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II. Labour Supply

9 Januar y 2024
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Stylized facts

 LFPR for men had declined over time while women’s LFPR had risen
― US LFPR for men aged 16 and over had declined from 84 percent in 1948 to 66 percent in 2017, whereas US
LFPR for women has risen from 31% to 55 % during the period in consideration.
― GB LFPR for men had declined from 87.1% in 1921 to 71.3% in 1998 and for women it had risen from 32.3%
to 53.8%
 The average hours worked per year differ substantially across countries and is
falling
― In the US manufacturing sector hours of work fell from 55 to 42 hours over the past century.
― The average South Korean employee works 668 more hours per year than the average German worker
(2018)
 These labour supply trends have surely altered the nature of the American
family as well as greatly affected the economy’s productive capacity.
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Meaning and Measurement

 The concept and measurement of labour supply is one of the problem

areas of labour economics.
 According to a recent survey, labour supply has become the most active
area of labour economics
▶ This popularity is despite difficulties of concept and measurement.
 Labour term used to describe supply is the term used to describe the
human input into the production process
▶ It is the supply of that factor of production which results from the activity of individuals.
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Cont’d…

According to Borjas (2020)

▶ Each of us must decide whether to work and, once employed, how many hours to work.
▶ At any point in time, the aggregate labour supply in the economy is given by adding the
work choices made by all persons in the population.
▶ Total labor supply also depends on the fertility decisions made by earlier generations
(which determine the size of the current population).
― crude deaths and net immigration also determine the total labour supply
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Cont’d…

The labour-leisure decision:

 Individuals maximize their well-being by allocating their time between:
▶ work (labor market activity) , and
― so as to earn the income they need to buy goods & services that makes their life more enjoyable like a house, car,
etc
▶ Leisure (non–labor market activity)
 Note: work is the time devoted to a paying job, while leisure in a broad sense
includes all kinds of activities for which a person does not get paid: work within the
household and time spent on consumption, education, commuting, rest, relaxation,
and so forth.
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Cont’d…

The labour-leisure decision:

 The economic model of labor–leisure choice isolates the person’s wage
rate and income as the key variables that guide the allocation of time
between the labor market and leisure activities.
 The framework is helpful to analyse the factors that determine a person’s
labor supply at a point in time (static) and to explore how the work
decision changes as a person ages.
▶ It also helps us understand why women’s work propensities rose and hours of work declined but also
allows us to address a number of questions with important policy implications.
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Measurement

Labour supply can be measured in a number of ways:

1. A head count or “the number of people” are sometimes used to measure labor
supply.
▶ But a head count may include under-age children and does not convey the notion of
engagement in economically productive activities, which is implied by the concept of labour
supply.
▶ The inclusion in the count of people of working age only improves the measurement of
labour supply, this too is defective.
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Cont’d…

…measured in a number of ways:

2. Measuring labour supply by the size of the labour force is an
improvement over the crude head count approach.
▶ Some think that “ productivity” is a key element of the concept of “labour supply” and
that it is imparted by the notion of “labour force”.
3. According to the labour force approach or framework, labour supply is
measured by the product of the labour force and its activity rate.
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Cont’d…

…measured in a number of ways:

▶ By means of a sample survey or a population census both the labour force and its
activity rates are estimated.
▶ There are alternative methods of doing so and the one used recent demographic
surveys is that based on the concept of current economic activity status of the
work force.
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Cont’d…

…measured in a number of ways:

― That is, the information concerning the economic activities of the labor force is received on the
basis of what the respondent was doing during the period of census taking, also called the
“reference period”.
― For current activity surveys, the reference period is usually a short one, a day or a week.
― If the reference period is a year (and not a week or a day), the measurement yields the usually
active population, which is another measure of the economically active population.
 The labour force estimation procedure based on the activity principle
involves three steps or stages (see Figure 2-1)
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Cont’d…

 First, the working-age population is defined and measured. Conventionally, in

most countries, the lower limit is 14 or 15, or 16, and the upper age limit is 65.
▶ However, the recommended international standard does not set the upper age limit to determine the
economically active population.
 Second, the economically active population of working age (i.e. the labour
force) is identified and grouped into two;
▶ Employed: To be employed, a person must have been at a job with pay for at least 1 hour or worked at
least 15 hours on a nonpaid job (such as the family farm).
▶ Unemployed: To be considered unemployed during a reference period, according to the standard ILO
definition, people must be (1) without work, that is, not in paid employment or self-employment, (2)
currently available for work, and (3) seeking work.
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Cont’d…

 Third, the identification and measurement of the population that is not in

the labour force, often referred as the residual group.
▶ Those not in the labor force” constitute a distinct category of the economically inactive population
(which include the inactive labour force and the under-school age children).
 The reasons for inactivity are many and the not economically active labour
force includes, full-time students, home-makers, retired or old-age
pensioners, and persons of working age suffering from disablement.
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Cont’d…

 Activity rate (participation rate)

▶ Activity rate measures the extent of involvement in economic activities, or the
participation in the production and distribution of economic goods and services
― It is the statistical measure of labour supply activity within the population.
▶ The activity status of individuals is determined on the basis of what they have
actually been doing during the short time interval (the reference period) of census
taking.
▶ Only if they were engaged in the production and distribution of economic goods and
services will they be counted as economically active, or as a part of the currently
active population, or the labour force.
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Cont’d…

 Activity rate …
▶ The activity rate (usually expressed as a percentage) is calculated as a ratio of the
labour force to the working age population.
▶ The working age population is a socially determined demographic factor and is the
sum of three variables: the employed, the unemployed and the economically inactive
of the specified age group.

Where: Labour Force = employed + Unemployed; Working Age Population = LF+ economically inactive
working age population.
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Cont’d…

 Activity rate …
▶ The population of working age is sometimes referred to as the potential labour
force or as the age-eligible population .
▶ This is contrasted with the actual labour force, which is the sum of the employed
and unemployed population of working age.
▶ The economic activity rate (or the labour force participation rate) is then defined as
the ratio of the actual to the potential labour force multiplied by 100, i.e.
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Cont’d…

 Activity rate …
▶ Apart from semantics, the two measures of activity rates are exact equivalents
▶ that the activity rate (or the participation rate) can be computed for the total
population or for any sup-group, for example, for males or females, for urban or
rural areas, for particular social groups or regions, for each age category, etc.
▶ The basic assumption of the labour force estimation method based on (current)
activity principles is that
― It is possible to differentiate economic activities from non-economic ones and
― All activities can be grouped into these two mutually exclusive categories. It is only the
engagement in “economic activities” that qualifies individuals to be counted into the labour
force, i.e. as the economically active labour force.
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Cont’d…

 Other related measurements are:

▶ Employment rate: the fraction of the labor force that is employed

▶ Unemployment rate: the fraction of labor force participants who are unemployed
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Cont’d…

 The limitations of the estimated labour supply

▶ The concept and measurement of labour supply poses many problems.
▶ The labour supply estimate provided by the activity approach is no exception. It
too fails to achieve a wholly satisfactory approximation of labour supply
▶ First, the concept of labour supply encompasses notions which go beyond the
number of people n the workforce
― The supply of hours of work, effort on the job, labour commitment, etc., are all elements of a
comprehensive measure of labour supply.
― The particular framework adopted (i.e. the activity approach) is defective in that it does not
include all these considerations
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Cont’d…

 The limitations …
▶ Second, in the labour force approach attempt may be made to set criteria for the
measurement of economic activity, but it is difficult to identify and measure
comprehensively the level of all economic activities.
― This problem is especially serious in the underdeveloped mainly subsistent economies where
 a large portion of the production is non-marketable (i.e. is produced for own or home
consumption),
 labour markets are largely disorganized, and labour force is largely self or family - employed,
and
 where a large portion of the population pursue not one “primary job” but multiple jobs.
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Cont’d…

 The limitations …
▶ Third, there are many cases where treatment by a standardized procedure (or
criteria set) is not always possible.
― The simple method of counting into the labour force individuals “who are able to work and
either are working, temporarily absent from work (with job commitment) or actively seeking
work” is not easy to apply in all cases.
 There are various types of “begging” (e.g. “pure” begging, begging with musical
accompaniment, begging with service, etc) and categories of “criminal activities “where a
consensus, to include or exclude in activity rate estimates, may be difficult to reach.
 There are individuals who may not be “actively seeking work”, but are willing to take one if
offered.
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Cont’d…

 The limitations …
▶ Fourth, the reference period is also a factor affecting the (estimated) labour supply.

― The reference period can be a day, a week, a month or even a year and these yield different
labour supply estimates
― If the census using short time intervals (reference period) is conducted during slack seasons
labour supply would tend to be underestimated. It would be overestimated if the short
reference period (a day or a week) were in a peak season.
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Cont’d…

 The limitations …
▶ Fifth, the measurement of labour supply is difficult when the frequency of
economic status change is high.
― If a large proportion of the labour force are in and out of the labour force count too frequently,
labour supply is overestimated and underestimated, respectively
▶ In conclusion, the notion of economic activity is spurious in developing economies
and produces unstable and inefficient estimators of labor supply.
― The labour force approach of estimating labour supply is a popular one and can be refined or
improved by using complementary methods of estimation.
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Some Factors Affecting Participation Rates

 Evidence from the industrialized economies clearly show that the extent
of “job attachment” is not evenly distributed in the population. There are
▶ Primary workers : who maintain permanent attachment to the labour force until
retirement and their distinguishing characteristics are that they tend to remain in
labour force (as employed or unemployed person) in spite of small changes in the
wage rate and working conditions..
― Male household heads are the archetypical primary workers
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Some Factors Affecting Participation Rates

 ….There are
▶ Secondary workers: who lack labour force attachment to the same degree as
primary workers. Such individuals usually have highly valued options to market
work.
― Household work may turn out to be a better alternative to market work for married women with
children,
― Students of working age have the option of going to school rather than earn positive incomes
from work,
― Elderly people past the retirement age attach high value to leisure.
― All the three groups don‘t have permanent attachment to the labour force
▶ These groups only participate in the labour market if the income differential is significantly
high enough.
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Some Factors Affecting Participation Rates

 Primary workers have relatively higher LFPR than secondary workers,

ceteris paribus.
 LFPR, whether for primary or secondary workers, is also affected by the
business cycle
 Whether LFPR increase or decrease during economic recessions and
during economic prosperity and vice versa has been the object of many
labour supply studies in the 1960s and 1970s.
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Some Factors Affecting Participation Rates

 Two hypotheses:
▶ Additional worker hypothesis: labour force participation rates move
countercyclically and hence tend to stabilize employment
― Household members (secondary workers) tend to maintain family income by entering the
labour market during an economic downturn and leaving during economic prosperity.
▶ Discouraged worker hypothesis: those in the working age group who have been
looking for a job, failed to find one and quit searching for a job.
― During recessions LFPR declines and unemployment rises due to massive job cuts and a
potential workforce is deterred from entering the labour market.
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Some Factors Affecting Participation Rates

 Two hypotheses:
▶ The discouraged worker hypothesis is also observed in developing economies
where long periods of economic downturn influence workers’ behaviour in such a
way that workers become increasingly unresponsive to market signals
― Job vacancies remain unfilled for a long duration because discouraged workers that qualify for
the job are not applying.
― School dropouts and graduates get used to depending on their families to provide for their living
and are not motivated towards active job search.
▶ The net effect on LFPR depends on whether the discouraged worker effect or the
added worker effect is dominant.
▶ This is an important policy question and one that constituted a distinct field of labor
research in industrialized countries.
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Labour productivity

 A measure of output per person per time period

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Trends In Participation Rates: Ethiopian Case

 Demographic surveys in Ethiopia are of recent origin

▶ Although guess estimates of the population size are available since 1930 (CSO,
march 1988, P-2-4), sample surveys of the 1960s (which did not cover Eritrea, Bale,
Ogden, and the nomadic frontier regions) constituted the basis of demographic
analysis in the country until the 1984 census
― Age-group-specific estimates of activity rates for the total population are given in the results of
the 1984 population and housing census (OPHCC, 1991), all others providing estimates for the
rural population only.
― Urban activity rate estimates provided by most of these sample surveys and censuses tend to
cover Addis Ababa and a limited number of other towns.
― Since urban participation rates were not comprehensively estimated (except in the 1984 census),
it had not been possible to provide activity rate estimates for the total population in these cases.
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Cont’d…
▶ Results of the 1984 census indicate that the Ethiopian activity rates are relatively
higher for each age group and the activity rate differentials are most marked for the
extreme age groups when compared to a typical profile for a developed economy.
― a high participation rate (of about 46 percent) by the lowest age group (10-14) is noted, and participation
rates reach their maximum values (of about 82 percent) for the age group 45-50. From that point on
participation rates decline slowly reaching the level of 53 percent for those aged 70 and above.
▶ The main factors accounting for the high activity rate of the elderly are low-wage
incomes, low-level development of non-wage income sources, and the inadequacy
of non-traditional social security systems. Low incomes cause an increase in
participation rates. Unable to provide for the means to enjoy leisure, the elderly
continue working to survive