Appendix to

Chapter 13

Labor
Supply

© 2004 Thomson Learning/South-Western

 Allocation of Time

 People must choose how to allocate their

available fixed time between work and other
activities.
 Table 13A.1 shows the considerable variation
in these choices.
 The study of time allocation allows economists
to understand how these decisions adjust to
changes in opportunities.

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 TABLE 13A.1: Time Allocation (Percentage of
Time during Typical Week)

Men Women
U.S. Japa Russia U.S. Japa Russia
n n
Market work 28.3 33.6 35.1% 15.4% 15.3 25.4%
% % %
Housework 8.2 2.1 7.1 18.2 18.5 16.1
Personal care and 40.6 43.1 40.4 42.6 42.9 41.6
sleep
Leisure and other 22.9 21.2 17.4 23.8 23.3 16.9

Source: Adapted from F.T. Juster and F.P. Stafford, “The Allocation of Time: Empirical Findings, Behavioral Models and
Problems of Measurement,” Journal of Economic Literature (June 1991), Table 1.

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 A Simple Model of Time Use

 Assume there are only two uses of time,

market work or not working.
 Leisure is time spend in any activity other than
market work.
 Assume utility depends only upon the
consumption of market goods (C) and the
amount of leisure time (H).

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 A Simple Model of Time Use

 An indifference curve map for such a utility

function is shown in Figure 13A.1.
 The opportunity cost of leisure
– An extra hour of leisure taken by a person costs
them the income they could have earned in that
hour, their wage rate (w).
– Thus, the opportunity cost of leisure is the real wage
rate determined in the market.

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 FIGURE 13A.1: Utility-Maximizing Choice of
Hours of Leisure and Work

Consumption

U3

U2

U1

0 Leisure hours
6 per day
 APPLICATION 13A.1: The
Opportunity Cost of Time

 Transportation Choices
– People consider both time and dollar costs in
commuting to work.
– Studies suggest that people’s willingness to pay to
avoid wait conclude that people value time at about
one-half their market wage.
– For example, fewer people use the San Francisco
transit system because of the time costs involved in
reaching train stations.

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 APPLICATION 13A.1: The
Opportunity Cost of Time

 The Economics of Childbearing

– One of the most important economic costs of having
children is the forgone wages of parents who do not
work.
 Estimates suggest these costs exceed all other
childbearing costs combined.
– Economists suggest that the higher real wages
earned by U.S. women help explain the decline in
birthrates.

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 APPLICATION 14A.1: The
Opportunity Cost of Time

 Job Search Theory

– Uncertainty in job search necessitates investments
in time and resources.
– The market wage rate can be used to approximate
the hourly search costs.
– Higher wages lead to ways to economize on these
costs.
– Subsidized search (unemployment benefits) prolong
search time by up to 10 percent.

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 Utility Maximization

 If Figure 13A.1, the person can enjoy up to 24

hours of leisure by not working.
– This point is the horizontal intercept of the budget
constraint.
 If the person works, he or she can purchase
(24·w) in consumption goods.
– This point is the vertical intercept.
 The slope of the constraint equals -w.

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 FIGURE 13A.1: Utility-Maximizing Choice of
Hours of Leisure and Work

Consumption

24w

U3

U2

U1

0 24 Leisure hours
11 per day
 Utility Maximization

 Given the budget constraint, the person

maximizes his or her utility at H*, working the
rest of the time and consuming C* units of
consumption goods.
 At this point, the slope of the indifference
curve, MRS (leisure for consumption) equals
the wage rate.

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 FIGURE 13A.1: Utility-Maximizing Choice of
Hours of Leisure and Work

Consumption

24w

C*
U3

U2

U1

0 H* 24 Leisure hours
13 per day
 Substitution Effect of a Change
in w.

 The substitution effect of a change in w is

the movement along an indifference curve in
response to a change in the real wage.
– When w rises, the price of leisure becomes higher--
people must give up more in lost wages for each
hour of leisure consumed.
– A rise in w causes an individual to work more.

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 Income Effect of a Change in w

 The income effect of a change in w is the

movement to a higher indifference curve in
response to a rise in the real wage rate.
– If leisure is a normal good, the higher income will
increase the demand for it.
– A rise in the wage rate will cause an individual to
work less.

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 A Graphical Analysis

 With a rise in the wage rate, the substitution

effect results in less leisure while the income
effect results in more leisure.
 Whether the person works more, less, or the
same depends upon the relative strengths of
these two effects.
 Two cases are illustrated in Figure 13A.2

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 A Graphical Analysis

 In both graphs, the optimal choices of

consumption and leisure before the wage
increase (w = w0) are C0 and H0.
 With a wage increase to w1 the new optimal
choices are C1 and H1.
 The substitution effect is shown by the
movement along U0 from H0 to S.
– This reduces the optimal amount of leisure.

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 FIGURE 13A.2: Income and Substitution
Effects of a Change in the Real Wage Rate

Consumption Consumption

Wage = w1 Wage = w1
Wage = w0 Wage = w0

S
C1 S

C0
U1 U1
U0
U0
H1 H0 Leisure hours 0 H0 H1 Leisure hours
0
per day per day

(a) Rise in Wage Increases Work (b) Rise in Wage Decreases Work
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 A Graphical Analysis

 The movement from S to C1, H1, is the income

effect which increases the consumption of
leisure.
 In Figure 13A.2(a) the substitution effect is
stronger than the income effect so the person
works more with a wage increase.
 The income effect dominates in Figure
13A.2(b) so the person works fewer hours.

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 Market Supply Curve for Labor

 If the substitution effect generally exceeds the

income effect, most individual labor supply
curves will have positive slopes.
 A market supply curve is the horizontal
summation of these individual supply curves.
 In addition, the rising wage will induce people
to enter the labor force.

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 Market Supply Curve for Labor

 In Figure 13A.3, this situation is shown with

two people.
 At wages below w1, no one works so there is
no market supply.
 Between w1 and w2 only person 1 works so
the market curve is the same as person 1.
 Above w2 both work and the market curve
reflects the summation of hours supplied.
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 FIGURE 13A.3: Construction of the
Market Supply Curve for Labor

Real Real S2 Real

wage wage wage
S1
S
w3

w2

w1

0 Hours Hours Total labor supply

per week per week per week

(a) Person 1 (b) Person 2 (c) The Market

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 APPLICATION 13A.2: Changing Labor Force
Participation for Married Women and Older Men

 Two important U.S. labor market trends.

– Increasing tendency for married women to hold
paying jobs.
– The decline in the employment of older men.
 These two trends are shown in Table 1.

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 TABLE 1: Labor Force Participation
Rates, 1960 - 2000

Table 1 Labor Force Participation Rates, 1960-2000

Year Females Males age 65

age 25-34 and over
1960 35.2 33.9
1970 43.1 27.7
1975 53.7 21.6
1980 65.5 19
1985 69.4 15.8
1990 73.5 16.3
1995 74.9 16.8
2000 76.3 17.5
Source: Statistical Abstract of the United States at http://www.census.gov/
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 Expanding Female Labor Force
Participation

 The fraction of 25 to 34 year old married

women in the labor force doubled between
1960 and 1980.
– It continued to rise for the next 15 years.
– Economists attribute most of this increase to higher
wages.
– Sociologist attribute this to changing political and
cultural factors.

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 The Case of Older Men

 Between 1960 and 1985, the labor force

participation rate of older married men fell to
less than half of its initial level.
– At the same time, there have been improvements in
health which should have stimulated employment.
– Most attribute the trend to increased retirement due
to rising Social Security coverage and benefits.

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