a ~ tere objctuer—worersae tring ha abour forte hghest pole pce a fem sretrngto buy labour ote ones pestle re “woes and wount of ehange that can toe place betwee the woke nthe fr depend hey nthe round lata gov hve inpoad to reguate arectne inte labour mark © typetot poe tare fees nottoodegerut) ‘ett workers squire fractiesofurempyment eu abou economia understand and rede hy some labour masa ates are ore bay tobe saved than thers Nain aetorin the nour mar Each econ sre th the dest optimise ‘hoc the bet option avatab The bau up cise ‘conomy tote wae tae bingoftared > the Narer ‘he age ing fered ual eh tem must dei © length atthe wore © ferzte ory wort eneranmanto ie workers esis enon much outer) tt best sere th cistomets ees > fs deme or Isbourte dered demand rom seer teansumer Profi mau he lots abou when chen anita when itis xzensie— downward png erin wage fr iin ony thera wage (S20) cara, eat 40000 berg pid 1029030 worker, higher ha aa then lowe teerloynt le woul be 10009 workers semanded when lary 29.000) en tare excess supply of worker the eicezsrumber och apices would id dn the wages tey compat fr ewer lobes are for lower wage fed thse wae Mey ‘esrurton rjc antstemorany meres emloymant ase chapter sbour Su ‘Must dacide whether to work and, once employed how many hous to work. Labour supply 's the agaregationof ll the work of people nthe population added together, iy does it matter? Bechse it allows us to adress a number of questions with important economic and socal ~ bo welfare programmes have dsincentive effect? beet etn income tax increas incentives to work? — Why do some groups of people ave such low partcpaton rates?varvcpation rate Usk uu} 298 men, 398 Women, Average WOKE Week 8 NOU. Individuals seek to maximize their well-being by consuming goods and leisure, st work tobe abe to pay forthe gods Trade-off: if we don't work, can consume alt of ese but wil not have income to pay {or the goods that make fe more enjoyable. in cantas, if we warkt be able to afford the goods and services then we mut gv up some of the leer, Labour leisure cle: lates person's wage rate ad Income asthe Key economic variables that guise allocation of me between about an ese ates Measuring the isbour force = people employed = people unemployed person partiiptes inthe abou force (UF); B= E+ U Notes ofthe labour force doesnot gve any infomation away abou how intensely ‘ch person wor anu re patna ort option: E Enploment rae act ot epatn at enpoe = y Unemployment rate ration of abou ere participants who are unemployed): Tobe memployed, a person must be temporary out of work or be actively searching for werk. Those who Rave gve up searching are rerroved fom the abou force and are rot Included inthe unemployment rate. Therefore the oficial rate of unemployment can Underetinate the tr ale, Pos-ecesion because it was So hard tof work, many simply sacked it ff and so the "Unemployment rate" woud not have Included those who hive gen op > underestimation, ‘This iden unemployment. chapter 2 - Labour su Neoclassical mode of lbour-letsure choice Assume representative person receives satisfaction both fram the consumption of goods (ch and tram the ensumption of leur). Variable L gives the number of hours of eure that a person consumes ring the time eid Ualty funtion: UCL) ‘The higher uty, the happier the person Assume that both sre and consumption are “goods” 0 the mae they have ofeach the apples the person. ll the combinaton an the seme Inference curve generate the same evel of wit, Bundle Z would increase tity greater than ¥ and). Inatterence curves have fur properties: 1. Inditference curves are downvard sloping. Ory way that we can offer a person athe goods. 2, Higher nfFerence curves incite higher levels of uty 3. Incifference curves do ot intersect. 4 Indifference curves are convert the origin Slope of an inatterence curve Marginal tity of ese = the change in uty resting fom an addtional how devoted to eure activites, holding constant the amount of gods consumed (0) fr marginal Uli of eure, it) for marginal uty of consumption ~ change in tity if the Inala consumes one more della’ werth of gods, olcng constant the number of ours devoted t ere actives. Since both are “goods” we bnow Ml and MUL are both positive ‘Shapter2- Labour Supply ‘The slope of he IC measares the rate at which person is wing to ge up some Letsre {ime in rtur for aaatonal consumption, holing uly canstant Le. how many adaioal collar’ worth af gods It would take to bribe the persan ina giving up some lene time (absolute valu ofthe slope isthe ratio of marginal utes ang is the marginal ate of| ‘subtitution HRS) in consumption. Ths meas thet scishing marsinal rate of ‘Substitution between work and les, Differences in preferences across workers Ditferenworkrs wl ew the tradeoff efferent > indifference curves wil sk ateret Person Aas step indifference curves meaning tht her DRS take ona very high vale she would have to have 9 sizable monetary bribe in terms of aditlonal consaption) to convince her to give wp an ational hour of lesur. it eno wok emer hours ets 8 ha ater ndterence curves dlcating that tele IRS takes on a ow value ~ Le they do not require a large bbe to canine them to give up an additional hou of lee Will tend to work more a they dont value leisure a highly ‘The ifrence nthe shape of inditference cues hou ther “preferences for werk" nd determine the eiferences in abour supply in the population, ‘Budget constraint Coneunion of gods and Unsure centain by time and nce Noniabour income (V) unearned income independent of hour many hous worked) 1. property income, dividends, lotery income. r= numberof hours the person wil allocate Yo labour market cng the tine period ehouty wage rate C=whevchapter abour Su Assume, nally, that wage rte constant for a particular parton =. the mahal wage rates the same however many hous te weet °> mae work = mote abou Income. For nov, we ignore the possibility that a werkers marginal wage may depend on how any hours she chooses to werk. ‘Two alternative ses or tine: work o ese. The total me allocated to bath of these activites mst be equal tothe total ime avaiable inthe period T hous per week, Tehel So the budge constraint canbe written as ceweryye¥ C= (WoW) mt Now the budget constraint is rearranged so that it shows slope of -w. = endowment point. Even f the person decides to not work at alle. IT then they will, stl ecehve SY for consumption, Fach hour fleur consumed ha pre, andthe pie Is the wage rate, ‘The budget constraint shows the worker's opportunity set- the set of all the consumstion bases that a patilar worker can afford to buy “The Hours of Work Decson assume the person wl behave ina way tat wil always choose a bundle that maximizes ‘he uty Le. they wil always work on the highest valle iaifference curve Chapter 2 - Labour su Imacine V+S10 and wes 0 and maximum nn-seeing hours be week (T= 10Point P shows the maximising pont. Although she would prefer to, the person cannot be at point (Optimal point ~ angency between budget constraint and hifference curve, where the Slopes wil be the sane: au, Mu: to workers when non tsbout income change? oat wnat happens when non eared income, V, changes? Cou be due to higher dividend payments en workers pot, or money fom 3 ceceaced relative or winning the etary A ‘chapter 2 Labour supply an incase nV, hong conetant, Increase in Vrern $100 to $200 (0 to E), Thesope ofthe budget constraints stil the ‘hme because ofthe same wage rat (lope = tl) Increase in V always make the persn better off in this scenario as they can now each Hipher cs expansion ofthe appraise), leisure 2 normal god then the increas in income wil increas eure time leisure an inferior good then te Increase in income wil race leisure te, Income effect- tha impact ofthe change in nan-labour income (aldng wages constant) ‘on the numberof hours word leisure anormal ge, then putcitferenty, if we were wealthier, we would surely emand alot more lsu. We focus primary on this case > the income eect implies that an nerease n non-tabour Income, elcig wage rate constant reduces ROU Of inning the otery what effects? + David Soeath worked at 2 Ford Motor Co. pars warehouse for 34 year, but instantaneeusty walked ou once be discovered he ha won a $136 milion Mega ilions jackpot. lmbens ana Rubin found evidence to show winning the lottery decrease labour force partcpation “+ tyou were werkng you gota 1, if you weren't working you got 20 > Le. average ofthe sample 6 years before anyone won the lottery an average core of 0.7 shows 70% othe sample were working ‘+ Te allocation of increas inno labour ince, V, fom the lottery winings can be seen a totally random (related to preferences of wage = which seria. ctherise it would affect Ics) 4+ Results: 6 yeas afer ater wining, only 35% hve a ob > the random ‘llnston ofan ncrsee in shows tat leur time Inceaces with V = theorypredictions correct What happens to hours of work when the wage changes? Holding V constant what happens when w increases fom $10 to $202 ‘increase ROTATES th buat tne aouna the endowment pol We know that an increase in wl increase the opportunites or the worker asthe ‘opportunity se intense ‘The effect depends on the preferences of the person. increases in came Increase the demand for normal good Including elsue, which wil duce the haw’ of Work ut now eure te more expensive - eich hou of leu costs $20 a8 opposed to S10 previously. This means tha sure time avery expensive commodity for high wage ‘warers and relatively cheap commodity for low-wage workers Therefore with a high wage worker, they wl havea strong incentive to cut beckon their {areumption of ere active thus a wage nereate reduces the demand fr lure nd iereses hours of wort Problem: the worker wants to enjoy the increase in the amount he can spend on ‘consumption but canet afford to ive up an hour of work ambigity in the eects, Inthe two diagrams above the movement from PtoR canbe decribed in two stage (ese ew. Totsolat the income effet, daw a budget tine thats parallel othe ol budget tin 50 that it slope alee 10) bu angen to the new Indifrence curve, THe budget ne (00) senerates anew tangency point 0. Chapter 2 Labour Supply Fieststage move: Pt0Q. the income effect a change in the workers income, bling ‘wages conta. The come effect increases the demand for lesure and Yeduces Nout Of worConsumption bundle 35 the wage increases, holding utility constant. 1A increase in the wage rte increases hours of werk f the SUB » INC {increase in the wage rate decreave Nous of work if he SUB < INC «Application: Dollars and Dreams ‘Allocation f time responds to economic incentives even when there are no ey Substitute avalable Le. how many ours asleep? Men on average sleep 58.0 Rows per rip wht women sleep 56.9 hours. Some esearch shows that amount of slp is influence by economic incentives geting up eaty to get in theofie at Tam). slong as a minimum biological threshold for length of sleep is mt, the demand fr sleep tine seams to respond to changes nthe price of time, ‘an aational four yeas of school decreases sleep time by about one hour per week. Sloat, a 205 Inerease n wages reduces ep tne by 15 (approx. 30min) pee week Toworkor oot to work? ‘What factors motivate a person to enter the labour force in the fst place ‘| \ \ \ \ 1. Draw ndference cue though Ef 2 person doesnot work at al they gt utility of Uy ait. 2. the person decies to wotk, they can reduce thei lure hous sight and be abl to buy more stuf, ther consumetion woul Increase higher IC. Chapter 2 - Labour supply 5. Decision on whether to work or nat depends - is he rate at whic letsure can be traded for additonal consaroton sufclently attractive to bribe her nt the abou market? 4. tow lower BC) no poi on this BC can give her more uty than 50 if he were to work for wlow she would alway be worse off > choses nat to work ‘5. high tiger Bc) - at any point on this BC she wil receive higher uly than rot working tall ctways be beter of choses to work RESERVATION WAGE -stherefore the wage that makes the worker iniferent between ‘working and not working IW It ges the minimum nceaee income that would make a parson indent between ‘working a ist hour or eating at eriinal E and not werking at al “The reservation wage ie sven by the absolute value ofthe slope ofthe indifference curve ot point The worker wil not wok for anything less than Wr and wil etwas work enter the labour market) they are offered higher than Wr > higher reservation wae means itis ess ely that person wll werk, an wil typialy epend on tat person's tastes for work (eis determine the slope of I). rls as na-labour income ees: a workers want to consume more ere non labour income increases, age rie il be required to convince a wealthier person to Labour supply Curveabou supply curve traces tthe relationship between the wage rate andhous of wok _At wages Below the reservation wage (S10) the person doesnot Work, At wages above S1O the person enters the abou markt Upward sloping eegment of the abou supply curve SUB>INC nally Bockware-bering Segment implies tat SUBCINC eventually arose labour poly cue: na {abou sup elatetty Measures the responsiveness of hours of wok to changes nthe wage ate: Percent change inhours of work _ 34/5 _ ah w ereent change in wage rate le, the abour supply elasticity gives the percentage change in hours of work associated witha 1 change nthe wage rate sve when sb > ne we when sub = ne stimating th lari ofabour eu ge area of research: hy = Bw; + yV, + other variables [stimates vary widely - beta often estimated tobe abou 0.1 for men aged 1666 For women its thought tobe large and positive iticut to etinate due to: Definition of "ours of Work" per week, month? “wage rate” take home pay pe [period dived by numberof hous that period average of marginal wage “Har to estimate effects of nonabour income Selection bias Labour suply over the Lie Cycle Because consumption and lelsure decors ae made over the entire working Me, workers ‘can "ade" some lesite today in return or atonal consumption toma “Typlealy: wages tend tobe low when the worker f young they re are the worker ages, poking at about age 50 and then tends to remain stable or decline slightly theretter olutionary wage change - changing wages over the life period. ‘ge-carings profile implies thatthe pie of leisure is elaiel low for younger and older ‘workers ad is highest for worker nthe prime-age working years. wage fs not observed fr thee who are not werk4 IT. According tthe slopes ofthe caves, we wil generally tnd optimal to concentrate on ‘wark activites In those years when the ages igh and to concenrate on sure ates in these years when the wage 1 Important citterence compared withthe static mel - nthe fe cycle model, an ‘evolutionary wage change (the wage change that werkers expecta they age) does not ‘Change the total ete income avalable to a particular worer, ac leaves the etme ‘pportnity set intact, Joe ang Jack ference in hous of work between the two workers would be affected by both income and substitution effect. Joe's wage exceed Jack's wage at every age - Both tos an lack should werk mere hen ther wages sr MS, {ven though Joe ha higher wage and finds lebure tobe very expensive commodity, he Also has higher etme come and ail went ta consume mate ler 1 we suppose the reservation wage srughly constant ove ime, the person mre hely to ster te [abour market n pera nen the wage hgh = 258 result, participation | Fates ate hey tobe Lo for young workers, igh for workers in her prin working Years, 2d lw again or older workers.‘The made suggests that the pole of hous of work aver the lifecycle wil have exactly the same shape asthe age earings rofl: hours of work increases asthe wage rises and ‘cline a he wage fal Intertemporal solution hypothesis: peple substitute thelr time over the fe cycle to tale advantages of changes inthe price of lure. “Trends iastrated inthe above graph are consistent withthe theocetialprediton tht partetpaton rates sould be hghes hen the wage Ng Te raplé deinen parcipation rates near retirement age could be health-related and could be influenced Eyrerement programs and dabity surance programs + Application: Cabbes In n¥C Ta ervers rent their ab for a specfed period - need to pay petrol, general Itntenance But can keep all he fre income they generte. Question: Row long shou he spend searching for aditiona passenger ides? Farber: “Ys Temorrow Another Cay? The Labour Supply of NYC Caborivers” (2005) Inanrattan ypcal cab vers shift ass 6 shouts, of which oly about 46 hours re ‘ent evng a passenger around the rest seating for passengers o aking break, Average hourly wage wots out at 52, “The teary of intertemporal labour substitution plies that the typical cabbie haul be wig to work Langer sift when Ne expects the city streets tobe busy and fl of potential passengers and take laure onthe slower days and ¢ 2am. The cabdrves eve a longer shift when the marginal wage rate higher. Chapter 2 Labour Supply Labour suppl: policy applets 1. Taxation and labour supply Imoosttion of tax changes the inaviduals BC effects abou supply, in terms of hous at ‘work andthe partcpaticn decison Itself (.e, changes reservaton Wage) ‘Tax reduces the wages the effective wage snow wit) > exactly the same as reducing the wage rotating BC downwards, 2. Welfare prosrammes and work incentives Replacement ratio= ratio of benefits tothe song weg (b/w) Reduced since 19705 to discourage recipients to “lve off the dale Effect of a ash grant onthe labour supply ‘alter incentives or tase who ae ete. imagine an unmaried woman (wth no ‘eared income with eve ciaren receives $500 when they remain Gu of the labour {orce. I she enters the abou force ten the goverment oficial immediately assume the woman no longer needs the asistence so S500 removed, regards f haw much they ‘arn. P > Gand oa of abou foeerma, sca ssstance programs are gesgne to atow weusare recipes to remann 8 the labor force. Typeally the amount of the cash gant reduced by some specified 2rrount for every dlr eared in abou markt. Chapter 2 - Labour su New iberat workforce” gant sytem: ‘ov tates sway $0.50 per dollar earned if woman work one hour at $10, hr Labour ‘ating inrease by S10 but her ran seduced by $8 50 her ne total Income $808 etc ‘The go Is actualy Caxing the welfare repens wage a 505 ate Actual wage rate (S10/hoe vs net wage (S5ihoun) Without grant FE budget constraint and optimal bundle =P. ‘th $900 a monthly gran if woman doesnot werk, he nen-eared income, $300, ia Program also changes the slope of 8: reueton ofthe gran by $0.50 for every dllat ‘arhed In the labour marke equvalnt toa 50s tak on earings. lope he net mage rate How the budget constraints HG Now with choice between FE and MG, se choses the welfare system and choses consumption bundle gven a 8 although the new liberal “werforce” program i ean to incentive people to work, ft cauee a reduction n hours worked vs no program at at orking tx credit and the child tax reat fundel (200) - polices designed to alleviate poverty wil be open to potentially armfl incentive effect of welfare trap” ‘4 howing Benet, medical are & reduction fn these can make hgh marginal tx ates ‘even higher. Inowor benefits or atned income tax crite ae intended to be a meth of poverty Fale wich des not have suc severe asincentive effects. The rectpt of berets ‘contingent on work. ares income Tax Ceci (ETC) + est 1975. Without tax cet, 8 FE 1+ EITC grante worker a credit of 4 of labour eaerngs along she ears es han 11,00 > credit therefore capped a $4400‘chapter 2- Labour Supply 1+ Worker receive max amount as lng as she eas between $11,000 and 54.370 set by eow) 1+ ASter reaching $14,370 threshold, credit begin tobe phased out. Past St4.370, ‘ech athena dolar earned reduces the reat by 50.2108 4+ Therefore credit completely disappears once woman ears $35,263 How does the EXT affect labour supp? (a) Without the EITC the worker would’ be in the about force, Preleusy, would maximise utlty by being at point P. Now maxims a poi She works a tiny amount). Cleaty, her reservation wage must have Been met with the new net wage from the ec scheme {b) Here the person woul be inthe abour force even Iv erTC wast in place. This worker's annual income Impilesthat the ET generates an income eect ‘without affecting the net wage. The warherreauces the number of hur she works fram Pro, (o)__ The person here woul work a large number of hous even nthe absence of Ee at pot p “The EITC cuts her net wage, and she maximizes her lity by euting hore an moving tothe inka point r Overall ITC has to eects inreass the arcunt of people the labour force (he partpaton rate, but may te numbers of hours works by persons who woud have bean in the labour force even nthe absence ofthe program, Chapter 2- Labour supply TABLE 25 The tmp th Barnd em Tt Crd aber Fre Petpaion “eancieoncnee sen 8 ms a ened apa gar u ‘Gece en 952 2 « Ditferencen-iferences shows tht with EITC the labour supply cree +14 combines before and ater comparisons ang) conttl and tester soups. Firat form of evaluating in-work benefit reforms though ondomised soci experiments What about the effect ofthe “taper”New 8 higher than old BC but als salow income and substitution eect work nthe "sie crscton 20 onthe taper we would expect poop to work as hows LcPoley- Welfare to work” polices Attempts have been made to nperent welfare police which aso provide incentives to Family Credit 1986)» ntodced by the conserrative government, bu conservatives replaced th WeekingFamiles Tax Creat and then Working Tax reat. ‘Working tax credit ha the same basi principles a the EITC but the implementation was ferent (oly pald to those working 9 certatn numberof hours) A “reat” budget constraint Chapter 2 Labour supoty Labour suply over the Busines Cycle Worker may asus his labour supply decision to take advantage of changes in economic pportunitis induced by business ces. ‘Added worker effect provides a possible mechanism for a relation between the business ‘jean the labour force participation rate. accoraing to tis poten, “secondary” Workers who are curterly ou ofthe abou force (Young people) ae affect by a recession because the main outome of recessions unemployment or decreas in wages. The aed worker effect thus implies thatthe abour fore participation rat of secondary ‘workers has a counterycial rend (it moves crecton opposite tothe busines cle. Dicouraged worker effect argue that many unemployed workers fad it almost imposible to nd jobs during recession and simply giv up. sre, the labour force participation rate Rasa proveeteal tren falls during recessions and increases curing pansion Job Lot ang the Added Worker Effect Business cele snot the only ecanomie shock that can generate aed worker and iecouraged worker etfecs, Research shows tht thee fa szesble postive labour upp) response by the wie to her husband's unexpected ob oss and that ths supply increase {an compensit for ove 25% of the lenin fart nem. Furthermore, the evidence also suggests that much ofthe potenti increase Inthe wife's Iabou supply wil be crowded aut" by te presence of unemployment Insurance system. Inather words, the goverment provgedsssstance tothe unemploed hsban greatly ries the need forthe wife to eter the labour mare in responce to he osbend's ob lors“Topic tabour Demand ‘argval product of labour = the change in cutpt resulting fom hiring anaddtonat ‘warer, holding constant the quotes fal othe rps. The MP curve saws the rate of ‘change in output 35 mare wockers are hires ‘Marginal produet of capital» change in output resulting fom a one-unit nezeas nthe ‘apa stock, holding constant the quantities fall othe inputs. oletting the Marginal Product and Average product of labour hong K constant) BE out sgn rg Padat val o ged—_vt re astm eau “mun zeuusreses! J “otal product curve ges relationship between output ad the numb of workers iret bythe fir (olin capita ie). Law of eiminishing returns the HP of labour eventually dectines 3 oo many ches spot the bath (apt ed. Average product - amount ofcutput produce by the typical worker. ‘The marginal curve lives above the overage curve when the overage curves ising, ond {he marginal curve les below the average curve when the average curve I fling. Profit Maximisaton Firm ssa to bea perfectly competitive firm icant inusnce prices tall. {Employment Decision inthe $8 Note, the short run, labour economies, the period when the fm canna change the= pa-WE-rk Ditferenitng rt. € and sting to zero to sles 2 (22) we Pee, ‘Value of marginal prose of labour Yat = pr Value of average product of abour VAs = px AM l= S | | | ™ L | {profit maximising frm hires workers up tothe point whee the wage rate equals the ‘ale of marginal product of abou. in the example when wS2, the fm tes 8 workers ‘Three conditions fr profit maximisation WP curve mut be dating Diminishing returns ae esuited (otherwise the fm woud expand infinitely) © Must be on the decing part of the VIP carve and must be Below the pant where ‘YMP=VAP. At very high wages (538) the average product of labour tess han the wage =m weutd lose money even at profit max solition and so leaves mare. “The ShortRun Labour Demand curve for afm Demand curve for abour in the short run shows us whet happens to the lens ‘employment the wag changes, hlding capital constant ‘The demand cave draws the relevant downward-slping portion ofthe t's YAP curve ‘This because for any vali of w the VHB curve ells Us how many workers the fim He. Decrease Decrease n wage ‘caures MOVEMENT ‘lng the labour Semand cure, increasing employment Weave) Increase in product price causing sup inthe VP curve ‘ws which abo increases ‘employment. Price change wl sft the VHP cure, wage change will move along “The Short-fun Labour Demand Cuve fn the whole industry Inada each rm na perecty competitive market price taker, bc al tems in the incszry ake aavantage of the ler wage by nceasg thei employment, here ‘would bea much larger utput inthe incstry whieh would imply afl in the output price 2s there would be excess demand‘sa resut, fall firms epand their employment, the VAP alo fl and the abour ‘demand curve ofeach invial form sits sgh tothe et nother werd, ‘employment In this industry would then expand less than would have been the cave if we [St sured all ofthe demand canes ofthe indica fens Py By. Imagine the industry has tw Fs ely. If ach fm fires 15 people when wages $20 then total industry employment 30 people. wage Si then each frm ies 30 workers and total employment s 0 people > industry demand curve DD. BUT the increase in cutpu wl reduce the price which they can slit for an so the VHP ‘une forthe indivi firm shifts ighly to the lft and row each fm hes 28 workers Instead of 303 S10 the industry demand curve becomes steeper. ‘The amount which the frm wil change its employment decisions toa change in the wage rate captured bythe shot ran elatety of labour demand Percent change in employment Hk, AE w Percoathangsinthewage Aw Fag be 50 according tothe mode and most evidence ‘analternative interpretation ofthe marginal productivity condition Profit maximising firms wl hire workers upto the pint where the value of marginal Product of abou equal the wage ves the Fm’ stopping rule” i ts ing decision Firing rule also known as the marginal productivity condition. Le. stop ring when MC of labour (wage) = MR of labour (YAP) ost employers have probably never ears ofthe VAP et alone work out what ts value However, in a competitive labour market, employes wl acta fhe Krow andebey the Implication of marginal productivity theory. Inoguents describe al combinations of K and E which produce the same eve of eutut Same properties as Is but higher noquats have higher outout(), Slope of the sogant x Me, ae" Marginal rate of technical substitution Conexty + cminising marginal rate of substitution between € ond k tt Copp ello aa perenne eters eetececraceentsoe _. Tempetmieraneatemecteen "\Y< pees Cw) .Note, quant are NOT budget constraints, Yu can actively chooee how many input you ‘employ may have enermous cots bt as long as you have even bigger revenues then stil making pot ost inimisation Profit maximising fm wants to produce units of eutput fr lowest posible cost ons inimises costs at pint p (same oquant Dut tw cet At costsminmizing pont, the slope ofthe ‘sequant equals the eps of the cost we wr ost minimisation requires that the last ala spent on abou lls os much ‘output as the last lar spent on capital Profitmanimising fs wil atways ee {the combination of abou and capital Tape that equates the rato of marginal rodets tothe rata of input pices. ‘This tue because we have assumed thatthe fm wil produce Outputs ths would beth prof maximising soliton, Long sun profit maximisation also requires that labour and capital are hire upto the pont where w= pX MPs and r= px MPy Cost miniisotion doesnt imply profi maximisation ut profit madmisation does Imply ost miniisction Just because the cost of ane input goes down doesnot mean the soost “phot” around the other input ke with a budget constraint. For exarpe a fallin the cost of “employment ages) fm cul Keep sae ama of wecers and Save the ference oF Increste amottofabeur and nereave output. For profit maximisation the firm ent require to incr the same costs before and after the wage change‘More accurate - the cost fal: es capital and mare employment - higher Hoquant ‘Seale. and substitution effets: Siace qt hier than g, the fm has expanded (ts output). The wage cut reduces the price of labour relative to that of capita. The decline In wage encourages the fm to Fagus ts input moc so that is mare abou intensive (aking acvarage ofthe now cheaper Labour. The wage cut reduces the magiel cst of production and encourages the rm to expan. As ieexpands it wants thie even more workers > Qi scale affect: the scale eect increases both the flan’ employmant and the capital stock (25 i substation effect: he wage cut encourages the fim to adopt a diferent method ‘ot prodeton, ane tat more abou Intensive f take avantage of he cheaper abou Ie shows what happens to the fir’s employment as the wage changes, hong cut ‘constant Sub effect must decrease the amount of capital Hed by the em Both sub ad scale effect duce the frm to hite mare workers a the wage falls. Topic Labour Demand Long run elasticity of abour demand is Percentage chang in employment ue = ~Perenags change ae wage ‘aw Ee Since the abou demand curve s downward loping, the longum elas of labour demand isnegatve The Long un demand curve for labour is mare elastic than the sort run demand cure because inthe long run theirs can adjust bot capital ad labour and can fly take advantage of changes nthe pice of labour In the shor run te im stuck" with a fixed capital stock and canet ach size ea Estimate al seem to sugges that the long un elasticity of labour demand about + i, "08 Ierease in wages > 10% reduction employment; shor un about 0.40.53 About 213 ofthis elasticity s down to substitution effect and 1 to scale effect.Ie diet t estimate the long run last of labour demand unless we ca sy for Sure if there hasbeen a shift n supply Line Z here would be Incarrect estimate of abour Gemand becsve actualy the damand curve ha shifted too, ef me get dat ror 2010 fd plot pont P and then ata fram 2014 and pla pin Rwe could assume Zs the Long fg labeur Geman elasticity and assume that supply has shifted but in realty supply Sted oo Need to fn eata where the supply curve shifts but the Gemand curve does ot Can use demand for women workers during Wi Incrument variation between sates inthe rate at which men ae crafted ta sre inthe ‘ware, 4:2 in Georgia tt 545) im Naseachuzetts This wold show an exogenau shift in labour supply rate: more women ae key to ener about market with gh obilsation rate (amount of ren being drafted to WH, Women ted working preferences changed) and so kept supplying the labour postwar an exogenous shift in about sippy. For 18 increase in ale mobitsation rat, female employment os by 2.62% and female wages fll by 2.505 laste (2 6212.50) = 1.02 Cnty 2 god estimate if mobilisation rat traty does shift supply without shifting demand Hamermesh (193) sunearised 70 studs and found that most comman estimate sof the “oncitonal elastic of labour demande, elastcty holding sale effects constant. Best timate around 03 Lee common to ertimate the total elastic but on average around. Shows scale effects ae considerable, Important for eect of min wages, wade unions causing jb loss, ference between ‘sty of ow sled vs high sill harder to replace and need taining), 4 dopiation: California's overtime reeustons and labour demand Fale Labour Standards Act of 138 io US states that workers be pad 1.5 times the wage for any hous worked n excess of 40 hous pet week Califo go further and state that any workers pald 1.5 times the wage in excess of 8 ours a day even f the workers works less than 40 ours in the week. after before 1974 the legislation covered women ony but after 1950 the legisaton covered beth men and According to our theory, the probably that men werk mare than eight hours a day shuld have deine between 1570s and 19805 they became more “expensive” to employ. 17.1% of California's working men worked mare than 8 hous per day in 1973 but by 1986, ‘ni 16.9% of working men worked more than sgh hours per dy. Before making strict conclusions i's important to See what would happen witha counterfactual - peed a onirt group. ‘ne possible ental group the wetking men nother states who would be unaffected by Caio’ new egiiation. Tureau fraction of man in ther tates wring more than 8 urs dy rose during the stme pero rom 20.18 to 22.8% Ditference in itferences: Califone’ overtime egiaton saw 2 substantial eduction of 2.9% on probability of men working mre than hours per dy. teratvely the cotrak troup could be women whose wages would have stayed the sae. During the same peviod, the probability that the women's working dy lasted more than 8 hous rose from 4 to 7.26 difference in cifferences of 3.4% again showing that employers moved towards eheoper women labour than now more expensive mal. — rattan Men cara (8) Men ae) Women Ca) yee ning noe“Topic tabou Demand Elastic of subsittion as of eplacing ne input (labour) with anther (machines) nS . For perfect complements there mus lvays be the same ato a abou and capt ‘Therefore elastilty of substitution sero we hod constant ants of capital, ang more worker as NO impact on autut: vice versa alas to [as shown by fed ies) For perfect substitutes the fr does care if they we capital o abou wil always use ll labour al capital depending on the cheaper options; never 2 combination. Elsi of substitution here sine (perfectly elastic). The marginal rat of tecoialsbstitton is constant when the sequent sa stag ne Percent chang (w/e) Elasticity of substitution = “em Sane IE) Percent change in (w/r) Marshal's Rule of Derived Demand 1. labour demand is more este the greater the elas of substitution Size of sub ettect depends on curvature of oquat. More similar inputs means as wage ‘merenses te fn can very su for capital instead 2. Labour demands mere late the greater the elatct of demand forthe cutput Wage se > marginal cost rise > output price rise > reduce consuner demand > cut fnployment. The greater the eduction n consumer demand, the larger the cut “employment and more eatery’ abou demand curve. 3. labour demand is more elastic the greater labours shore in tta costs For example a company hand. making pottery wl be see large rein ther costs even with a small wage se, ralsing output rice ad lowering derand - reducing employment. 4 The demand for tabour is moe elastic the greater the spol elasticity of other {ectors of production, such epi “Topic taboue Demand ‘The demand cave for abou s more elas the ease It to ress the capital stock (e the more elas the supply curve of capa) 4 bpplcaion of Marshall's Rules: Union Behaviour ‘wnhout unions nthe market a tem hes 1000 workers ‘Te urion wilt have mre success in geting higher wage forthe workers if he fms labour demand cuve is nelastc (higher wages would not est incuba). The union 6 exder to be succesul, oes everything it can to lower the fim’ elasticity of demand, Le. the union wants to prevent cecnololcal progres (wll mean substitution i not as Simple) - the typesetters unions long objected to computerized typesetting equipment a the newspaper dustry. ns alto want to lin the avait of gods that compete with the opto the Uumionsed fms... United auto Workers (UAW) sonal) supported pots that mage it ‘fie for Japanese crs to break into US markt Lnins are mae key tobe sucessful when the share of labour cots salUnions often attempt torte the pice of other Inputs, particulary non-union labour. The Davi-Bacon Act requires that contactors nv in play financed projects pay the pretaling wage to consruction workers which, shocks the union wage even the labou is nonunion; ales the as fring other inputs eter than aro Labour. Ths shows an attempt to make the soppy of other actors of production mere elastic and ence reduce the elasticity of demand for union labour ‘More than we inputs in production i.e diferent types of abou (sled, unskilled) and ferent types of capita (old machines andrew machines) which are not perfect. substttes: wth mints, produetionfaretin = fey kotyrooky) Production function tell us how much output is produce by any combination of inputs. ‘The marginal product MP ofthe ith np the ehange in output resting rom 8 one Unit neease that input, hlcing constant the quankes of al oter inputs Profit maximising fm employs each input to the pint where the marginal revenue of {that input sequal tothe price (or wage) or eat input w= px MP, “Atypical finding is that the labour cerand for vskiled workers is mre elastic thn that ‘of sled workers; this means during arecesion ti the willed werkers who wl feat the beget negative effect, ‘rosea of factor demand ‘The demand for inp | might increase when the price of irput increases, but might fall “nen the price of input Ik ncreaces, The crs elasticity of factor comand mescurs the ‘ensvty in the demand fora particular Input to the prices father inputs: Percent change in, Com eticty of itor demand = PERS SHINES ‘The cros-lasty of factor demand sves the “age change Inthe demand for iput resting fom a 1s change Inthe wage of pt. 720 TR eve [Two pit are sub [laste of absttin ae | Tee [Two pits are campements astiy of ubsittion mal“Tope 4 Nonoptonitc Labour Markets enopsony example: one-company town (coal mine ina remetelacaton is steretypcal example of a manopsary. Tne ony way the fm can convince more towmspespe to werk to ase the wage 2 as to mee the reservation wage ofthe nen- Perfectly icriminating monopsonst: The monopsnst hires the sare number of ‘workers as a competitive market, but each worker gets paid his reservation wage. Hire up tothe pata where vee Non dicrminating Monopsnist: must pay all workers the same wage, reqarles ofthe worker's reservation wage. 2s the fim expands eurs andere ighor marginal cost moeny itonatacnetd Marmot ter Friction inthe labour market - menopsony, ‘The “aw of one price” eros industries and fins depends erally on the assumtion that workers ean costlssy move fem one Job to anther. ‘Te mabhity costs could exceed the wage nereate > mebiity costs (tions) itrosuce a {eat dea of eta ito the abaur market to atract a worker the em mu ay 8 "wage high enough t quit ther current Job and cover the mebity costs = upward sloping supply curve. Shleking: ager fms cannot monitor the work of al the employees so there sncentives toch and get pad the same One way to get round shirking iby offering higher wae. ‘This would make them realise they would havea ott lose they last their Job ana therefore the higher the wage the les incentive there to shih. There alt of evidence that shows larger fs pay higher wages a8 ds more dict to monitor Itewerters. Frietons and shiking means that is possible for a frm to have manepsony power even ‘hen there sa lt of competition inthe market. mating the labour zupoly of eat ‘Study examines how te supply ofrehtered ures (Rs) to a particuar hospital Fespands to changes inthe RN wage. boplcation: Pre 199, the US Department of Veteran Afi (VA) had a national py scale that roushty determines Rx wages in al of facies, regress f whether those oeliies ‘were nigh or lw cos fing ares Mean was hard for VA to recrut RNs nigh wage regions 2.3, in 1990 iaukee RO hourly wage $1.20 for non-VA but $11.5 for VA hospital 50 ‘Vawage offer was competitive conversely, RU hourly wage San Fran wat $16.30 butt VA wage was $14.00, “opie 4 Nonoptoniste Labour Markets Nurse Pay Act of 1990: changed the way RL wages were set by VA. No, they were set ‘asad onthe market wae erga n maet wage tranclated into an inmadate ae‘Va wage. However, ifthe VA wage was greater than the market wage then the VA wage ‘would be helm nomial terns a the market wage aught Up ‘The aw meant that there would be arge VA wage increases in San Fran but hardly any change in athe DAD: where enactment of he Nure Pay Acts the instrament Between 1990 and 1992 the wage of Ris changed by 12.5% n VA hsptals and by 9.9 in ron Va fiference = 2.8 ‘Thee wage changes ed to a sizable ncrase in 8.3% the numberof RNs working 3 VA pias but ony to 25.6 Inereace nthe number ef Rie warsng at non Vk hosp (Pr eterence) Supply elasticity is dtined as ratio of age change in number of workers employes to ‘age change n wage Le. 2.7/2.8 | approx he 7 cease mage Dat VA ota pay woul strat 1%; mare nares to those hospital Summary of toi: 4+ Anon terminating manoponist hires fewer workers than woul be hired na ompattiv abour mara and pay them a lower Wage ‘+ Aparecular frm may Rave some rcnopsery power, even in labour markets that may seem competitive, when workers find costly to move aro ms Topic 5 Labour Market Equi verview of Labour Market Equilibrium Labour market s where workers looking for jobs and firms loking for workers finaly meet and compare wage and employment oes. ‘The abour supply curve slopes up. we assume thatthe substitution effets dominate the income effects, ‘At Whig there s exces supply of labour and the competition amongst workers forthe high paying Jo drives the wage Back cown to eqn At Wow, there excess demand for abour Snd the compattionsmengt fn tie labour increses the wages offered up to eam ~- Nev demand curve reacts the “wedge that exits between the fot amount that employers st pay tite a worker ana he amount tho € Z the workers actualy receive frm the employer‘otal cst of hiring labour when they make their deco Note it des not matter whether the tas imposed on worker or fms. The impact of the tax on wages and employment isthe sare regardless of ow che Legislation wnten Also there wl be a deadweaht loss whenever thee is movement aay fem the ‘eulibrium evel ot wages and employment. But an argument forthe tx even wth the eadeight los i thatthe tax revenue can increase consumer (and worker) welfare by Increasing government expenitre so the income tos tom the increase in tax can be feet by the uty gained fom improved pul services > Da Tople 5 Labour Market Equilibrium (nts Pa een peter nnn a £ . tg oo ee we roger Sonmain < Employment sbi ‘Workin the same wage a payrl axes but in the opposite rection Largest employment subsidy in US history, the New Jobs Tax Creat (NJTC) began scon| after te recession of 1973-1973 egave fms a tax cre of 80% on the Fst 54,200 paid to.a worker, 25 ong a the Frm’ total wage bil rose by more than 2% aver the previous veer “The fim could claim no mee than $100,000 a tax credit for any shen year Because ‘only he fst $4,200 f earings were eligible fora credit, his progam was designed ‘encourage the employment of low-wage workers survey of the evtence conde thatthe NTC increased employment in the subsample Coffins that were aware of the program, generating sbout 40,000 permanent new jobs. Note only 27% of smal fms were even aware of NITC oud be argued against though as the total cost ofthe tax credit tothe US Treasury was roughly $4Sbilion which work out a5 average of S11280 per naw Jb create, ‘Employer Sanctons asa Payeoll Tax ‘of Jan 2006, 11.6 milion Regal immigrants ved in US. lms can be fine for noninly employing legal imran Get fined if caughe (fst ime, approx. $2800) Secon tne fin nerestes to S2000 but can face up tos monte in prion, Labour market impact of Immigration Approx. 3% of wld donot reside Inthe nate county Imumgrats increase the labour supply and hence reduce the eqm wage “taking obs away” from native works. This would be assuming native workers ans lnm ae perfect, substitutes ctaly the migrants an native workers maybe competing for aifferent Jobs. THs Alternative argument stats that the inmlrans are searching forte owed Jos such ‘sn agrcuture and so ths ees up the native workers to specialize: thereby nressng thele productivity. Here Inmigrants and natives would complement each othe. The Later argument, increasing the marginal produc of natives, wl sift cut the demand ‘curve for native-born workers ralsing the natve Wage ational Minimum Wage: Competitive Market “The es freauenty the minimum wage tained to heep iting with real wages, hebigger he apart Topic 5 = Labour Market Equi ‘The unemployment rates larger the higher the mininum wage and the more elastic the emand and Sippy curves Compliance with atmum wage ls ‘ny do so many ims gpce the min wage law? Because If they are caught the penalties ee only relatively) ta ‘nen caught, the rm must pay the worker the ference that they had been mising out ‘an had the worker been pad at leas the NAW and cout costs as wells further penalties ‘Those tems are esently receiving an terest tee Loan, ‘Therefore, the greater the degree of noncomance with the legsatin, the smaller the Employment creating fem the minimum wage and lower unemployment rate. Covered and uncovered sectors: (ne industry covered and ot the other ‘This coud tes to two outcomes: 1. Workers who ose the fb nthe covered sector wil migrate tothe uncovered sector to acept (intial) the competitive wage, but 5 the supply of wears Increases the wage falls 2, Workers inthe uncovered sector want to get the higher min wage in the covered sector so migrate to the covered sector and wal fo Job to popup, Ths rakes ‘the wae ih the uncovered sector rise a supply fal 1938-1974 Puerto ican labour market had min wage set by boars of industry ae about leaders in Puerto Rico, Because mean incomes h Puerto Ric are substantial below those In US, thse bards set naina miniman wages that were much ower than the US, level. In 1974, Congress began to equate the nominal minimum wages, 1968 US = $1.60 per our PR= $10 butby 1987 "$3.35 both. In PR that wat 63 of average manciatring wage, NUS was 3 “ople 5 Labour Market Equi ‘The un trate increased by 3 PR. Since PR zen ate aso US citizens, many of them {actona 0.38] migrated to US to try ad ind a jab they hac been fred follwing the Ino of min wage In (US here ihe the uncovered) Evidence ‘Young nd united people more affect by min wage n 2003, 10% of paople aged 16-19 received min wage as opposed to 1.7 overage of 25 ara Krueger:sed to take into account that the economic conditions cou have jut changed: 8y “comparing the changes In empioyment nthe restaurants in Both states, ane can then “net ‘tthe effet of changes in economic conto and iat the impact of rium ‘wage (ference-naferences). Is the minimum wage an effective antipoverty program? ‘Trade-off between wage increase and potential job los. It can be argued thatthe main beneicaries of the minimum wape program are werkers in the betteroff husehaes. seqae— chapter 7~The Wage Sucre 1+ Greater the productivity ferences, he more unequal wage lsbution wil be. 2. Therate of return to sels wl Yary across the labour markt and oer time, responding to changes nthe suppl and demand for ls the greater the fenard ‘er sl, the greater the wage gap between shlled and unslled workers, and the more unequal the cstrbutn of income. Sel not sure why wages became so unequally istibuted in 1980s USA esearch has concluded there tn single reason. Wage ferential wil persist between generations echie parents care about the wel being oftheir ren and may parents wl make Tange investment children's haan capt 1 The Earnings Distribution Positively sewed wage cstrbution implies bulk of workers car elatvel ow wages and thata smal numberof workers in the Upper tl ofthe dstrbutonrecetve 2 liproportonately large share ofthe rer In US: top 108 earn 30% of country's income whist bottom 10% ony eam 25 of come zieUs data 2010: Cqamte ——Sneotnome Cama Sart eae 50-10 wage gop: the percentage wage ferential between the worker tthe 0" Percent ofthe income dstbution ar the worker a the 10th, 50-10 wage sop: percentage wage dferental between the worker a the 50” percentte and 10° provides a measure of inequality beeen the mile class and Low-income workers eras Chapter 7 ~The Woge Stucire ‘The increase nthe Gini coefficient in the past 30 years is due to the widening ofthe Bo SUlwage gop, suggesting that isthe “stretching” Income a the wpper ena ofthe istrbuton that nosy response for there in inequality. In 1979 uni grads eared 47% more than high schoo rads, by 2001 it was 90% mere. ‘The retums to sil, whether in terms of shooting or experience, oe dramatically the past two decades, 1940 to 195 period USA suggest that the relate demand for mores workers. an increase in dscrmination. By early 200 the Equl Employment Opportunity Comision had received 48 complaints ‘f9/1 elated employment driminaton, nclusng 307 tng. ‘A stu showed that weet earnings of Arab ac usm men fl by about 108 following 9131 Reduction in earnings wasnt Long-lasting thous. By 205 the reduction was Sigufcanly smaller isrimination in the workplace: Orchestrating Impartiality ‘Musicians who played inthe major symphony orchestra in US were han picked by the directa of the orchestra. Every person asdtoned and then the deectr chase M100 Tvourtes was almost always 10% women, 90% men, ones chapter ~The Wage Strucre In 19805 and 905 the Orchestra introduced anew “lind auaion” where the dector coud ot see the audionce but coud hear ther. The composition changed dramatically with nore than 20% women by end of 19505. ross section of workers at time t-iterences could be because some workers wil always fave lw wage and others always have igh wage -penmanent aspect”. “Transitory” aspect shat a me tthe worker coud behaving bad yar” and have lower wage for that one year Bu that would"t show up inte cos action anal Increases In both permanent and transitory component of earings in US and UK - suggests the abaur mrkets hve become mae unequal nd unstable Wy did the derbution of earnings change? Clobatsation- Meckscher-Ohin framework‘eitively abana endowed and import goods that use te factors which are relatively {earce at home, Trade crests demand fo alld workers (in devlapes county) ahd Feduces the demand for uslled workers (developed). mereaes the eatve wae, In an extreme case we wou cere factr price equation, bose evidence of globalisation etween incur effect =f nt. trade had caused te shift in demand aay fam ls Shes worker, ought fo be Because expeting kil ntersve) Instr eypanded and ron exporting (ured intensive) iaustes sur, thin ndistry effet - prea in emand for lle workers has occurred nal Industries, even these which peduce nontraded gods ‘Technologial change Technoiogy is sil based: sub for unskilled and comp fr sled - computers inthe work bce (ee above) Ne eas way to measure "echelon change “Tope 8 Unemployment and JobSearch "ust because the unemployment rat 5.9% doen't mean tat every employee Nat 23.3% ‘hance of lesng tei Jb. Unemployment, instead, i concentrated among pacar More jb offers = higher chance of geting higher wage but takes Longer so wl cost ‘ore both rectly and intact ‘Te longer someone searches, the more they he wl et a hgh wage fer, but the Longer hesenches, the more ft cost to nd that ob. Non sequential search: optimal sample size rule (Stinger 1962) before be starts to Search, the person sa Iwi serch 0 fs and accept the one that pays the Mighest Netopia st! ay Hn gest paying jb rst but as to sarch 19 moe times just Sequential search: optinel stopping rule (MeCall 1971) worker decides what wage to cept, when he finds t,he acts, (Optimal = maximising itetine income Benet of continued search declines in the value of the offer FS) = 4/13 ands 1-F(5)= 9173 but Flach=10/%3 so Flack) = 3/13 Le. the marginal gain fom further search eclines the higher the wage offer ~/.e. when you move towards the tp tal of the as. Asking wage (wil eal the reservation wage, Wr, in nots) thresh that determines if he unemployed werker accepts or rejects incoming jb fers. The uenployment spell, ‘wil ast longer he Lrger is the aang wage. Pretty much te sare reservation Nabe To caeuate Wr need to know the marginal cost and benefit of efferent values of Wr Mb: The lower the wage offer th greater the marina benef of serch becaute ti ery Tiely you'l fied a higher paying job. Vie versa fr high wage offer, ‘Mc: The higher the wage offer, the greater the opportunity cat of an ational search Ineudee cect sascn corte but asume thi constant no mater how high the wage oer Retervatlon wage s the eg of C=NB. Vine cotesbenfit you ae naterent to Accepting the jo or nt Benes of the Jo search ae collected inthe future so they depend on the worker's discount rate, Higher cscout rate > lover marginal bene cre 0 il ak fr Lower “Tople 8- Unemployment and JobSearchang one so they can gt paid NOW. Us reduces the marginal cost of searching, so MC curve sits Marginal benefit of search ‘When you canner continue to serch once you acept jb fer - OCETAED ~ rumen crs RMIT canny ene Note, this is equivalent to once rearrange 2 (aon lw > w,)-.) ‘we yeu can continue t search once you have accepted a jb offer then the marginal bene trom Using the jb offer becomes zero = you ean sil do wha you were doing befoe but row ar getting pd fem the fst Job you accepts. ‘nen yu can search whist on-the jb then the reservation wage willbe unemployment tenet because you woudl never werk below that but would instantaneously work ou ec ob offer paying more than the benefit implied warld that lrares the benefit te. ‘The reservation wage higher when you ae not allowed to Search whist you work. Way? Decne you have to be mare cautious and be sure to lk the ght Jab. Wr when you aren't lowed to earch! b+ A- Fw) KEW IW >W,)-",) “Topl 8 Unemployment and JobSearch Ihe stitution shit tothe ight he ‘worker stil wants to bearing relatively the same a Before, tis want tobe caring 10% more {han the average TH ‘souls mean tht the ‘nfcauses the ‘worker's reservation ‘wage t increase Hazard ate probably offing @ ob i each period “Te hazard rate (= estat fom unemployment oF the jb ining rate) the probably = period of tndinga Jb. For example, suppose 100 peope become unempioyed. On the first day, 3 of tham find 3 ob. Then an estimate ofthe hazard rateon day I would be (0.03 of 3." Now on day 2 thee are 97 unemployed psope left. suppose that 2 of them find 3 ob. Then the extnate ofthe hazard rate on cy 2 wouls be 2/97 oe abot 2 Note tat you ean alo ealeuate a Raza rate per week, or per month o any period of During a recession, lamba goes down (Less ob otfersin recession) ands reservation wae lowered. Proseelieal = fobueker il be more desoerate fn ecestnInthe rezeation wage constant? I he reservation wage were constant (dt depend on duration of wnemployment) then Fewoutd imply you were just as tel find Job n week I of unt a5 week 3, But actually, UB may be withdrawn a some point, increasing MC; worker may face liu constraies ana have to work fr lower wage; arma may fal anda uch fever Jeb offers coming to them so have to lower thet WE. ‘fect of UP on hazard rate: Evidence ethos 1. Collet data rom unemployed indicus every period 2 Find out how much UB they get 5. Record when they find 8 Job 4 Runa rerenson tose if UB acs how qulty people fn a Jeb 5. Coneet for athe personal chasetritis ana bung ese Image below shows US thee i pein the hazard ate a the pole when the UB ‘withdrawn Le, before, with US the hazardrate 12.7 but then afer ts removed I becomes 80 inetantaneauy, But UB not exogenous (ot strty exogenous regression «K's rity endogenous othe ‘estimates vl else). In an deal wer, woul locate UB much more fandom a see'f those people remained unemployed fr longer. 1 and Job Search In austria i you ar age under 50 your max Us duration 39 weeks If you are 80 or oer ‘then your max UB ration s 209 weeks raph Sows those aged over SO have an {average unemployment length whch double that of those aged under 30 and recelvng U8 {or much shorter tine 1 he hazard rate fs detning as unemployment dation neeases then this would suggest thatthe lange smeane is unemployed, the Ls ely they wl ind a ob that meets thal resration wage. 1. Unemployed become gpk Harsthated nde il ee “¥ making them tess employable (oe eS {temperary shock to human capital cou lead to permanent {os of aman capita 2. Employers discriminate ‘gsc long tm unemployed, les hard to extimste cratonee erence nec ty = average hazard rates canbe Tego —=—rematoreme] observed. Eg. the green ine = car {the average dependence ratio. ‘opl 8- Unemployment and JobSearch but actually mare people with igh for wl find a ob than low effort and of the fst instance 200 ofthe 30 people who finda Jb ae greet. The one statistic doesnot Show he relationup very clearly a bissed statistic. ob Search andthe Internet Reduces the cost of jobsearch - forthe workers and forthe fms Im 2000, the typleal Jb seareher who used the tenet tok 3.4 months o fn Jo, a8 Compared to 3.7 months fora worker who dnt we But this can be put down to the Citferences in unsberved characteristics ‘ath Bonuees and Unemployment Insome experinents, some ofthe workers who apply for Ul benefit are offered 9 cash onus if they fin jb relatively qu. This andom samples the weatment group The remaining group are the conto. In ints, workers in the treatment group who founda job within 18 weeks (and who kept that jb fer atleast four mans) ware given a cash Borsa $00 (four times thea Weekty In eonsyvana, unemployed workers nthe tretment group whe found a fb within ‘weeks were entitled to a bonus equal to sk times the weekly Benefit amount dence feces - recive ch bonus > search harder to tnd afb! eolent EREXEREYE® 2a ioieon ae