each level of education is associated with an age-earnings profile I None = < High School =) enter workforce at age 16 and earn Ynone I HS = High School Degree =) enter workforce at age 18 and earn Yhs
  • 4.
    I PS =Post-Secondary Degree =) enter workforce at age 22 and earn Yps I Assume Ynone,t < Yhs,t < Yps,t 8t I Education is costly: tuition, books, opportunity costs Age-Earnings Profile by Education Assumptions I No psychic utility/costs from education I hours of work are fixed I expected income is known for each level of education I individuals can borrow or lend at rate r Age-Earnings Profiles by Education E ar ni ng s Age
  • 5.
    Signaling Model Signaling Model IEducation does not increase productivity I Workers are still rewarded for productivity, but their productivity varies according to their underlying ability I Employers do not know underlying ability, so must use “signals” to infer productivity I In this sense, imperfect information is embedded in the signaling model I Individuals know their productivity and employers wages and choose education to maximize their utility
  • 6.
    ECON 370 -Chapter 8 - Labour Economics Maggie Jones Compensating Wage Differentials I Our discussion thus far has mostly assumed that workers are homogenous I One of the implications of this assumption is that wages will be the same for these workers I In reality the wages of di↵ erent members of the population di↵ er substantially I We’re going to shift focus to understand some of the ways in which wage di↵ erentials can arise Compensating Wage Differentials I Workers may be equally productive but face di↵ erent working environments for which they receive di↵ erent compensation I Adam Smith outlined 5 principals that result in di↵ erential compensation
  • 7.
    I agreeableness ordisagreeableness of employments themselves I easiness and cheapness or di�culty and expense of learning them I constancy or inconstancy of employment in them I small or great trust which must be reposed in those who exercise them I probability or improbability of success in them The Firm Single Firm’s Isoprofit Schedule I We will begin by focussing on wage di↵ erentials that arise due to compensation for risk of injury or illness I Trace out firm’s isoprofit schedule to obtain all the combinations of wages and “safety” (or any job attribute) that generate a given level of profits I Both wages and providing a safe work environment are costly and must be traded-o↵ accordingly I firm can provide more safety and maintain the same level of profits if it can reduce wages I Firm exhibits a diminishing marginal rate of transformation between wages and safety
  • 8.
    w ag e safety Different Firms withDifferent Safety Technologies I Higher isoprofit schedules correspond to lower profits I The shape of the isoprofit schedule is determined by the underlying safety technology I di↵ erent firms can have di↵ erent abilities to provide safety at a given cost w ag e safety Different Firms with Different Safety Technologies I The outer limits of the two isoprofit schedules are known as
  • 9.
    the market envelopecurve I They display the maximum compensating wages that will be o↵ ered in the market for various levels of safety I Note that in a competitive equilibrium, firms earn 0 profits so that I1 = I2 = 0 The Worker Single Individual’s Preferences I Define an individual’s preferences over wages and safety I These preferences can be represented by an indi↵ erence curve I ICs exhibit a diminishing marginal rate of of substitution between wages and safety I When safety is “scarce” the individual will give up a large amount of wages for an incremental change in safety I When safety is “plentiful” the individual is less inclined to give up wages w ag e safety
  • 10.
    Differences in RiskPreferences I Individuals may di↵ er across their “riskiness” I e.g., risky individual does not need to be paid a much higher wage to accept a lower level of safety I less risky individual needs to be paid a higher wage in order to accept a lower level of safety w ag e safety Equilibrium with Single Firm, Single Individual Equilibrium with Single Firm, Single Individual
  • 11.
    w ag e safety Equilibrium with ManyFirms and Individuals w ag e safety Equilibrium with Many Firms and Individuals I Risk averse individuals sort themselves into safer firms/industries/occupations I Risky individuals sort into less safe firms/industries/occupations that pay high wages I Set of tangencies between isoprofit and indi↵ erence schedules outline the wage-safety locus I slope of the wage-safety locus gives the change in the wage premium that the market yields for di↵ erences in the risk of
  • 12.
    the job I giventhat compensating wages are required for reductions in safety, the only restriction on the slope of the wage-safety locus is that it is negative Effects of Safety Regulations Effects of Safety Regulations w ag e safety Effects of Safety Regulations w ag e safety Effects of Safety Regulations w
  • 13.
    ag e safety Single Firm’s IsoprofitSchedule I Referring to the previous graph, we see that the firm’s isoprofit schedules exhibit a diminishing marginal rate of transformation I At s = 0 the firm provides no safety. It can therefore increase safety relatively cheaply. I Once safety increases substantially, it becomes more costly for the firm to provide increased levels of safety Different Firms with Different Safety Technologies I Firm 1: safety is costly to implement (e.g. dangerous industries like mining or logging) I Firm 2: safety is cheap to implement (e.g. o�ce job) I Outer edge of isoprofit schedules represents the market envelope curve (a.k.a. the employer’s o↵ er curve) Equilibrium with Single Firm, Single
  • 14.
    Individual I In theprevious graph we assume perfect competition I Firm will operate on IP schedule such that profits are equal to 0 given the safety technology that the firm faces I Consumer will try to reach maximum utility (indi↵ erence curve) given that the firm is restricted to making 0 profits Equilibrium with Many Firms, Many Individuals I We imagine 3 firms: I A - least safe (costly to increase safety) I B - middle ground I C - most safe (cheap to increase safety) I And 3 workers: I i - riskiest (don’t have to pay much higher wages to accept less safety) I ii - middle ground I iii - risk averse (have to compensate them a lot for them to be willing to accept lower safety) I Equilibrium: risky workers will sort into less safe firms and receive higher wages and risk averse workers will sort into more safe firms and accept lower wages
  • 15.
    Effects of SafetyRegulations I The previous graph represents a situation where safety regulations don’t improve the well-being of the individual I We assume the firm operates in perfect competition and let sR represent the minimum level of safety mandated by the government Effects of Safety Regulations I The previous graph represents a situation where utility doesn’t decline in response to an increase in safety I We assume the firm is not operating in perfect competition, so that profits are greater than 0 I If the firm makes profits, then to pay for an increase in safety, the firm can dip in to profits I This is likely unrealistic in reality ECON 370 - Chapter 7 - Labour Economics Maggie Jones
  • 16.
    Wages and Employmentin a Single Labour Market I Chapter 7 puts the supply and demand of labour together to examine equilibrium wages and employment I We will start by assuming output markets and labour markets are perfectly competitive I Workers sell labour on an individual basis I We begin with the single firm’s decision problem, then move to the market–e.g. “occupation”, “industry”, “region”, etc.–the level of aggregation that determines wages I We then examine the implication of relaxing the perfect competition assumption The Competitive Firm’s Interaction with the Market W ag
  • 17.
    e Employment W ag e Employment W ag e Employment The Competitive Firm’sInteraction with the Market I One problem with the previous analysis is that it assumes that the firm can actually get all the labour it needs at a given wage I In the short run this may not always be the case (although in the long run it is more realistic) I E.g. the firm may have to raise wages in the short run to attract workers W ag e
  • 18.
    Employment W ag e Employment Implications of CompetitiveMarkets I Wages are equalized across homogeneous workers and homogeneous firms I No involuntary unemployment I No queues to work In reality, we may have imperfect competition, imperfect information, risk and uncertainty, or a long-run relationship between firms and workers Imperfect Competition in the Product Market Imperfect Competition in the Product
  • 19.
    Market I If theindustry is competitive in the product market, then the industry demand for labour is obtained by aggregating all labour demand curves I If the firm is a monopolist in the product market, then their labour demand curve IS the industry labour demand curve I Under perfect competition, the firm sets MPN ⇥ P = w⇤, where w⇤ is determined in the market (assumes MR = P) I The monopolist sets MPN ⇥ MR = w⇤ I as monopolist expands output, MPN AND MR decline W ag e Employment Imperfect Competition in the Product Market I Note that there is no reason that the monopolist should a↵ ect the market wage I As long as there is a large number of other firms (possibly in other industries) drawing from the labour market, the
  • 20.
    monopolist will nota↵ ect wages I Thus, the monopolist will continue to act as a wage-taker, as was the case under competitive markets Imperfect Competition in the Product Market I However, it doesn’t always appear to be the case that monopolists act as wage-takers I monopolists may earn profits and workers may be part of a union that collectively bargain for profits to be split among employees I monopolists may be larger firms where monitoring is costly, and thus a “premium” is paid to workers to prevent shirking Imperfect Competition in the Labour Market Imperfect Competition in the Labour Market I It may be the case that the firm is the only firm purchasing labour in a given market
  • 21.
    I In thiscase, the firm has market power in the labour market, in a similar way that we think about market power in a product market I Monopsonists can be either perfectly discriminating or non-discriminating I perfectly discriminating = everyone paid reservation wage I non-discriminating = if you increase the wage to attract more workers, you have to increase the wage of existing workers, too Imperfect Competition in the Labour Market I Both types of monopsony result in an upward sloping labour supply schedule I Perfectly discriminating: I Average cost and marginal cost curves flatter I Non-discriminating: I Average cost and marginal cost curves steeper Example: Discriminating vs Non-Discriminating N w TCd TCnd ACd ACnd MCd MCnd 1 5
  • 22.
    2 10 3 15 420 W ag e Employment Imperfect Competition in the Labour Market I Firm will max profits by hiring labour until MC = MRPN I discriminating monopsonist: wage determined by intersection of MC and MRPN I non-discriminating monopsonist: wage determined by point on AC curve that corresponds to N associated with intersection of MC and MRPN I di↵ erence between MRPN and w has been called measure of monopolistic exploitation
  • 23.
    Working with Supplyand Demand Working with Supply and Demand I We can use our tools of labour supply and demand is to “simulate” the e↵ ects of a policy change on equilibrium employment and wages I This requires a functional form for labour supply and demand I NS = f(W ; X) I ND = g(W ; X) I W, NS, ND are endogenous variables (meaning they are determined by the system) I Z, X are exogenous variables (meaning they are determined outside the system) I Solving the system requires a market clearing condition, NS = ND, from which we can derive w⇤ and N⇤ Working with Supply and Demand
  • 24.
    ECON 370 -Chapter 5 - Labour Economics Maggie Jones Demand for Labour in Competitive Labour Markets Demand for Labour in Competitive Labour Markets I The principles that determine the demand for any factor of production can be applied to study the demand for labour I We consider the short run as a period of time during which one or more factors of production cannot be varied I The long run is then the period during which the firm can adjust all of its inputs Demand for Labour in Competitive Labour Markets I The demand for labour refers to the firm’s decision of how much labour to employ at each wage I This decision will depend on the firm’s:
  • 25.
    I objectives: tomaximize profits I constraints: demand in product markets, supply conditions in factor markets, production function I in the short run, this includes having at least one factor of production whose quantities are fixed I Our goal will be to derive the theoretical relationship between labour demand and the market wage, holding all else constant Demand for Labour and Market Types I The amount of labour demanded will depend on the structure of the product and labour markets I Product markets (firms sell their output here): I Perfect Competition* I Monopolistic Competition I Oligopoly I Monopoly I Labour markets (firms purchase one of their inputs here): I Perfect Competition* I Monopsonistic Competition I Oligopsony I Monopsony Perfect Competition in Product and Labour Markets I Product markets:
  • 26.
    I large numberof sellers I sellers produce a homogeneous product I sellers and buyers have perfect information I no barriers to entry I Labour markets: I large number of workers I workers are homogeneous I workers and employers have perfect information I no barriers to entry I Implication is both a horizontal demand in the product market as well as a horizontal supply in labour market Demand for Labour in the Short-Run Demand for Labour in the Short-Run I We will consider a firm that produces output Q using inputs of capital K and labour N I The firm turns capital and labour into a product according to the production function: Q = F(K, N) (1) I In the short run, capital is fixed at K0 (i.e. it can be treated like a constant) I Then the production is just a function of N I firms can either adjust N by changing the number of people
  • 27.
    employed or bychanging the number of hours it requires Demand for Labour in the Short-Run I Demand in the short-run is derived from examining short-run output and employment decisions I Two decision rules follow from profit maximization I firm will operate if it can cover variable costs (fixed costs treated as sunk costs) I if the firm operates, it should produce quantity Q⇤ that sets marginal revenue (MR) equal to marginal costs (MC) I If the firm is a price taker, the marginal revenue of another unit sold is the prevailing market price (MR = P) I Under perfect competition, the firm cannot influence the market wage, and so the marginal cost of an additional unit of labour as input is the prevailing wage (MC = W) Marginal and Average Product of Labour Marginal and Average Product of Labour vs Employment Q
  • 28.
    ua nt ity Employment Marginal Revenue Productand Average Revenue Product I Firms only care about quantity because it relates to revenue I Marginal Revenue Product of Labour: additional revenue due to additional worker I Average Revenue Product of Labour: average revenue per worker MRPN and ARPN vs. Employment $ Employment Deriving Labour Demand I Two key points arise from firms profit maximizing under perfect competition I Operate if total revenue exceed total variable costs I If producing, produce quantity at which marginal revenue =
  • 29.
    marginal cost MRPN =MCN Deriving Labour Demand W ag e Employment Demand for Labour in the Long-Run Demand for Labour in the Long-Run I In the long-run, firms can vary all their inputs I both K and N now choice variables I Decisions are examined in two stages
  • 30.
    I minimum-cost ofK and N to produce any output I given cost minimization, choose profit-maximizing level of output Q I Starting point I isoquants: combinations of capital and labour required for a given output I iso-cost curve: combinations of capital and labour the firm can purchase given their market price for a given expenditure level Isoquants C ap ita l Labour Isoquants I As with utility functions, isoquants exhibit diminishing marginal rates of technical substitution I as one input becomes scarce it’s harder to substitute away from it
  • 31.
    I Di↵ erenttechnologies may have di↵ erent substitutability across inputs I 1 broom per employee cleaning sidewalks - adding 10 brooms without any additional workers doesn’t increase output I self-checkout machines are highly substitutable for cashiers Isocost Lines C ap ita l Labour Isocost Lines I The profit maximizing firm will choose the cheapest level of K and N that yields the output Q0 I i.e., choose the combination of K and N on isoquant Q0 that lies on the isocost line closest to the origin Cost Minimization C ap
  • 32.
    ita l Labour Cost Minimization I Tangencypoint between isoquant and isocost lines yields the point at which the marginal rate of technical substitution is equal to the market rate of substitution: I In the short run, the marginal product of labour is equal to the wage I In the long run, the relative marginal product of labour is equal to the relative wage Deriving Labour Demand in the Long-Run I Labour demand tells us how firms change the amount of labour they employ in response to changes in the wage I Deriving labour demand simply amounts to varying the wage in our isoquant-isocost framework Labour Demand in the Long-Run C
  • 33.
    ap ita l Labour Labour Demand inthe Long-Run I Implication is that in the long-run, demand for labour is downward sloping I As wages increase, demand for labour falls, output declines I Why does the firm decide to lower output? Profit Maximizing Output Levels Pr ic e Output Pr ic e Output Costs, Capital, and the Wage Rate
  • 34.
    I Total costsmay increase or decrease as wages increase I lower quantity produced decreases total costs I higher wage increases total costs I Capital may also increase or decrease as wages increase I Labour will always decrease I Costs and capital depend on: I substitution e↵ ect: how much of the cheaper input does the firm substitute for labour I scale e↵ ect: how much does the firm reduce quantity produced in response to cost increase Substitution and Scale Effects I Substitution e↵ ect: I capital becomes cheaper (relative to labour) I firm substitutes away from labour and towards capital I N falls, K increases, C increases I Scale e↵ ect: I firm reduces scale of operation I K falls, N falls, C falls Scale and Substitution Effects C ap ita l
  • 35.
    Labour Short vs. Long-RunDemand for Labour Short vs. Long-Run Demand for Labour I Short-run I capital is fixed I =) no substitution between capital and labour I =) no substitution e↵ ect I Long-run I firm can choose both inputs I substitution and scale e↵ ects work to reduce labour demand (in event of wage increase) I Together, this means an increase in the wage will lead to a larger e↵ ect on labour demand in the long-run compared to the short-run Elasticity of Labour Demand Elasticity of Labour Demand
  • 36.
    I Demand forlabour is a negative function of the wage rate I implication: factors that increase the wage will reduce demand for labour I e.g., union wage demand, wage parity scheme, minimum wage, equal pay, fair-wage legislation, extension legislation I In reality, the magnitude of the firm’s response to a wage change depends on its elasticity of demand for labour I Elasticity of demand is a↵ ected by the availability of substitute inputs, the elasticity of supply of substitute inputs, the elasticity of demand for output, and the ratio of labour cost to total cost Inelastic vs. Elastic Demand for Labour W ag e Employment W ag e Employment Availability of Substitute Inputs
  • 37.
    I Labour demandwill be inelastic when (e.g.) capital is not easily substituted for labour W ag e Employment I More substitutable inputs mean there is a large substitution e↵ ect and a larger change in labour demand Availability of Substitute Inputs A↵ ected by: I Underlying technology: can only use labour for a given process I Institutions: union does not allow for non-union workers, di�culty borrowing from lending institution, etc. I Time: in the long-run substitutes are more likely to become available Elasticity of Supply of Inputs I Alternative inputs also a↵ ected by changes in the price of input W ag e
  • 38.
    Employment W ag e Employment I If wage", firm will substitute towards capital, demand for capital shifts out I More inelastic supply of substitutes =) more inelastic demand for labour Elasticity of Supply of Inputs A↵ ected by: I Availability of resources - if resources of alternate input are plentiful, they will more easily adjust I Technological innovation - as innovations occur, technology underlying production may change and a↵ ect elasticity I Number of producers Elasticity of Demand for Output W ag e
  • 39.
    Employment W ag e Employment W ag e Employment W ag e Employment Elasticity of Demandfor Output I The size of the scale e↵ ect is determined by the elasticity of demand for the product I An inelastic demand for output leads to an inelastic demand for labour I Wage increase is e↵ ectively passed on to consumers in the form of higher prices
  • 40.
    Elasticity of Demandfor Output I The size of the scale e↵ ect is determined by the elasticity of demand for the product I An inelastic demand for output leads to an inelastic demand for labour I Wage increase is e↵ ectively passed on to consumers in the form of higher prices Elasticity of Demand for Output A↵ ected by: I Nature of the commodity - some commodities more or less necessary (e.g. think of gasoline compared to something like a fan) I Availability of substitutes in output market (e.g. a firm producing coca-cola may face an elastic demand for coca-cola if, in response to a price change, individuals can substitute towards pepsi) I Income of consumers in the product market (high income earners are generally less sensitive to price changes) Share of Labour Costs in Total Costs I Share of labour costs measures the extent to which labour is an important component of total cost
  • 41.
    I Demand forlabour will be inelastic if labour is a small portion of total cost I firm won’t have to cut output by as much because the cost from the wage increase will be small I E.g., construction craftworkers, airline pilots, employed professionals Changing Demand Conditions, Globalization, and Offshoring Changing Demand Conditions, Globalization, and Offshoring I We can use our insights from labour demand theory to think about how Canadian firms make employment decisions in an increasingly globalized world I outsourcing: delegation of specific elements of internal production to external entity (e.g., a professor asking a research assistant to do data entry) I o↵ shoring: delegation of specific elements of internal production to external foreign entity (e.g., a professor (or lazy/clever domestic research assistant) sending data entry work to a foreign country)
  • 42.
    The Impact ofTrade on a Single Labour Market: Short-Run I Scenario: Canadian firms compete with foreign firms for the same product I Product market conditions will a↵ ect output at Canadian firms, which in turn a↵ ects labour demand I In the short run, increased competition lowers the price of goods =) MRPn # I If the Canadian wage remains constant, then employment will fall The Impact of Trade on a Single Labour Market: Short-Run Pr ic e Output W
  • 43.
    ag e Employment Offsetting Factors: ShortRun I Wage could decrease I Marginal productivity could increase The Impact of Trade on a Single Labour Market: Long-Run I Scenario: Canadian firms compete with foreign firms for the same product I Product market conditions will a↵ ect output at Canadian firms, which in turn a↵ ects labour demand I However, in the long-run, we can think of Canadian labour as being one labour input into a production technology that draws on labour from other countries I Just as firms can substitute capital for labour in the long-run, they can also substitute foreign labour for domestic labour The Impact of Trade on a Single Labour Market: Long-Run
  • 44.
    Fo re ig n_ L ab ou r Domestic_Labour The Impact ofTrade on a Single Labour Market: Long-Run I Implications are that Canadian firms will substitute towards cheaper foreign labour I Not always the case: I foreign labour has to be a substitute for domestic labour I if foreign and domestic labour are close substitutes then the substitution e↵ ect (# domestic labour) may o↵ set the scale e↵ ect (" domestic labour) I relative productivity of domestic versus foreign labour matters I focusing on labour costs alone is unwise as no firm would hire purely foreign workers if the productivity of foreign workers is too low
  • 45.
    Compensation Costs (%of Canada) Compensation Costs (% of Canada) � Productivity, Hourly Compensation, Unit Labour Costs in Manufacturing Trends in Labour Costs and Productivity Canada relative to USA (base year (1989) ECON 370 - Minimum Wages and Employment Maggie Jones Minimum Wages Across Canada $13.85 $13.00 $13.46
  • 46.
  • 47.
    ONTARIO MANITOBA SASKATCHEWAN ALBERTA BRITISH COLUMBIA MINIMUM HOURLY WAGERATES AS OF OCTOBER 1ST, 2019 RETAIL COUNCIL OF CANADA RetailCouncil.org Minimum Wages and Employment I In Canada: I Set by provinces and territories I Highest: Alberta $15.00/hr I Lowest: Nova Scotia $11.55/hr I Interprovincial/international industries are under federal jurisdiction I In the United States I Set by local, state, and federal governments I Employers generally have to pay the highest out of the three minimum wages
  • 48.
    Minimum Wages andEmployment I One of the largest debates in labour economics revolves around the employment e↵ ects of raising the minimum wage I According to the theory of the firm, we expect wage increases to be accompanied by a decline in employment I Empirical evidence does not always suggest this is the case Card and Krueger I In April, 1992, New Jersey increased the minimum wage from $4.25/hr to $5.05/hr I Card and Krueger compare changes in employment in the fast food industry in New Jersey to that in Pennsylvania over the same time period I No evidence of reduced employment ECON 370 - Chapter 3 - Labour Economics
  • 49.
    Maggie Jones Labour Supplyand Public Policy Public Policy I Canada’s provincial and federal governments implement a number of social programs designed to alleviate poverty I transfer programs I unemployment insurance I welfare programs I child care subsidies I About 10% of GDP is spent on income maintenance schemes Income Maintenance Programs Public Policy I Objective of these programs is to alleviate poverty I universal: e.g., transfer everyone a fixed income (most expensive type of program) I targeted: e.g., transfer enough to low-income individuals so that they make at least as much as the poverty line
  • 50.
    I In anyincome maintenance program we are concerned about the disincentive e↵ ects on labour supply Types of Income Maintenance I Transitory income shocks: temporary decline in income I e.g. being laid o↵ I unemployment insurance I e.g. workplace injury I worker’s compensation I Permanent income shocks: long-term decline in income I e.g. permanent injury or disability I disability benefits I e.g. discouraged worker I welfare programs after unemployment insurance is exhausted I Returning to work: individual’s who have been out of the labour force but plan to return I e.g. having children I child care subsidies Types of Income Maintenance I It turns out there are a number of di↵ erent types of income maintenance programs that may have di↵ ering e↵ ects on a
  • 51.
    worker’s labour supplychoice I demogrants, welfare, negative income taxes, wage subsidies, earned income tax credits, employment insurance, disability payments, worker’s compensation, child care subsidies I We will focus on static partial equilibrium e↵ ects I we will ignore dynamic (over time) e↵ ects and general equilibrium (over the economic system) e↵ ects Demogrants Demogrants I Income grants tied to specific demographic characteristics (e.g., age, gender, etc.) I Example: Universal Child Care Benefit (before it became the Canada Child Benefit) paid $160/month for each child under 6 and $60 per month for each child between 6 and 18 Demogrants In co m e Leisure
  • 52.
    Welfare Welfare I Sometimes called“social assistance” or “income assistance” I Financed in part by the federal government but administered by provinces I Payments to non-participants of the labour force; amounts typically based on needs of the family (e.g. family size, city, etc) Welfare Welfare In co m e Leisure Welfare
  • 53.
    I Potential solutionsto disincentive e↵ ects: I Decrease payment amounts I Increase market wage I Reduce implicit tax I Alter preferences Negative Income Tax Negative Income Tax I Guaranteed income plan plus an implicit tax rate applied to labour market earnings Y = G + (1 � t) ⇥ W Negative Income Tax In co m e Leisure
  • 54.
    Wage Subsidies andRefundable Tax Credits Wage Subsidies and Refundable Tax Credits I Alternative to taxing earnings, per-hour wage is supplemented by government I Essentially can be viewed as an increase in the wage rate, which e↵ ectively induces an income and substitution e↵ ect. Wage Subsidies and Refundable Tax Credits In co m e Leisure Wage Subsidies and Refundable Tax Credits I Work incentives tend to be better under wage subsidy
  • 55.
    compared to negativeincome tax because the income and substitution e↵ ects work in opposite directions I Disadvantage is that it is not helpful for people who legitimately cannot work I Often wage subsidies are targeted to low-income people I In Canada we have a program called the Working Income Tax Benefit I received in the form of tax breaks after you fill out income tax forms Working Income Tax Benefit I Implemented in three phases I phase-in: wage subsidy proportional to earnings I flat range: constant subsidy at max wage subsidy I phase-out: negative income tax as earnings reach highest level Working Income Tax Benefit Working Income Tax Benefit In co m e
  • 56.
    Leisure Employment Insurance Employment Insurance IChanges budget constraint faced by individuals I Incentive e↵ ects often di↵ er based on individual attachment to the labour market I Assumption: if individuals want to increase (or decrease) labour supply they can I E.g. 60% of weekly pay for up to 20 weeks, requires a min. of 14 weeks Employment Insurance 0 10 0 20 0 30 0
  • 57.
    40 0 50 0 In co m e 0 10 2030 40 50 Weeks Leisure 0 10 0 20 0 30 0 40 0 50 0 In
  • 58.
    co m e 0 10 2030 40 50 Weeks Leisure Labour Income Benefits Total Income Disability Benefits and Worker’s Compensation Disability Benefits and Worker’s Compensation I Social assistance programs designed to compensate individuals who legitimately cannot work I Work incentives are less of a concern when designing disability benefit and worker’s compensation programs I There are still instances when we might be concerned about disincentive e↵ ects I The type of program implemented will depend on the nature of the disability or injury
  • 59.
    I Depending onthe type of disability/injury, the individual’s budget constraint and preferences will be a↵ ected di↵ erently Disability Benefits and Worker’s Compensation I Ways in which individual labour supply may be a↵ ected by disabilities and injuries: I partially disabling injury could a↵ ect time allocated to the labour force, but may not a↵ ect performance I other disabilities may a↵ ect productivity (wages) but not time devoted to the labour force I some disabilities may require expensive medical expenditures I it is also possible for a disability to a↵ ect an individual’s preferences over their labour-leisure allocations Time Constraints In co m e Leisure Productivity
  • 60.
    In co m e Leisure Medical Expenses In co m e Leisure Preferences In co m e Leisure Disability Benefitsand Worker’s Compensation I As we saw previously, di↵ erent policies will have di↵ erent e↵ ects on labour supply
  • 61.
    I Worker’s compensation* IDisability pension entitlements I Long-term disability insurance I Court awards Worker’s Compensation Worker’s Compensation I Designed to soften the negative e↵ ects of a temporary disability/injury on wages I Consider the case where an individual is compensated up to two thirds of the loss of income I Idea is that as the individual is forced to reduce their labour supply, the negative impact on wages is not as severe Worker’s Compensation In co m e Leisure Child Care Subsidy
  • 62.
    Child Care Subsidy IWe often think of child care as a fixed cost incurred by the household I Several types of child care subsidies available (e.g. from in-class discussion readings) I Imagine a program designed to subsidize child care for those who are employed I cost incurred only if individual works Child Care Subsidy In co m e Leisure Child Care Subsidy In co m e Leisure
  • 63.
    Child Care Subsidy In co m e Leisure ECON370 - Chapter 2 - Labour Economics Maggie Jones Labour Supply: Individual Attachment to the Labour Market Labour Supply I Is supply upward sloping? I Intuitively it makes sense that higher wages generate an “incentive” e↵ ect, wherein people are incentivized to work more when the wage increases I This may not always be the case (we will see why/where) I Concept that people will work more when wages are higher is
  • 64.
    still at theheart of the study of labour supply I We will study how this a↵ ects the decision to work (extensive margin) and how much to work (intensive margin) Extensive Margin: To Participate or Not Labour Force Participation I labour force participation decision: to participate in paid labour market activities or not I as opposed to: unpaid work in the home, volunteer work, education, retirement I has implications for the size and composition of the labour force I a↵ ects unemployment, economic growth, occupation and gender composition I these, in turn, a↵ ect relative wages, unionization, daycare, equal pay, etc. The Labour Force I potential labour force: everyone who is eligible who participates in labour market activities
  • 65.
    I eligible: civiliannon-institutional population, �15 years old, excluding the territories and Indian reserves I labour force: those in the “potential labour force” who are in the labour force I employed: those in the labour force who did any work during the survey period, or those in the labour force who were ill or on strike, but otherwise would have been working, during the survey period I unemployed: those in the labour force who are not employed, but are seeking work Participation vs. Unemployment I labour force participation rate: fraction of eligible population who is in the labour force I unemployment rate: fraction of those in the labour force that are unemployed How does the LFP change? Labour Force Participation Rate Over Time
  • 66.
    Labour Force ParticipationRate Across Countries Labour Force Participation Rate Across Countries LFPR vs.Per Capita Log GNI Intensive Margin: How Much to Participate Hours Worked I The “hours worked” decision encompasses more than just how many hours to work I hours per day, days per week, weeks per year I In the short-run, hours of work are relatively fixed I Occupation choice, flexible working hours, additional part- time jobs, allow hours worked to be more variable than we may assume
  • 67.
    Distribution of HoursWorked Basic Income-Leisure Model Labour Supply Model I We want to represent an individual’s choice of hours worked, given their market opportunities and the value they place on non-market activities I We will assume that individuals do the best they can (optimize) with the time they have (constraints) given their individual preferences I Our model is grounded in the canonical consumer theory model Preferences I Starting point is to provide a framework for modelling individual preferences I We will assume there are two goods I Consumption goods: things you can buy in the market I Leisure: time spent doing all non-labour market activities
  • 68.
    (household work, education,etc.) I Preferences can be graphically represented by indi↵ erence curves which depict all the potential combinations of consumption and leisure that yield the same utility C on su m pt io n Leisure C on su m pt io n Leisure C on su m
  • 69.
    pt io n Leisure Constraints I We assumeindividuals want to reach the highest indi↵ erence curve subject to the constraints they face I Money I Time (which e↵ ectively equals money in this framework) I Let price of consumption good be P so that the value of consumption is P ⇥ C I Ignore savings =) income equals the value of consumption I Allows us to transfer our consumption-leisure framework to an income-leisure framework I Understanding the constraints agents face helps us to determine the set of feasible income-leisure combinations from which the consumer can choose In co m e
  • 70.
    Leisure In co m e Leisure In co m e Leisure Consumer’s Optimum I Puttingtogether the individual’s budget constraint and preferences (i.e. indi↵ erence curves) yields the consumer’s optimal allocation of labour/income-leisure I in other words, the individual’s labour supply In co m
  • 71.
    e Leisure In co m e Leisure I Let’s considerthe individual’s decision to work when faced with specific wage rates I When MRS > wage the individual will not work I When MRS < wage the individual will increase hours until MRS = wage I E.g. Suppose you value one hour of leisure at $10. Someone o↵ er’s you $8 to complete a task that requires an hour of your time. Would you complete this task? In co m e Leisure
  • 72.
    Reservation Wage I Thisanalysis illustrates the idea at the core of the reservation wage I The wage rate at which the individual is indi↵ erent between working and not working (labour and leisure) I It equals the slope of the individual’s indi↵ erence curve at 0 hours worked (T) Comparative Statics Comparative Statics I We are now equipped with the basic framework required to analyze how individual’s will respond to changes in the underlying economic environment I changing non-labour income I changing the wage rate I First we need to consider how the purchase of leisure will be a↵ ected by changes in income if leisure is a: I normal good: " income ! " demand for leisure I inferior good: " income ! # demand for leisure
  • 73.
    I Whether leisureis normal or inferior depends entirely on preferences (most empirical evidence points to leisure being normal) Changing Non-Labour Income In co m e Leisure In co m e Leisure Changing Wages Increasing the wage rate has two opposing e↵ ects: I income e↵ ect: for each hour of work the individual can buy more goods including leisure. If leisure is a normal good this means the “purchase” of more leisure and a decline in the number of hours worked. I substitution e↵ ect: return to work is greater so the
  • 74.
    individual may chooseto work more in response to a wage hike. The opportunity cost of leisure has increased, i.e. we have a shift in the relative price of leisure (it is more expensive). The individual will increase the number of hours worked. The overall e↵ ect depends on whether the income or substitution e↵ ect dominates. In co m e Leisure Changing Wages Note that increasing the wage can never cause people to not participate in the labour force. That is, LFP will not decrease because of increases in the wage rate. Individuals can always reach higher indi↵ erence curves, and will not choose the lower IC
  • 75.
    that will lead tono participation. Increasing the wage could result in labour force participation among people who otherwise would not participate. In this sense, increases in the wage rate cannot decrease LFP, but could potentially increase it. Wage Elasticities of Supply I uncompensated elasticity: %�hours %�wage I compensated elasticity: %�hours attributed to substitution e↵ ect %�wage The Individual Labour Supply Curve Individual Labour Supply
  • 76.
    I Using ourleisure-income model, we can examine how varying the wage rate will a↵ ect individual’s optimal labour-leisure choice in order to map out their labour supply. I i.e., how much labour would the individual supply at each value of the wage? I 0 hours until the wage = reservation wage I substitution e↵ ect dominates at low initial levels of the wage I income e↵ ect dominates as individual becomes wealthier I At low wages the individual has an abundance of needs that higher wages can help address. As wages rise and these needs are met, the individual does not need as much extra money and can begin to reduce labour supply. Individual Labour Supply Curve In co m e Leisure In co m e Leisure
  • 77.
    Barriers in theLabour Market I Assumption underlying our model is that individuals can choose any labour-leisure combination given their budget constraint and preferences. I In practice this may not be realistic. I e.g. suppose you wish to work 35 hours per week, but your employer requires 40 I e.g. suppose you wish to work 12 hours per day, but your store is only open for 8 I It turns out that we can incorporate these barriers into our basic income-leisure model. Moonlighting & Underemployment In co m e Leisure Overemployment In co
  • 78.
    m e Leisure ECON 370 -Chapter 4 - Labour Economics Maggie Jones Labour Supply Over the Life Cycle Labour Supply Over the Life Cycle I So far we have assumed that individuals do not consider the future when they are making current labour supply decisions I can be an unrealistic way to think about decision making I This chapter considers labour supply schedules when individuals consider their entire life I Are labour supply schedules of men and women the same over time? I What do we have to change in our labour supply framework when considering the life cycle?
  • 79.
    I How havelabour-saving technologies affected the evolution of female labour supply? Male Labour Force Participation Female Labour Force Participation Labour Force Participation Over the Life Cycle I We will focus on understanding whether the observed labour force patterns over the life cycle can be explained by changes in the economic environment in a way predicted by theory I We will consider three additional life cycle phenomena that warrant individual attention I women’s fertility decisions I the decision to retire I the school-work decision A Dynamic Model of Labour Supply A Dynamic Model of Labour Supply
  • 80.
    I Individuals planout their lifetime labour supply, given their expected lifetime economic environment I Starting point: I individuals live and potentially work for N periods I no uncertainty regarding future economic variables I prefs are defined over consumption and leisure in every period u = U(C1, C2, . . . , CN, l1, l2, . . . , lN ) I budget constraints defined over all periods C1 + C2 + · · · + CN = W1 ×H1 + W2 ×H2 + · · · + WN ×HN Income and Substitution in the Dynamic Framework I Income and substitution effects are more complicated in the dynamic framework I We will consider three types of changes in a simplified framework: I permanent unanticipated wage increase (A-B) I evolutionary anticipated wage increase (B-C) I transitory unanticipated wage increase (C-D) Dynamics of Life Cycle Wage Changes *Note: each wage change is supposed to represent the same magnitude
  • 81.
    Income and Substitutionin the Dynamic Framework I permanent unanticipated wage increase (A-B): this type of wage change leads to standard income and substitution effects. I evolutionary anticipated wage increase (B-C): the anticipated wage change is factored into the individual’s decision making at the beginning of period 1. This means there will be no immediate income effect, rather the income effect is spread over the life cycle. The individual will still see a substitution effect as their wage increases. I transitory unanticipated wage increase (C-D): this will yield a substitution effect at time t and a small income effect spread over the life cycle. Fertility and Childbearing Fertility and Childbearing I Clearly, from our previous diagram, fertility is an important determinant of female labour supply I But the arrival of children is not a random occurrence I Many individuals make their decision of when to have children based on economic considerations and do so in a forward looking manner
  • 82.
    I Starting pointis the Becker/Mincer model: I applies the principles of consumer theory to the decision to have children I children are a “good” that are “consumed” Fertility and Childbearing Several factors may affect a woman’s fertility decisions that we can consider in the context of our dynamic labour supply model I Income I Cost of children I Price of related goods I Tastes and preferences I Technology Income and Fertility I Theoretically positive relationship between children and income I assumption: children are a normal good I problem: income correlated with other things, like knowledge of contraception, opportunity cost of having children I often we see a negative relationship between income and fertility I Income effect: higher income =⇒ more children
  • 83.
    I Substitution effect:higher income usually correlated with higher wages =⇒ higher opportunity cost of having children I Once potential earnings have been accounted for, empirical evidence suggests that yes, children are like normal goods Cost of Children I Not surprisingly, if the price of having children increases, the number of children should decrease I Price includes many things: I food, clothing, housework associated with raising a child I forgone income I As we saw previously, an increase in the potential earnings of wives leads to both an income and substitution effect of having children Price of Related Goods I Complementary goods: medical expenses, daycare, education, etc. I A rise in the price of any complementary good should decrease the number of children Tastes and Preferences
  • 84.
    I Over timewe have seen large changes in attitudes towards women’s employment, religion, family planning, contraception, etc. I These can all be viewed as changing preferences for children - in this case, they would lead to a reduction in family size I Increased educational attainment may also change preferences by changing the set of “alternative goods”, e.g. travel, entertainment, etc. Technology I Decrease in family size: contraceptive devices, medical advances (vasectomies, tubal ligation), reduction in infant mortality I Increase in family size: medical advances that decrease risks of pregnancy, processed food and diapers The Decision to Retire The Decision to Retire I The decision (typically among older workers) not to participate in the labour force I can mean leaving the labour market, reducing hours worked, moving to a less onerous job
  • 85.
    I can bea gradual process or a discrete change in employment I Micro level effects: I financial status, psychological state I Macro level effects: I unemployment, labour force participation, private savings Factors Affecting Decision to Retire I Mandatory retirement age I typically in North America, age 65; individuals are not actually forced to leave the labour market I variability across jobs, provinces, countries I Wealth and earnings I wealth: income effect I earnings: income and substitution effect I Health and the nature of work and the family: I poor health can lead to early retirement I shift from blue collar to white collar jobs may increase lifetime employment I decline of extended family, rise in dual income families, deinstitutionalization of health care Social Support Programs
  • 86.
    I In Canadathere are 3 main types of pension programs: I Universal Old Age Security I Canada/Quebec Pension Plan (CPP/QPP) I Employer sponsored occupational pension plans I Individuals can also save on their own through RRSPs Universal Old Age Security I Financed by general tax revenue I Demogrant paid to those 65+ I Max monthly benefit as of June 2016 for a single person: $570.52 I benefits reduced for high earners (expected to save) I May be supplemented by a Guaranteed Income Supplement (up to $773.60) Social Insurance Pension: Canada/Quebec Pension Plan I Financed by compulsory employer and employee contributions through payroll tax I Benefits related to contributions based on payroll tax applied to past earnings, but funds come from payments from current workforce I Max monthly benefit in June 2016: $1093 I Virtually universal participation
  • 87.
    Employer-Sponsored Occupational Pension Plans IFinanced by employer, sometimes with employee contributions I Benefits depend on type of plan I Covered 32% of LF and 38% of paid workers in 2013 Labour Supply Over the Life CycleA Dynamic Model of Labour SupplyFertility and ChildbearingThe Decision to Retire ECON 370 - Chapter 1 - Labour Economics Maggie Jones The Canadian Labour Market At home exercise: 1 Go to Stats Canada Census Profile, 2016: https://www12.statcan.gc.ca/census-recensement/2016/ dp-pd/prof/details/page.cfm?Lang=E&Geo1=PR&Code1=01& Geo2=&Code2=&SearchText=Canada&SearchType=Begins& SearchPR=01&B1=All&TABID=1&type=0
  • 88.
    2 Examine howthese ratios look for median income in 2016 Variation in Earnings I Variation in earnings is due to both wages and hours worked I These are two of the fundamental outcomes studied by labour economists I Hours worked are typically modelled as a choice by individuals regarding their optimal labour supply I Our discussion of wages will be grounded in the competitive labour markets model The Competitive Labour Market The Supply and Demand Model: Workhorse of Labour Economics I Fundamental outcomes: employment and wages
  • 89.
    I We canuse tools from previous economics classes to study quantity and prices in the labour market I Quantity = employment (how much to work) I Prices = wages (what is the price of work) I This comes together in the neoclassical supply and demand model I assumptions about how buyers and sellers respond to prices and other factors I assumptions about how buyers and sellers interact, and how the market determines levels and terms of exchange Wages & Employment in a Competitive Labour Market I Labour supply curve depicts the amount of labour individuals would like to sell at each wage rate (workers’ side) I Labour demand curve depicts the amount of labour firms would like to hire at each wage rate (firms’ side) I Equilibrium given by intersection of supply of and demand for labour and generates a wage and level of employment I In a competitive labour market we assume workers and firms take wages as given and then make decisions based on their supply and demand functions
  • 90.
    Wages & Employmentin a Competitive Labour Market W ag es Employment Implication 1: Wages will equalize in markets with homogeneous workers & jobs W ag es Employment W ag es Employment Implication 2: I Absence of involuntary unemployment (i.e., you would like to work but can’t find work at the going wage)
  • 91.
    I In equilibrium,no workers who are currently unemployed would WANT to work at the going rate Implication 3: I No queues or rationing (all jobs are equally satisfactory) Do Implications Align With Reality?