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ECON 315 MT#2
Terms in this set (45)
Why has the Participation Rate for Older Males declined?
1) Real earnings have risen since 1940, so the 'income effect' suggests that it is not necessary to work as much in order to maintain the same level of utility
2) Social Security benefits and coverage have increased over time
3) Private pension coverage has expanded, which is another source of non-labor income
4) Social Security disability program has become more generous over time.
Theories on the Increase in Female Participation Rate
1) Increased real wages for women (strongest explanation)
2) Changing preferences & attitudes
3) Rising productivity in the household
4) Declining birth rates
5) Increased divorce rates
6) Expanded job opportunities (strongest explanation)
7) Attempts to maintain standard of living
Racial look at LFPR, by gender
Male: Activity rate for AA men is consistently 6-7% lower than white men
Female: Gap was closing until mid 1990s, then widened again (AA women is higher than white)
Possible explanation for Low Male AA participation (Supply/Demand)
1) Non-market income may be more appealing
2) Health of older AA males tends to be worse than older white males
3) High participation rate for wives may lower that of hunsbands'
1) Lower education 2) Discrimination 3) Unmatched job & residence (Frictional Unemployment)
Assumption of the Income-Leisure Tradeoff (ILT) Model
Individuals can choose between work or leisure
-work: time spent on a 'paying' job
-leisure: 'unpaid' activities (including household work)
shows the combination of income & leisure that yield the same level of satisfaction
(both income and leisure are 'normal goods')
Properties of Indifference Curve
1) Negatively Sloped
2) Convex to Origin
At LOW hours of leisure, the person is willing to....
give up LARGE amount of income to get one more leisure hour (high Marginal Rate of Substitution)
Marginal Rate of Substitution
the amount of 'income' one must give up to get one more hour of 'leisure'.
(=absolute value of the slope of IC)
Curves further from the origin have...
'higher' utility levels
Utility Maximization occurs...
when the budget constraint is 'tangent' to the highest possible IC.
(slope of IC = slope of BC)
Workaholic vs Leisure-Lover (IC)
Workaholic : IC is flatter
Leisure-Lover: IC is steeper
Shows all the various combinations of income&leisure, given the wage rate.
Higher wage (w) result in
same x-int, higher y-int
for particular workers that show no desire to work at all and are not in the labor force
Backward Bending Labor Supply Curve (and intuition)
Illustrates that for a specific person, hours of work may initially increase as the wage rates rise; but beyond some point, it may decrease the hours of labor supplied
-intuition: at low wages, work more, but at sufficiently high wages, no need to work as much.
IE vs SE
IE: change in desired hours worked, from a change in INCOME
SE: change in desired hours worked, from a change in the WAGE rate.
If wage (w) increases.... (IE vs SE)
IE: lowers the desired hours worked
SE: raises the desired hours worked
SE vs IE on the graph
IE: from original BC to CBC
SE: from CBC to adjusted (new) BC
Labor Supply Policy: Income Replacement Program
only benefits those who are NOT working
ex) unemployment compensation, worker's compensation
Labor Supply Policy: Welfare Program
pays benefits based on difference between a person's earnings and their needs
How can policymakers attempt to address the work-incentive problems caused by welfare programs?
1) Work Requirements
2) Lifetime Limits
3) Incentive for companies to hire welfare.
Time use on average work day for employed persons
(Age 25~54 with children)
1) Working and related activities (8.9hrs)
2) Sleeping (7.7)
3) Leisure and Sports (2.5)
4) Household activities (1)
Unitary vs Bargaining
Unitary: One spouse makes all the decisions, acting as a
social planner' or the two partners have the same preferences
Bargaining: The partner with the greater access to resources carries more influence
Specialization of function
It's beneficial to specialize in the work that needs to be done, both in the market or in the household
The losses/gains from staying at home are related to....
losses: market wage of each spouse
gains: enjoyment of, and skill, at child-rearing
-a career path for women who opt to sacrifice promotions and pay raises in order to devote more time to raising their children.
-earlier you drop out, bigger the gap
Factors changing slope of budget constraint
(Increase in wage rate -> Steeper BC)
Factors changing slope of indifference curves
(What can lead to 'flatter' IC?)
1) Inventions allowing easier substitution of purchased goods
2) Children growing up
3) Larger future wage penalties associated with staying home
A wife's increased hours of paid work could either...
1) make husband's IC steeper
2) make husband's IC flatter
(We cannot predict what'll happen to IC when a partner decides to work more.)
Added vs Discouraged Worker Effect
-Added: when the primary earner loses their job and other family members look for a job
-Discouraged: occurs when a person stops looking for a job because they become pessimistic about finding a job.
During the recession (AWE vs DWE), which effect is larger?
AWE: INCREASES participation rates
DWE: DECREASES participation rates (larger)
Lifecycle aspects of labor supply:
SE says people should
1) Perform the most work when earning capacity is HIGH
2) Engage in household activity when earning capacity is LOW
Child care subsidies' effect on
1) Mothers already in the labor force
2) LFPR of parents
3) Overall LFPR when childcare costs decrease
Impact of child support assistance
1) Remain out of labor force: Steep IC, Receive welfare
2) Continue working before/after: Flatter IC
3) Enter the labor force: reach higher IC, workers enter the labor market
Higher relative wages attract workers away from....
household production, leisure, and other jobs
Labor Supply Determinants
1) Wages of other occupations
2) Non-wage income
3) Preferences for work
4) Non-wage aspects of job
5) # of qualified suppliers
Compensating Wage Differentials
(and what causes it?)
the extra wage they pay in order to attract workers.
It is caused by decreased labor supply for a job
Sources of compensating differentials
1) Risk of injury or death on the job
2) Fringe benefits
3) Job status
4) Job location
5) Job security
the wage difference between skilled and unskilled workers
ex) doctors vs Nurse practitioner
Efficiency wages: Shirking model
-assumes firms will pay above-market wages when it is costly to monitor performance or employer
s cost of poor performance is high.
-the employer's goal is to prevent shirking (goofing off)
Efficiency wages: Turnover model
-firms pay higher wages when hiring and training costs are high
-the employers want to avoid spending time/effort training new people.
Job heterogeneities that change wages
1) Union Status: Union workers earn 'more' than non-union. Most of the differential is caused by 'Economic Rent'
3) Firm Size:
-Large firms tend to pay higher wages
-Large firms are also more likely to be unionized
-Higher wages at big firm may be 'compensating differential'
4) Human capital differences
Worker preferences for time
-Present-oriented (high discount rate)
NOT willing to sacrifice present consumption unless they receive a large increase in future income
-Future-oriented (low discount rate)
willing to sacrifice present consumption for a small increase in future income
-->People with low discount rates are more likely to attend college, which is another cause of wage differentials.
Labor market implications
Workers with fewer nonwage amenities get higher wages
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