Ch. 8: Labour Market Decisions of Households: The Supply of Labour

Human Capital

• Human resources considered in terms of their contrubtions to the economy

  • : Skills, education, etc

• Supply of labour

• Factors of Production: Land, capital and entrepreneurship

Opportunity Cost

• Can do two things with time: Work for pay or enjoy leisure

• What you give up to get the next best alt.

• Trade off

Leisure Activities

1. Non-market work like househod chores

2. Consumpton time like enjoying purchases of food, entertainment made in the marketplace

3. Idleness: Rest and relaxation

Substitution Effect (Labour)

• Leisure and work hours are subbed for each other as the wage rate changes, people work more

• Positive effect on the supply

Income Effect (Supply)

• The change in hours caused by changes in income

• Negative effect on supply

Factors that Influence the Decision to Work

1. Age: Lifecycle issues

2. Reservation wage rate

3. Retirement

4. Fertility and family size

5. Investment in education

6. Non-employment income: Access to money other than work

Types of Non-employment Income

• Inheritance

• Demogrant: Lump sum payment based on membership in a particular demographic group

• Welfare benefits

• Employment insurance

• Subsidized daycare

Labour Supply Curve

• Graph showing the number of hours of work offered in relation to the wage rate

• Typically not willing to work as many hours due to low wage

• Wages increase= opportunity cost increases

The Backward-Bending Supply Curve for Labour

• May choose to purchase more labour

• Slope becomes negative

• Sub. effect dominates at low wage rates

• Income effect dominates at high wages

Price of Leisure

• Wage rate per hour for the hour not worked

• Opportunity cost

Wage Rate Elasticity of Labour Supply

= Percentage change in Quanitity of Labour supplied / Percentage change in Wage Rate

Market Supply Curve for Labour

• Sum the individual supply curves for labour in a given occupation

• Generally the supply curve is upwards sloping

• Can be a movement along a supply curve as well as shifts of the curve

Changes in Supply

• An increase in the supply of labour can occur because

  1. More people trained in that job

  2. Lessening barriers to the occupation (no licensing)

  3. Increased immigration with the same skills

Changes in the Qunaitity Supplied of Labour

• Movement along the curve means quantity supplied

• Wages are on vertical axis

Immigration and Emigration

• Immigration increase the supply of labour in the occupation

• Emigration decreases

Economic Rent

Wage rate received in excess of the reseveration wage rate

Migration

• Decision to migrate depends on many factors

  1. Higher salaries

  2. Lower tax rates

  3. Exposure to leading edge technologies

  4. Opportunities for personal growth

  5. Family issues

  6. Climate

Normal Good

Product or service for which demand increases as consumer income rises and decreases as income falls

Reservation wage rate

Lowest wage individual is willing to work for