0 Chapter —o4 + Laboure economics studios hr labours mankels work. PE addyesses mony important topics. , such agi bie determination OF the! Income distnibbution G4re gonomie. impact | F unions Sie alloextion ¢ a worker's time to the laloours marke Gane hining and fring dassions & ies. S labours market discrimination logment- Vth determinants & unemp n human capital . Gone esoraken's decision fp inwost 3 es help ue +o undenstand ard address labours economi ~ which pe socal and ap nomic: problems oe mang & shies are facing. Be) commen, wweton® yoderon 6o0i frat labour: eoonomists are usually acing ° 2 my did he pantici pation of women in Agbour trea. veise steadily) Q. What 1s The impact € \mmi @, what is we Impact & employ ve gration gn the wage? nt opportunities bt native workers?4. what is se impach of occupational safely on opt S. What is he impact f heath regulations on ompt ? 6: tohal is tne impact df fax unions bath on bei Members and on the’ vest of Th economy 7 % what is jhe Wrpact of affiremative acton Poe she aaronings & women and minoibies? 8. why did wage inequality rise So rapidly afte 305? 9. Dow minimum wage inerease othe wunemploy ment vote of Jess skilled wovekens? to. Govt. subsidizes Jo invest in human capital. $27 Ts it an effective vey co improve he 2tenomic ball —baliog é disadvantaged workers ) U1. Do anemploy ment insunances lengthen the dunation 6f unemployment 7® E. -ERGN [atussaeeuscereso « wWonkers and finms enter Ine lalooue manket wit, different objectives’ % workens are snying =p sell Thetis labours at ho highest price. Gfinms are trying to buy labeur at the (mwost pre: * economic exchanges 4nat can occurs between uworkens fiom: 4 ote govt to limited xy the set of ground pules actions \n the lalours manket. 5 ould (ead ave vequlale tran. + changes in qhese -nuler and regulation do different outeomes: ho sludy 's& labours eepnomics + toby some laloowre marsket- © Parefro, + halps ve to undenstand and predict outtomes are more wed than 'n2 othens.® pe ECE BEER HEEB E-Hee eo eeo eeee *Theve ave 3 lending, aeloos in “he labour Markets 4- Workers afinms 3. Government « wonkers$> Thee persons who want +o maaimize theirs well-being tend +o supply move Hme and more cflont op those abtivitios that have a higher pays Tus labour supply curve rleerefore, 16 upward slopping, efirms$ thy want +o maximize pratits. fron Prams by 1 ‘ nD @& Ns, . . . pov, Consumer is king Te tiem will maximize {its profit by making the production decisions.cohich fulfill The customens’(consamens’) nuds.*50, tinm's demand hy lalooun is 0 depived damand .*© —=——_|_ See eee Sfirms want to hing rnony worlens when labours is cheap & pefrain from hining when labours is expensive S go, qhe relt” betwen ue price ¢ \abour and athe. number é wonkans —firnrms art willing stp hine 15 summarized. by -tre downeoard sloppin} D, curve. eGovt.2 Govt. can ipope foxes, On a workens earnings, subsidise ne “hnaining & workers, | napose a paren tot on firms, ‘increase eupply & worekers by an counaging noi mvrrigntion “om abroad . tions will charge fre equ. Therefore, xehanyes e All these acl got nagulations ot the grourd pules that guide @ \n ce labours market.© * Labour eeonomics Is an empinical gclonce » Tr makes extensive use 6f econometrics . *Thals thy te main stotisHeal technique used 4 laboun economists és Repression Analyste - 3'¢ (Yeans ot schooli * Te negression Une Aves she nlt? between the average tog wonge pata and The avernaye pans & schooling & workens. That ist \og w 2 A+Bs o Tht slope f he regression Une shows change in tne tog sage nesulting Prom a one- gear the change in years F schooling (5). Symbolically ,@” aah a Nak Change in Iny wage Be Change ‘in yoans € sehooling i A loy %0 ns ges fae rey oudtgo ton an yeas t o The inten cept arewpation whore workers have zen (0) schooling 7@ ~Choplen-2 (Lalcoun Supp). Individuals want -bo maximize 4hir wall -teing by consurring goods and leleure. + Mast & us are not wealthy by bon. $0, we must work in ovdera-to eave The cash to buy the desired qos. ©The economia —nade-eff is clear. SAP wo do nok work, we can consume a lot of leisure, by trading off ie commoditios that make our tifa Ynore enyry ale . SIF use do coonk,, we, will be oble to aferd many these gocds , lout we must give wp some our lelsure Hime . oT ynodel sf Ieioure-labour choice, Shas @ persons coage vate (us) and ineme(X) os the key economic vamnjables . ese “tuo variables guide the allocation of time welween the laloourr market and leisure activities.——— | ¢ labors supply decisions acfect a penson's labore supply ala point in time. This economic Framework, helps us to undesstand some questions’ 4) why usomen's worakpropensities W0sé § hours of work declined overr re yoars? 2) Do welfare -programs have a dis-inenhve effect on labours evpply? 3) Does a cub in he Income toterate “Increase wworek incest ves? 4) toby do some’ members &f a house hold tend “to specialize in ht labours market & others memboans tend to specialize in housohold ~ Programs?() Wert lhe Labour-foree® + All pewssons aged ave categorized nto . Sib & sections : a ob ustth 794 foro ah least 3 hours G Empleyed — nonpaid Solo fore, at least (5 houres ‘temporary log -otf from 4 Job U . 1 i nempleyed Ss no 4p but achivelp Iroking fore work fors -Pours ~wa0ks . & fesidual group (eohich’ is: eaid to be out 6 ~the labounferet) Symboalically, b= Laboun--force , Es number & emplyed Us number & unemployed a Labour force doesn't ey anything 4 work, rather tb ony shows The numbero rE about the intensity and th numben f U.fe ee eee ee @ —_ SS uF ‘Thus, Laboun- ont para pelon noes eK toluye , te pulation pe lal. pe &, Employment nate (Grployment- population rake) = au Fnatty, Unemployment nate = Ww UL TE DTaghidden onampigtdé * Persons coho have given wp and stopped leoking fore work ave not counted as unemployed. Tay are considered ty ba “Out of tre Ltbour-force ” Ab -he same Hoe, some persons ho have tite Intention working at the present time, may claim to be “actively Ilcing ” Poe a job in orden to qualify foe uunarnplogament wenefits , ¢ 50, there isa dilemma ‘in measuring unengt . o troweverr, sometimes itis. $0. hand to Bind work that mary inid—4 wonkens become dis counaged worth thon ole search ackvrty, drop out G-thelabour nan kel ond stop baing unemployed + $0,-\hese * persons Are assumed te be. tidden Unemployed .forrexample 2 Retirees, eyomen with, babies, Students ennolled. in; schvol) facts about labours Supply 2 * Labour —forece parotidipation pote & men “failsfrom goto to 45%> ‘foe 1960 4p 2000 » Laboure- fore participation pate 6 amen rises from gly, to more “than 60° 1, fron 1900 +o 2000. © Porson employed \n groduction wonked 55 Wns | work in 1900 Now, it came aoon +o BEryAs| wooly by 2002. omen are less tikely +o be ernplogad in porate Jebs- as only “of woveking men are in part-time aphs whareas 15% Of wor king women are in port Hime pbs.‘Othe ewookan's preferences ® ° The framework that economists Ay pically oe “b analyze labous ovpply behaviour is called : : . the” Neoclassical Mode} of Lobour-Leisuré choice: * The moda} isolates tre factons which determine ohethen a Percon aonks and if so, dren how many hours he chooses fo work. Tis theory lets as predict hyo changes in economic’ conditions ore in got: policies wil] affect worl incentives. e worker receiver satisfaction both from the consumption goods (2) and -he consunption of Lefsume - (L). Veondn) @ — ber er ni@ener 2a1 aa Leisure) L—> car fag viene eal Rar@: otility & Indifference Cunves =? e Te notion that individuals act eatishachon from 5 leisure, 1s gummani zed by the consuming goods Utility fant Symooti cally + U mansures te individual indgxU, the hoppien jae parson. 5 level] of satisfaction . ode higher dhe level t oT Ay. Mustrates mang § combinations C Ok L which, genenate porsticulara Jevel- tli: Tie locus € puch. powrts is called an Sniffer uve. ; o-the wig hero Ins indifference wirve- he more -the ubilifyTndiffevence eurvos have -fours im porstartt* properties A Indiffeyence curves ave down wand slopping & Higher indifference eunves indicate highure levels of ely, 2Indifference cunver co 'not intersec 4. Indifference curves are convex tp the origin. Te Slope f an indifference curves Te slope of she indifference eurve measures © “the rote ot which a person is willing fo give SP (OY) some laisure time ‘in relunn for additional consumption Sr PE fells us hovs mang additional dollazs’ worst th of goods it would “ake +p ‘bribe’ wthe person to giving up rome Jeisure time. AN slope gf I@ = hae ee My aL Muk 9 elope ic also called as MRS vwohich is the patio of manginal utilities, * he assumption f converity § +h slope is eaptivalent- torea - @ assumption of drm nishig MRS. Ane ferences across vsorkers® 5 different for different workers Difference im pres ote 30 curve look: Because some persons many like 4o devote o great deal f- | ctHme and effort -to tei pes time to ldoure- cA while chenrs mx prefen Ao duvote most of thaire Ce, Pae\ | lato z\ i Yo ® | : | SY | “ | fsus —_— Sh | Le 7 > Sas, the Tels, ave, very stoop, sas, th Te’s ave volativel, [fiat, osontars doas not lavege birilbe to eonvinte an additional worker A requires & sizable monetary bribe +o convinee, him -to give op an additional houn & Leisure intenms & additional conumption « consumption. -tne. “tastes for sole poquive & him to give “p houn f Leisure it.o. additions) » Atrough , inten peronal. dliffentes ”1, _ ave imgt dete minants & diffenences 1 labour supply eeonowte models don't include thom 04 tety ave hand-to ploserave and measure. Instead, models lk about age md a [incom e} as “they ave much more Obsenvaelé - Oenc ~—. Budget Constnai nt & The person's consumption ot goods and leisure Aye conshaained be his me and y his neome: Symrbolicalts, 0 Here, wh 5 tolhounly wage vate) x h{ number d-hns) ye V—~ nonlabous intorne( preparpy inwome> dividends , lotteny prriz0s) ®h > lnloouys eavenings $e wage nate plays & eantnal pole in the leleounr supply decision. Assuming, wage nate is constant fn a particulars parnon Femanginal wage vate depends on how mang hours a person awoidks - % Overtine premium — person who work oven 4 hos] wack yeeeives “this. ¥ wage vate in part ctime Job < wage rate in Pulttins Job© 2 given wage nate is eonstant, tke person has two ailennative wes Bra kis time’, Wowk, ova leisure Lef assumes T = 4otal time availatle bo allocate, these activities. cokeye, We worwk hour Le tisure “Te hal | on {he Tok \ using ane value fF hb into equt @, Ce wo(T-L) +V oy, Cc who WL tV giope cue ean illushrate the budget Une fon tris eat) ; e oto othe person decides not wmv 4 one 4o work at all and devotes es x T houns -fo leisure jhe can stl) punchase Vv collars’ Unth 'of Vv Conswrption goods. point 5’ {| }6 The Srdow ment point. ’See eee Poe ae @ / 7 much h Endowment point 4» lt tells the reer 4 {abou ro hecan consume if he does not onjers “We ymarket-. TP Ake workers trades off an hour & feisure re additional eonsamption jt budget bine al move ep ° Tee absolute value & iu ope: of te budsel aii Ye Ae wage mete ope ef budget One = Therefore, re budget line ehaios “the -frontion if two wnraker's oppemtunify set (the sot ofall Ae eonsurp— tion baskets “that a panticolae worker ean affendto bay) The hows —f-work dedsion’ + given he linittons imposed Hythe, budge: cond The worker will choose 0 gorticatara level whore greds consunption gnd leisure activities lead to the highest possible wits inde uyLye Hs NE [eee | 1 Va senna Hons 6 b ce > 5 4a! Wo L (Catenre) Tre figure shows ans ‘interior So\t” to the oboe - sure decision. : G LE = badget Une % ot guint €, the unakanshas £100 SE nan-tobours niemt yer week, OT sors Frees a mareleet Usage rate of blo [how Vo cake Grd KAS AD Rowres f non Sleeping Aimeto 6 betwen work and Leisure activibes, SA wilt mot mizing workow chooses the consureption- Joisure bundle, quer 4 Point iz Were, the differen 1 tangent othe bad get ne curv £“AE point p, “tne unnken ean attain che higher indifference eunve vohich gives him oF unit & uli. At his ‘point / the Wonkers eonsumes Fo hours & leisure/week, wonks 4ohns/wmk, and he sOneurnts. 4 S50 worth f- qreds wrek)y. S Point A ges she worker Loss hilly ‘than point Ps Pont ¥ + would give Wim. more alititg but he canviot evera afford nis comumption bundle- \ 30, ke definitely oles at prat P mhis ype Solt” js called on inferior solstion bocayse he workers is noteteithers conners the opportunity set. Tangency Condition tere pretation’ o A goint p, loudget Une is tangent to the Ie. $o, ~the slope R-the IC = the. slope oP rs Qudget ine. feet us Chrom page ty & 20t MU, t | oy MKS = &@ 2 Can yerorite it as, w MUL c MUe Ww Here, MU, = = additional bly yeeeived “foorin consuming an extra hour ‘ Leisure thie’ Costs [ca] collane ee numboy sf utils reedived Ano a) ‘an additional dollar on ‘Wdsure. Me = numbers f vets received Prom spent an additiona) dollars on eongunaption goods - ¢ So, rte tongongy sol” ove aa np ios that ne lost dollar spent on leisure achivities touys tae game number ¢ utils,as the last dollar spent on tonsamption a s.U2) cohat happens -{p houns of work when Non- labour Thome changes) 3 We wish +o delewmine what happens to hours werk thon tre‘ wonkers -nonlabour, incom@ “4 Increases. © The inerease in MV can be ooeuned 8 9 By the Payment of hiner dividends on “tut wooeker's Stock portfolio . / GS on, because some distant relatives had named she wonkars as toe beneficiary in mein wilf.© e U PY go no? (a) Leloure tg nowmel geod — fo) Leisure ts aniafenion 9i ® » Tre obove Figures ‘Mustrotes, vohot hoppens te hours f work a@hen le worker has an inerease In. non-labour invore(v){hobing he us constant] int is at & where the ¢ Mitially, the endow ment $100 /weelk and the worker's non-labours Income is budget Une is fb (given be worker's 09) | 050, The worker Maxim LES his whi ka choosing dns undle ot pont Pp, . At this pant the worker twondumts Fo hns & Leisure and wowks. 40 hne/ week. © Now, f non-laboure interne, inereases so $rpp/werk , here could) be two outcomes . before analy ting the outcomes, we should dravo “tre budget Une, dohich- parallel shifts -to upwared to EjE). | (a) The Fins outeome 15 houns of work fall, i lesure is a normal yrod. Then the Jangent pent@ fn Moves up-wighlward to Fy 30 that mth . nsumpbon. additional non labours intome neveases 60 NOD, Ihe Upnkker works 0 hne] week, and fonsumes Sohouns of Leisure /waek, Ce) dhen outcome is houns of wonk snereases, Wf laisure ig on Intenion geod - Neo -the point f moves up- lefturand reducing tthe demand for leisure hours 6p hrs] woxeke and intnensing | othe evorkhoun to 50 hoe] werk.” Ihe impact cf nthe change ‘in Non-laboury invome2 onthe numbowr fF hours wsoreked 1S colled Treome Effect. o As the ect syanies Poon person to person s we cannot predict how an inerease in Non-lalooun _ yntoma affects hours 6f work , Unless We make an additonal nostpPetion on the shape te.@ ae mane * FH seams reasonable fo assume that leisure ic a norma) god » Perefore » “tha ‘intome effet ‘implias “funky an jnerease In non-labours income reducts houns & work (holding ths wage rate constant) (a) what happens so hours & work when “rs uovye Changes? © TE use hold non-lalooure income V_ genstantt and jnerease the wage, tren it rotates the loudget Une ¢ around the endowment mes 0 gs a0.—NO othe alove Figure Shows the notation f she budget- Une which shifts the opportunity éet trom FE to WE.°A woage Inerease moves the worekerr from point P +0 R. This. Movament can etthen , vohtov Inevease on decrease hours of work Wwe can see on -the above. figures: ° Out regardless oF whol happens -fo hourss & work, a woago increase 2x pands dio woreken’s Opporttanity sek. ° But, if we count ‘(éitlere asa normal good. chen the inerease 1y Wage Increases Hs demand fon loisure and reduces ho house csork.@ Decomposing ‘Hoa tnpadh a a wage change io ‘income, and cubstitubion edfectes eat is not likely fo bo that voage increase alvonys increases fe demand fo leisure. Tt Can alse takes - leisure more expensive . 2 As a vosult, leisure time is a vers Px peneive i commodity tye high- wage usopkans. $0, thay have. strong inconti ves “fo consume less leisure - o But, a highravage usopker warts to eney| “tue yewands his high meome ard could like +0 tonsume moro leisure. However, Ww Finds leisure 08 vor axpensive and he ily aearor atiord po take -time- off frapm uwsork . These tuo conflicting aspects ave illustrated in fg (4)@ @) income effect dominates’ _,Y) Substitution Alfect dominate c $5 wage increases, tre ladget line votates ‘ from FE #0 WE. The voage increase genenates un oftectss )ineveases Wworken's Ineome« 2) noises. re price ot Aetsuive D4 an alyze Income effect, we fat dnavo a budget Une ga OD gar alle] to FE. So, the now TOU,’ Is Tangent +o DD at point Q. 30 ,the move From point F +o point & is the intone effect.@: 2) movement fare BWR is called the Subst titi fe L vs eve J+ illushakes wohat “happens -fo fre sop ken! consumption ay wage imeredses Unoiding ublty constant) Th subslttetion effect shes, tne impact: f He increase in Ane price oF leisure on hours ot ork, work ‘income effect —— > hours & deerease x | substitution effect —> hous of work increase (Income effect dominatess 4 negative viel actionship betwen toage ratdp and houves & workd tS) gubstttution effect dominstese. a positive velotionship locwarry, ong o pate * and — hours & usonk, P.—— 4D) Review Auess2 ‘aT work op not to work? cohat frdows motivate perem qo enten Ne [sboun Foor? ‘on, 2 To illushate ae nature of te work decls We neod +p consider Figure inst - yon wee 7 Le, otha person chooses rot ty work, at al}, she oor vemain athe and otorrunt pant € and gets Us units & ublty *hrouh his non-labour income.8 _——— __ ae e However, the person con still choose -to enters fry a market at -he lowest voage and sell Ff some & Nip jowre time. So, the decision F whether fo work or not boils down | -o 0 simple quustion® Aro the fens & trate sulficiently thactive -to bribe him into entering tae labours maroket denms G trade Cae an {eer ere “Canovinp hon ar @ar @ ‘ear leisure WMO, AF- © Onthe above Pigatelthe person's 90g ¢ voto 1s Wigs andthe toudyet, Une is GE and Ww initially CAN act Maximum ably % aging +p ang point (fx example Wp of ne woken moves frorh & % point) » he would be worse dt as le would be movef “to o lower T0 tohich is Ug: - Seat Peng] eng he wonkan@® oof woage nate is) Wea, then the budget Une is HE. Ay point ‘Y, tte worker gets Uy wh Lit - So, atthe voago [yp [en workers 1S “ bellen eff, Nd Chooses aero “he Pela) * AS We nolate tne budget res iy nigh 1% will get a soage nate Lo) [SP cohere she 'wonker és indifferent -+> work on oe his vwoag 0 nate! is. called. ties wage. ° Tf, market voagec yenenvation wage ; f a -tee person wil] Not. tvorat, otal). TP, market wage? “yeseravintton wages 7m Ce wil] antera tre labours martkel. avert tie dedision ty work is based on The eam parison “efter market wage te Resenvation waje ’fe Manket wage —> Hove much 2m ployaras are. willing-to pap for an hour 6f warek g ma gesenvation coage—> Hy much the worker requires -lp bo bribed into working for an hou Foneve Guts: 03,06) Fs o Lolooura Sepply eunve J houns of work. yo Wael mi gation fam euprek, -to eunvo foro very peneon inthe ehoos The velationship bofeser n he wage rate an 2 We can use ae uh clonive a labour - ouppy euonom ad We can depive a labor supply tupve for’ a usoreker® |h at | | Leow soppy ass eR ee a its iN , » | 5 0 foun. Sf Leiow / oo @) Coneunvgtion loundle (8) tous é uuvak, ond wuage rate relationship we aan seg, from figure (4), > at wages belovd reservation wage (i = 410), tho person Woes nob work, SS at wages higher than “he resenvatinn age (do =9t) , qe penson enters the \abour market: fom Figure Ww), othe xp trond sloping segment of Sp curve ‘implies hat substthtion effects are stronger smitally .oe bindirg segment implies teat - income effects may dominate overrtually at ubertthon effects aan no longers exist. / © Now, fe’ Sp. curve ‘in dhe aggregate labore market is given by adding up the houres shat al\ persons in bo i) aye cailling so work ata giver) wage . o fhe market oupply eunv! ans ¢& individual workens, 2 adds wp she ovpply We. can ‘Nusbate re, manket Si eunve oy B & worker | workers ¢ voonken A neing too individ worHouios sh > baie, fod Monkel S, Cunve ° ° ooyg the graph ©, volar the voage \6 bale Wy > no. one wryekS 5 tOhon the voage isos 0 Bp, wookew A enters re market and if-be woye reses above Ba, token B enters tne = mankeb.& + So, the otal market 1 36 givers ty Ind “oi number F houws worked by Hee tase Ub bases which is = hathp: ae 2 faboure Supply Elasticity: Responsiveness & hours of work +o chang es whe wage patecohich te? gtd Ay, dh ‘th ay, SHA A S whe an v ” At 20.) 6 eurve is is upeond sloping tnd; Oh fp, oc Beet downward + & Parefore; SL 1s (4) when’. substitution effect doming and, 4 is(-), tahun intome effect dominates. of St elasticity 5 | Snelastic , hours oem are less affected by He : change in the wage . affected [2 4], elash'c, hours & work are greatly by the changed (dre wage:a, = laboun Supply of Women’ / * womens labon -force pantici pation rates have been vanied from cotintry to ‘county . * Over time, women's cpareici pation notes have ‘nereased . ° Tn most ohdies on female labourer supply» the substitution effect dominates the intome effect fon women, which tmplies rat, “te labo n supply eunve is “pwned sloped . 3 Cosh grants and Labour Supply? é “pope ona anmarnied wromer\; votth” children ave quen a cash gpant f £500 pen, mori. as tong as they pemain outside tre labor force . Tf These persons enter -e labors market, fee govt: assume “hat Ke women ‘no longer nod public assistance. and they ape removed rom re welfare Polls.on.work ineentives qa impact ot! tash grant , is ‘Mustrated loon bela: Sy ¢ “ eee te VU omnes T Sai ; ME —> fours Leisure + Tn the gbsone ¢ each grant, fie budget Une ‘s gren by FE: And: -fre:! soledion point is is P, whore dhe person consunes . 40 hours ot Leisure and usonks 40 hous. ow ;if th $500 6F cash we wil) boa given ty the sgn vege hari he woman can purchase $500 “consumption _ goods. if she doesn't, work and pee in fu welfare p preyram* But, if the woman enters Hhe labors make he cash grant js taken 2? and fre wudget line switches back to the original budget Une FE. “This ype aT on Tene e7 “grant can induce mong workers 4p choose tre welfare solution and drop out cf eathe labor force. © Timprovements yw ete ondow ment point trom pont Eo eG inereasg The workers —_ nae Remember? (D welfare prayrams ag labor Fore participation Ta! otes & low-wage ' poondens.,. (@ Rater, iL yaduass he wovdk Nee Ff low- wage workers. not \owen te nitive s® i ach of 0 wwotfare ram on hours 6 work! ype CHR bo WN Us eceyep ee keel seb i \ i 1p q O85 0 = ya = cad ( { DH -xcih yh ; | at hs a+ tent i | ty Hous of- 5 Fo tap Wel? mors Jeisure spe worker & » A wolfare ‘propor ushich aives eno grant & $500 and ‘imposes 50% fax on Lalooun earmings produces voorsl, incentives. +The worken s ot point Pp initially * Because 6f ra welfare program, she income effect moves He worker to point @. + Jha substitution effect moves the worker sty point R. oth edfeets veduee fixe hours of ark[Review Que? 3] & te 2 Ee eam rome Tas Crt) h to improve Ht + An oblern ative approac peonomic-slahus ef low-metome persons is given bby se ‘fpned Income Tox Credit (EITC). © PEG a wok credit that may qive the low-income Workers money back, ot -tax--time on lower dhe taxes “they owe 40 “he govt . 1 gj009 pos © 3 009 ba \o,009 F » 1,000 7 0GS » In the absence of tax credit.” Ane budgel Une is FE, ~qhe ETTe dives the usorker 40> ton credit pn labor eapnings as long as she eanng Jess than $10,000 + Suppose, sre credit is capped at {4,000 . The workar reeeives this maximum abe amount as long ag she earns between $]9000 and 4 18/000. 2 Tran the tan credit is phased out (are Gi) gradually wf ¢ In panticular eal (after reachivg tie $13,000 threshold) veduces the credit i) 20%. This Heo implies that -fre credit completely disappeans one tre’ wornan earns & 33, 000 I h additional dollars eanred,Tmportant olooul ITC Pregrams 9 Tt eneourages non- coorkers to state workire quit word => It never encourages a worker to oeyTtives. b 7 cri oss “program produces some in produces an income effect. gbour'! supply® =p Te impact & E11e 6 U A) EITC draws usorkee into. se Laloour market fer e OE11e ae houns : wok . HollGD ave oqna E171C program Shifts The budget: ine and wil) dou nevo euprkers ‘wito the labours manket - (a)— The person enters the labor, marker by moving trom: point pto a. (ww TH de person already in Ao labor - market and is eligible for Te EDTC program, there wil) be an’ intome effect eohich yeduets, his, hours CF work, (The loudget Ure ‘shifts povaliely) > ©) — Come -for this print as Uke: paieie —.° Worktrs’ have -to make ginilar choices tontinouely overt the years - ¢ usork- duisuve choice) © Rocause, consumption and Rolsure, decisions ore made over tre entire workiny ufe, woorkers can-trade some, Jusure time today, in rehien fop. additional eongumption tomorrow. + The wborkenls woage over the Life eyele has a predictable paths _ > v9agos tend to be tevd When {ye worker is oy = wages vise 05 the workin ages, peaking at Sd yeas (somewhat) — Te wage rate tends to decline slowly ottor wge 50.way? vate a 2} + Tha above figure shows hat tre eoorken will devote move hours to tie labor market when -fre voage is high and -fer02m houns when the vwsage is (ww: \>) ou ae ty she two woorekens coith .o4 A @)> 4ods usage vate exceeds Jacles - evar Og C—> Both Joo and Iaek Work more hours whan tre wage ts high. But Ff (income etfect dominates, Joe coonks fewer hours pran Jak (afer Lasuve fre) substitution effect domi nates, Joes voorks wore hours than Jack. (bias intome Ga corny Seisuve (@ Substitude #22)@ _ rfelivementt + ufelime income is highen, the longen a worker p's off yetirement - od pension benefits ave Constarrt , wage increases have a Substitution and income effect, ° So Ufetime income mag not be changed. > An increase” in pension lan etits, veduees the price ch yetrement. whith ineneases the demand fo “Deistire’ and? encourages the worker +o. relive antier.3 } 2 The ‘above igure shows ne yetirement- duoision of x worker. : » point E gives a. worker pundle if be -velives ob ageso- ns, leisure ~ eonsurption ft ublity maaimnizing oso chooses pomt P and rvehves Poy do years instead f 20.8 2p benefits) on rehvement age®! the Kfhecls of arn inerease in The wage “and pension 2(a) = werease In wage, vetotes, tre. budget Une grpint pre point 6. torn ef to 4, _sintome and Substitution effects influence ooorker twnove 6 for pont Po point R. 3 Fe worker delays his yelroment-| as qt substitution effect dominates :| c Cb) = inevease In pension benefits roles: -the budget Gre around he pint F. — Here the intome and aubsttution Cffeets work reversely and encoureg® Ane worker fo rere earlier. =P Codiq Seeurityy farming Tests > © Social scout earn test applies +o people who are earming an mome and chooses -fo collect benefits: before fuj) retirement age - . fr every dollars an: individual makes above a contain Umit, the Social _Seeuriy » administration wil) withhold some “heir[sk Beit cd TS yon 4 | ; E~\ EK pa al ll a ( pid | ESaeee as ot Hob Hg D «Tha Figure shours fhe impact of tro soda) security earnings ortest. on: hours FF work. «Here; SSET ‘generates the ‘budget: tine HaEE gro. ‘elimination Gt atae test allvo the trees “to face buid get ine WE. othe At woorker 6) ak “pot, P4 > vohere work very feu hours phere is less impact 6 the donning tent on him. he@ Oe ee ° Te second dvorkere ic at point fo> tohich means ho allocates many houns “fo tue labor market even rough be has © to forfeit his sorial security toons - © The worker moves from foint fp to &o- if quo earning test is removed ° Iho hind coorkers works a mediam number ot hours. Ms person hag not antiray fortiaighted his SséT ponehts? and’ fans a contain amount ton rate om his, labor earrings. 6 The worker effectively Gs ad vooye Vrevense when +e enrmings test ts! removed and movls tom point Pa, cto ky,: ee ae ee Chapter (‘Labor Demand) + labor denland a denied “demand = because ‘fim hing doorkens i long 4s the consummens want) to purchase a want ety oj goods and: senvias.) So, tne eons urnin’s poeferences offoet th, -Finms output: decision. And -fo increase. te firm’, output » tts Firm hire-mbre workers... Thats chy labor demand js 0 Uarived demand. i } s Now, How gana worlaans are hired and abhat- are st poid 1 | ° we know, « 4inyn'S production Function is’ a -tle) cohorey,€ = number gf | emp log eee howrs/ number of workers hined vate ip ke capitaSS FFT ° MPe (Manginal Product ‘Labor) * ~The change in output resulting Hoorn hing an additional serdar (holding constant aller inputs) MA, (Maigina) Pood uet Capital) § ‘the change hn owbpat: maulting feom ‘a oneHunit jnerease. inthe capital stack. : Ate ( Average preduct & laboe’): The amount AE ontpitt ponduced bey ie, workerfiom’ refit: maximisation emule’ Rettis(n) = pa - we - wK Here, » yal arat p > price at cahich “tat Hin! can sell its output wos woge rate/ cast f hining an adaiti onal worker re pee & anpital ° Suppo “tes fiem sO smal rye inte industng and cannot change us pre tthe output & that industry bq egng his outputs . So, the fiom can be eplled a8 * Perfectiy Corp etitive tem? [2 “3 a v| ‘cr Pshont pun amply ment decision’ + Re value of cohat ach additional coorkeer protic 1S Called tha Value ef the rmangina] product 4 labop VME. = px ME, Re vol ef average product gives tw doltoe value 6 output per overdker. oA Profit Masi miaing fmm wi ot tie \evel volere to and vite is declining, or, qe firm hire workers at tne poinb where I hire workens the marginal gain from ivining on additions} worker cs tne cost f hire , Gara ay athe einer fear trear Gee - wife Ga (ae Ge Ar AA,Tn Abe previous; Figure, BIS fre point. where VME = 3 Sy 4 Wn peint where Ww firm van pret gain maximum prdit- by ving P® umber tf wo KaI%6 . * Hocause manginal product declines, tno [Short- run domand ewnve ‘form Tabor] 1s dewon wand sbpiry: we cary show this by drawing a fig: no" \ 6 Emplegment- ° AP wage rate crops from 422 to41e, then. sno fiem's employment ineywases ~forn $to 9. + Df te price: tes output. increases. it shifts swevilfe wunve to UMP and dre now employment of workers is 12.feet * Now we uso an etosticthy to measgune he Yesponisiveness! & labor demand in the Indust ob changes in ther wage rote, -. Showterun’ labore demand! é Sage in voag @ a disp Aw” © Ge [2] Suppose, a inhshy kites 0 workers when she wage jis $20 and hires g6 workerss cohan fre woge FLO kat fhe Shorwt- Pun -dirnand.+fir labor? ; b 1% change in Employment ; Sq ~ “oy change in wege — Meg | w (568). g) Stee “aaa EY “way 20) "50® \ Sse] = J. 402 | = \4t% > tnbor demand is Elastic. © as tne obsolute value te labor demand 7 4. Reviews Question + ° a> Margina) Hod uch ae Condition » 4A Bom hines arorkers, | 1p) 10, ” pont where — . o Tfa fiom 1) ot thot exact point “he fiom steps hining woot This 3s ‘cated ‘skp Rule” Akp known as, the Marginal Dray Cerdition. “A peotit mati mi ting Fins contpat docision iss MSMR] i yy NV° OF. outst » Here, he prafit ay Fiom( in a povdectly eo petitive market) sill produce » ae pet wohen Pree ‘ts Sp 2¥ Because ) Now, we know (from pre ee Vif = px ante and, VMic. 2"'us * ovMte = PX Mle FUP »y (P= wx —o Combining M$ a): - MCS Ww ' te |© »Tka above @ondition +el]s qne rena prt: mai mizing hrm | —> when -fo stop predaciog outpat- > whon to Ste p hivsirg | foorkers 1A tke she ig pun, ee capital stock and {oloove input nae ave not fixed . Tt can maximize - préfits bap ees ta » => Howo remap | oyorkens tb hire aa ae aad plant ond capris hvost'n “An isoquant, Sra te ‘diffyent ‘oembinations of- Copital and jae the slope ae Neate is copixa|.*An isocost line Shows sha different combinations F labor and capita hot ane equally costly . A firm's: cost af production: alle capita aa @ 4 . , ov, Fee oy + oh cio bebor 2 Coy few er rk ; “fv / sv Te slope fc an’ tstost, Lins, = EF p ° Ar The tsk minimization ‘solution, slope ¢ tue isoauant = oe Fhe ispeost or, a __w Copitay + Mi 6 G Here, ‘p’ is the tost mini mi V solution for a prstit - MAY Miz Prom . > laborRevorriting the equation, we gets Mle Mig orate \ me ME. tne last coorkar Wied produces MP e units w & output ata evst 6 to’ dollars . Mi = The ouput gield ch tns last dollars spent on capital a cost minimization veqaives/Fnak, tne last dellarr spent on tabor yield as much output as jrelast- dollar. spent on’ a. * ud, “the above condition doesnot deaenitie he i mas ii “pahowinure a finm | in the long-run. as long ry profit raced ri zation also remlres4iat’ baby and ] byw hired ae ll me Parra] fred py page) og———— ee +o hun t Labor Demand Curves , © we ean dolormine the long-run labor demand curve TH the wage vate changes. Tho qua ie Hoco ust!) he irm respond it re market st wageh ayo og Cl +S 6 Erploy mount _ 4 roage - dacion Prafens he isscont eurve 2 ne firm hold ue cos out condiant at G.) the Asoeost, will, rotate, around Co and the $tom os} move from point P.t0 Rk.© + Here, re Wage reduction ( holding the tost outley constant). nereases tno firm’s employ maent- fom 26 +0 40 workers and increases output fom % 10% - * Though the an alysis is simply nuporg. Because, tr firm will not manimiza 1% pret y constraining itnelt- to meus 4he same ‘costs eee CRAM: vefore and ofter A wage charg 2. feviews question: § 04 Gre (a “the wage fatie Balle “Pin erepand = oe decline in the wage ull “Typically ent} tae. manginal cost £ produchy ba faws output ots predurho ° So, drop in the wag 2 rcourages ane firm to arpand t's prediction . ewe can show tw impact f foe reduction in Mm 3 me 0 In rargiaal cost on tte ive of doe Flom byyee we a}fioms output dovision (00 200 > St adobe mangina) cost eunve dope Born Mts! toMe, qe wage eu eneounnge sjne fren fo prednce 20d units - oe nother sthany. Age anits . © So, he finm ust tt hep ote o- higher wont i or wyfirm ‘himing darision@® » Here “Ihe hyghen isequant langens “tne Kighen - Ysocest curve at point: R. S0,ne Solution is given BA pint where he tints emplog mrant- ‘roneases from 25 to 50 workers. oA evage eut can effect the long-run domand curve Pore Unbove LOL g) vohich ts dnawrn below’ yote wih | 255d En plyyment- + At fue Initial vsage, £9 wre An hired 25 wonkans . + Whin ti wag 2 fol\so wo, tre finn Can Nolo hive more asorkors ,trat 1s $0 workons. » 50, Dig on labor 15 downtwand spiny .| — $$ —_—_———._ -p Substihution y Seale offectss j ‘Wa know, tre. wage ent reduces tre marginal cost production and eneouragas “hs firm +o expand, ¢ As que -fiom erpands,, iE sonnts “fo Wine ever. More workers. Reve ara two effects Bo 0 Seat e effet) Substitute n edfeer 6 @5 4) 50 — Emplogmrent- « Here, we Move From “point POR is a “kov- stage move@ asi ie Prt 4° stage?! ne fin fakes odvantas 2 ‘of txe tovwere price & labor by expendi e production wand stages Ire +finrh fakes advantage ef fe usage change by reanpangirg Ws Input mix, i) Seale effects & Move Prom point P to & demand for tre Gutndieates eohat happene fo. tes fem’s inputs as tre firm expands WG Prod. uctto SP Tnereases, boty the emplog ment (from ste and ne eapital Stock (fromm ite B “4 ii) Substrfchon effects SHEE & After oxpandivg its scale, tre sage euit- encourages “tre from -}0 ‘adopt a more later jntennive production: . 3 Indicates, what hap pons to fue. fins omplog ment ng the wage changes, holding gutput constant.@ q © -move from port 6 Joh, bldng atte constant at 20 Units, raises Gat -Pim's emplogment fom 4o to SD workers. Substitution effet must deereace the fins dunand on expital. @ | Seale effect dominate arate» demand “fore Copital { | Bslihetion - [2 +s dtinand-br eapstal Y | = Bastia 7 ental Te measure par hae of changes wn ae errplegmart (&x) 4o changes in wage we need the concept 6 lastly. Solong- pan elasticity AO Dt, to change In emrploament \ fo change my wage ~ Melee ‘ Awfuy bin ®® + Ay the tong -pun D, tunve 6 dovonwand lopli ne long-run elastichty for PL is nagative (> = Elasticrty Gf Sabgtituction s » Copita) and talon are if the isoquant Ung is linear » Y Te Substitution . effet is 1 lorrge : when labor. and aim are gente sulostitudes . * Capital ond boro are, [pertect *P if tre isoquant- is vignt- gid . Ss Frare is no substitution affect cohen ee tuso inputs ‘are perfect torplornarts ae hh x @ pertect substitutes a * perfect Corplarnents——_—— @ * Retweon these two ectremes> There area “great numben ¢- substituHon possi biles . * jsoyvant cunve Ho Thr’ Cvnve 297 substitution feet oo DR kG! To measure tne sunvatare Ge the isoauant, Wwe ase leis ¢ substitution © Kye" Qacety et Sshivton = seid . 7h Onarge 10 Cl pelweon Capita) § Ubon * (holding ouput constant )l @ dAffiemahve Action and Paoduction Costs? —_—— *Affinmative action programs in tw Labor market eneounge the foms -to alters The race, ethnielty or gender Gf atie wonkfores moro of thnse workers by hinfng relatively rapresented in the who have een andere Poms hining in Ane! paste! . Suppose there are two firms | I. diseriminatorg firm » 2. Color blind firm ee Black labor Qe of vohite lala © whife labor q) Affirmative Achion Reduces ¥) Mfemative action increases dine Cost F Diseri minatory fm tie cost 6 Color-| (4) Diser’minatory fim Anitially “chooses “the input mi fat Dont, P. Tt, \gnores 7 “tne ee vale to employ more wohite “aber iii S An atfiornatve achon n goagram ¢ “ean Fone vorthe firm fo move to eee 8. woich ic Re mor effcient in poodwckion and lenin costs. ® A colon blind firm 15, at pint & ' hining velotively more whites - gj velo. more ahs > An otfirmotve action progyam can oreo sve firm +o move.te goin 8 and jncevenses we Firm's eocts.he roles dalarbee tbe Batons that soe Sika) “bo generate elasHc tabor ‘demand ‘eunves in a pooticalar industry. Slabor demand jis more: elastic, the greater the ‘elacticihy of. substitution... S lobo demand is more Zlastes ste: nae ae ed sf demand -for -tne output. S taboo danvanl js more. elaatics The greater Labor's share ‘in total costs : =pfacton Demand twith Many Anputss, 1 ye Piae "9, A ptt motioning “fem hires ith inpat— : up To tne point ohare? : we 2 pRiMpe avmfe| ® * TF here are many Inputs in she p roduthon Process, than te demand fore input j ineveases:, S when “fot price &- input 3 increases S when te price of input i decreases - a) MLAsure: fre sensitivity re partiolan put tO the pries dt oolwr inputs in tho demand, ve nod Cross.— dlashcity S faclora demand. ‘ , 4 a : Cross-elashcity of: _*& change in factor demand. - 6 thang eon "4 Trton pretation’. The eross ~ elasticity of factor demand qives fre percortase change in tee demand for input &, resutting trom a Aes change th the wage of Wput-9:Qe ‘Tf cross- elasticity is (hy othe demend fon input { Inereases, hun ste pris JE input 3 pises . S dan Inputssi ik. ave. nore be cabatides \n Production . ° Tf cress - elasticity syd 9 SSHnd demand Por linpat % ckereases, when wy fincreasess! von complements S Tun ‘inputs 3 635 ‘are es debe in production. a 7 Employment cle teak iy (4) positive cross - elasticity 77 ® negative cross elastiity° The \ilorachion bodwonn' workers’ and stroms thot oceuns in sya labor marckel- determines ae qu wage and omphygment tevel, At-this. ous level, tae: numbero g houns thot worden s wish tp) upek, matches with tre number & employ se- houns tha rms wish + employ : wage : ov S “high wt {Doo pomand F npg want BE, s At ww & woge and ‘employ ment level 6 labore sup By 2 Jabor dermand] :! =p Thke_inpack of heiminimum woe on 2rnploy musts rs Review Ques B8 * (?) Shouo hous “tw mini nun vaccg 2 create - unemplog rent in 70 comparivive market 7 : feploymenk ° Initially dire a lelbore thartkek isin by eqn ‘ot wonge del wt and } enplyrrant et, 0 Sf the yreroment pes a minimum 1309. of Byethen tw toms move up 4D qh tabor, darnand wrve ond | $0 » emplagment fais + €.® “As a result; some yoorkers oF get sacked som -tnein Jobs and becon~. unerpleyed , ° ‘Though do higher wage ancoureges Some, additional persons “to ersten the labors marche wanich ar 2 shown kt (&- €*) ; - e This addtHonal workers cannot find Jobs’ and are added +tp:no waver plog ment rolls, => Tarefoyo ,m mini mum, wage creates unemplay ment because some coonkkors Cer E) who are ewpbyed bebve, lose cir ‘obs and some worekeps CEs - e*) mar fat conpotitive wage ‘@ SET AD aXe oman, org Ged higher minimum wage @ A 2a@ whee, Fig job ME Al@~ * from “tne graph, she oun employment vate / ste ratio of tunemploged workers 4p labors marset prrticl pants Is &-& 5 ° his scepter pe Caer somtt Aang) vocause ! Sfioms do “hot. wish 48 Wire more *voorkons "ot! tne Wygher jes0g2 rato S unemployed workers —taant to -vo01%k ot fe “minimum wage. ;@ Review) Quiston: 9 Diseuss Hine Topaccl of digg’ miaimumn woige wokon reve ar’: tus os ecto rs Hin) AE economy, ie Covered sector ard The 4n covered Sector, Ps The graph, (oe ‘lushate to describe rine sempack & 1 m imum wnge on unemplagnrant) assumes oat all - wpigkens are covered. 0! Bub TF “we /donsider aN, “economy with ted sectors : eel a sector: | ; hone Me i S Tearavee ‘eeckorr chon wo need fo ‘illushate Two graphs to deseniber 3Covered Sector! mdusinies undo govt. obsenvabion Uncovered Seclor. Vendors, streot havokors; self emplogors. vp [Covertd_setor) Untovered Sector AL el De > Emplogment ‘r ick, fy & » Anitialla see egy" toage is we fore both mankets before’ “the: inrposition GE minimum wae : As we know, minimum wage can only be iwposed. on the industries st are in covered sector so the lurkers employed in tne aneovared, sectore ail vective the | “competitive After imposing mini man wage «89¢ rives 4p for this @ (E)-€) workers tose -trairy jobs and@ mn migrate -lo untovered sector. Cue aes : * Tf. Some Gf he usprkens Ghat ¢ migated -frorn covered sectors to uncovered sector) can find yobs in the uncovered sector, * Teen, The supply sive will ahifts do a “which force tne wage +o decline . . us Ran? he Wumben. of workers empleged in -thés ; geetor increases fom Ey, to eal ;f Aritially erxta wovdkars undovered sector-@ Bow, Oran “Brena fy mee CE GATE Sera AD aqaaspe aeah,so “inj kang! around in the covered sectors until a minimum — worge solo can be found . + The sepply curve hon shifts to tet —» SU, which will ise the wage and-néducetra ep led° Tho mod] of Dp assumes 2h at fog instarrtly adust eis employ rrerst voken tne economic environment changes.” « Rut it is costly fon wm finm +b make quick, changes which wishes to adjust the size & vs -worrkfonce i of ( firm loys df a lange number ¢ wordkers _ on wishes to expand empt, Fa bn neue sbehntial rgd) casts 0 : qe expanditaves ‘that Bee a as tay adjust tre cite of Theil doordcfores , are called i Adjuctmsnt tosts,| + Two “hypes 6 adustmunt costs: S Vaniable Adjustment costs fred - * Variable, adjushnunt Costs depend on bo, numbers «f voordkors that he Bion is gory to hire on fire. S Fixed edict a az CG ae wegAly °, vise at an ree rate. “At gov! sPoieg Anies a prevent fiems oom Firing voorkkers, cant 7 “fhe tosh of rimming ‘i iv — oso ‘wovkbree, Ut) mse Ee im erplny nent faster han the costs of expanding tne tinm.@ ° eneourages ne -fiems to adjus! the employment aw) level Slotoly « Gmplegraer low son “) joo WP pall cs | bo! yup ertey i ee ( rn wy J too Selle. so <> Time 2 af got OT, x?! Prams? which jet employment, fae OCU stron the enpansion | Lah woortkeres workers. more rapidly dian Ane! con traghon ¢ Fixed Adjust ment Coste silt oof a frm Lan makes: any chang 2 intun & fixed in Ws employ ment tne fiom us'l| amount of) addust mint cst. L(t ger e a ) Kho Ce © Fon, the tiny has two options? | alia + lows). yt can remain at HS current 2p w5t can adqust HE amply ment evel.Capitar — Skil) om plementary Hy punesis® | is more * Tt states tat pypical capita Complementaney to skilled labor 4nan +0 Unskilled labor . | * Unkilled tabow 8 Capital —» Substitates Skilled -lalovi Copttal = Conploments pe 0 Sy Phe priw of capital falls, employons increase trai use - opital Squipmentystohich ipises cts demand -fors skilled workers. Because , tat area Romeplenanis Ge Tegetor) prey use » ‘Demo fr 1 | | capital Capital U9 skilled voortkens I 2 This 's known 4s ‘Opital-sktl) ‘ Corplementarity, Hype’@ * TH suggest j | uggests nat , subsidies -to Investments in phir] Gpital will have a different impact on different qreup & workers. (Arvestment tan Credit) Tyvestmunt tan Gredtt Demand Qamand Poice of Demand -br 4 for T Capita J d Gpital | ” Unslilled sag! i See + So, ynvestmont an credit accelerates nvostment in the econem7, out eopnomic conditions for (es @ ekilled workers. also worsens Te hapotnesis also eng pests that Fechnolegior] Prograss can have a coneidenable \mmpaet on Income imequal thy Peoause ite & Demand fon skilled re S Pamand fo unskilled workers +