Economics Prelim 2: Labor Supply and Work Decisions

Vocabulary and core concept flashcards reviewing Chapter 6 labor supply, labor force participation trends, and the income versus substitution effects for Economics Prelim 2.

Labor force participation rate

The percentage of a given population that either has a job or is looking for one.

Labor force participation trend: Population aged 55+

The percentage of individuals aged 55 and older participating in the labor force has increased ($\uparrow$).

Labor force participation trend: Married women

The percentage of married women participating in the labor force increased ($\uparrow$) until the year 2000, and is now decreasing ($\downarrow$).

Labor force participation trend: Men aged 25–54

The percentage of men aged 25–54 participating in the labor force has been slowly decreasing ($\downarrow$).

Hours of work flexibility (Employee choice)

Even though employers establish work schedules, employees can exercise their personal preferences regarding hours of work through their choice of part-time work.

Income effect

The change in desired hours of work ($\Delta H$) produced by a change in income ($\Delta Y$), holding wages constant ($W$), expressed as $\frac{\Delta H}{\Delta Y} \Big|_W < 0$, where $\Delta H$ and $\Delta Y$ move in opposite directions.

Substitution effect

The positive change in desired hours of work ($\Delta H$) induced by a change in wage ($\Delta W$), holding income constant ($\overline{Y}$), expressed as $\frac{\Delta H}{\Delta W} \Big|_{\overline{Y}} > 0$, where $\Delta H$ and $\Delta W$ move in the same direction.

Opportunity cost of leisure (Wage increase)

When wages rise, the opportunity cost of leisure increases, which forms the substitution effect component leading individuals toward working more hours.