LABOR

SUPPLY
NADZMA SARACAL
 TABLE OF CONTENTS
The
Neoclassical
01 Why work? 02 Theory of
Labor
Supply
Extensive
Preferences
and
and budget
03 constraint
04 Intensive
Margin
 TABLE OF CONTENTS
Policy
Estimating
Applications:
05 labor Supply
Elasticity
06 Taxation
Earnings
LABOR SUPPLY

Each of us must decide whether to work and,

once employed, how many hours to work. At
any point in time, the economywide labor
supply is given by adding the work choices
made by each person in the population.
LABOR SUPPLY

● The supply of labor is defined as

the amount of labor, measured in
person-hours, offered for hire
during a given time-period.
 LABOR SUPPLY

supply of
01 02 supply of hours
workers
LABOR SUPPLY
 LABOR SUPPLY

labor-leisure choice
isolates the person’s wage rate and
income as the key economic variables
that guide the allocation of time
between the labor market and leisure
activities.
 01
WHY WORK?
WHY WORK?
When an individual is employed, they
are paid by their employer. This results
in them having money to spend on
food, clothing, entertainment, and in a
variety of other areas. The more an
individual spends, the more that
demand increases.
 02
The Neoclasssical
Theory of Labor
Supply
This model isolates the factors that
determine whether a particular
person works and, if so, how many
hours she/he chooses to work.

The standard neoclassical theory of

individual labor supply considers
income and leisure as the source of
individual utility.
Two effects on the amount of labor
supplied due to a change in the real
wage rate:

1. Substitution Effect
2. Income Effect
 03
Preferences and
Budget Constraint
 04
Extensive and
Intensive
Margin
Extensive margin - how many people work
Intensive margin - how much a given number
of people work, on average.
 05
Estimating labor Supply
Elasticity
The elasticity of labor supply
is the percent change in
amount of labor supplied
due to a percent change in
wages.

• Hours of Work
• The Wage Rate
• Nonlabor Income
 06
Policy
Applications:
Taxation Earnings
 Earned Income
Tax Credit
(EITC)

An alternative approach to
improving the economic
status of low-income
persons
 Two Distinct Effects on
Labor Supply

- The EITC increases the number of labor force

participants.
- The EITC may change the number of hours worked by
persons who would have been in the labor force even in
the absence of the program.