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Extending the Model
SLR
SSR
w*
D
H*
Lectures in Macroeconomics- Charles W. Upton
Labor Supply and Demand
S
w*
D
H*
Extending the Model
Backward Bending Supply
• People value both money and the things it
can buy and the time to enjoy the things
money can buy.
• At some point, people decide to spend less
time working.
Extending the Model
Evidence on Backward Bending
Gross Domestic Product and Hours
Worked
in the United States, 1820-1989
Hours
Year
Per Capita
Worked
GDP
1870
2,254
2,964
1890
3,115
2,789
1913
4,868
2,605
1929
6,336
2,342
1938
5,568
2,062
1950
8,611
1,867
1960
9,995
1,795
1973
14,103
1,717
1987
17,340
1,608
1989
18,317
1,604
Extending the Model
Evidence on Backward Bending
Year
1870
1890
1913
1929
1938
1950
1960
1973
1987
1989
Per Capita
GDP
2,254
3,115
4,868
6,336
5,568
8,611
9,995
14,103
17,340
18,317
Define the “wage
rate” as Per Capita
GDP/Hours
worked.
Hours
Worked
2,964
2,789
2,605
2,342
2,062
1,867
1,795
1,717
1,608
1,604
Extending the Model
“Wage
Rate”
$0.76
$1.12
$1.87
$2.71
$2.70
$4.61
$5.57
$8.21
$10.78
$11.42
Evidence on Backward Bending
Year
1870
1890
1913
1929
1938
1950
1960
1973
1987
1989
Per Capita
GDP
Hours
Worked
“Wage
Rate”
2,254
2,964
$0.76
3,115
4,868
6,336
5,568
8,611
9,995
14,103
17,340
18,317
2,789
2,605
2,342
2,062
1,867
1,795
1,717
1,608
1,604
$1.12
$1.87
$2.71
$2.70
$4.61
$5.57
$8.21
$10.78
$11.42
Extending the Model
Evidence on Backward Bending
Year
1870
1890
1913
1929
1938
1950
1960
1973
1987
1989
Per Capita
GDP
Hours
Worked
“Wage Rate”
2,254
2,964
$0.76
3,115
4,868
6,336
5,568
8,611
9,995
14,103
17,340
2,789
2,605
2,342
2,062
1,867
1,795
1,717
1,608
$1.12
$1.87
$2.71
$2.70
$4.61
$5.57
$8.21
$10.78
18,317
1,604
$11.42
Extending the Model
Evidence on Backward Bending
Year
1870
1890
1913
1929
1938
1950
1960
1973
1987
Per Capita
GDP
Hours
Worked
“Wage Rate”
2,254
2,964
$0.76
3,115
4,868
6,336
5,568
8,611
9,995
14,103
17,340
2,789
2,605
2,342
2,062
1,867
1,795
1,717
1,608
$1.12
$1.87
$2.71
$2.70
$4.61
$5.57
$8.21
$10.78
Over time, wages have
risen and hours
worked have fallen.
We seem to be in the
1989
18,317 bending
1,604
backward
portion.
Extending the Model
$11.42
The Backward-Bending
Labor Supply Curve
S
w*
D
H*
Extending the Model
The Backward-Bending
Labor Supply Curve
S
w*
D
We should draw the
labor supply curve
like this.
H*
Extending the Model
The Backward-Bending
Labor Supply Curve
S
w*
We should draw the
labor supply curve
like this.
While there is
debate on whereD
the curve begins to
bend back, we
seem to be in the
backward bending
portion
H*
Extending the Model
But there is more
to the story…….
Extending the Model
A Simple Experiment
• Miller’s Pizzeria offers you $1,000 an hour.
The owner promises – and you believe –
that you can earn that rate for the rest of
your life.
Extending the Model
A Simple Experiment
• Miller’s Pizzeria offers you $1,000 an hour.
The owner promises – and you believe –
that you can earn that rate for the rest of
your life.
– No doubt you will work fewer hours,
using the leisure, to spend your extra
income (wisely?)
Extending the Model
A Simple Experiment
• Miller’s Pizzeria offers you $1,000 an hour.
The owner promises – and you believe –
that you can earn that rate for the rest of
your life.
• Miller’s Pizzeria is desperate for your
efforts right now. This bonanza will not
continue for long.
Extending the Model
A Simple Experiment
• Miller’s Pizzeria offers you $1,000 an hour.
The owner promises – and you believe –
that you
canwill
earnwork
that like
rate afor the rest of
You
your life.
dog and put money
for the
future. for your
• Miller’saside
Pizzeria
is desperate
efforts right now. This bonanza will not
continue for long.
Extending the Model
A Simple Experiment
• Miller’s Pizzeria offers you $1,000 an hour.
You
will
work
like
a
The owner promises – and you believe –
money
that youdog
canand
earnput
that
rate for the rest of
aside
for
the
future.
your life.
• Miller’s PizzeriaIn
is short,
desperate
for make
your hay
people
efforts right now. –This
bonanza
will not
or pizzas
– while
the
sun shines.
continue for long.
Extending the Model
Our Revised Model
SLR
w*
H*
Extending the Model
SSR
Our Revised Model
$1000
SLR
w*
H*
Extending the Model
SSR
Our Revised Model
SLR
SSR
w*
D
H*
Extending the Model
Our Revised Model
SLR
w*
The demand curve shows us
the demand for work as a
function of the wage rate.
H*
Extending the Model
SSR
D
Our Revised Model
SLR
SSR
w*
The demand curve shows us
D
The
runassupply
curve SLR
the demand
forlong
work
a
shows
usrate.
how people will
function of the
wage
respond to a permanent rise in
labor demand.
H*
Extending the Model
Our Revised Model
SLR
SSR
w*
The demand curve shows us
D
The
runassupply
curve SLR
the demand
forlong
work
a
SR
Thefunction
short run
supply
curve
S
shows
usrate.
how people will
of the
wage
shows us how
people
respond
to awill
permanent rise in
respond to a temporary
risedemand.
in
labor
labor demand
H*
Extending the Model
Our Revised Model
SLR
SSR
w*
The demand curve shows us
D
Or
what
they
expect
is
a
LR
The
runassupply
curve S
the demand
forlong
work
a
SR
Thefunction
short run
supply
curve
S
temporary
rise.
shows
usrate.
how people
will
of the
wage
shows us how
people
respond
to awill
permanent rise in
respond to a temporary
risedemand.
in
labor
labor demand
H*
Extending the Model
Permanent vs. Temporary
SLR
w*
We will defer that question.
Let’s see what happens when
you know whether it is a
permanent or temporary
change in your wage rate.
H*
Extending the Model
SSR
D
A Permanent Increase
w’
SLR
SSR
w*
D
H’ H*
Extending the Model
D’
A Permanent Increase
w’
SLR
SSR
w*
D
Wages up,
hours of
work down.
H’ H*
Extending the Model
D’
A Temporary Increase
SLR
SSR
w’
w*
D
H* H’
Extending the Model
D’
A Temporary Increase
SLR
SSR
w’
w*
D
Wages up,
hours of
work up
H* H’
Extending the Model
D’
A Permanent Decrease
SLR
SSR
w*
D
w’
D’
H* H’
Extending the Model
A Permanent Decrease
SLR
SSR
w*
D
w’
Wage rate down,
hours up
D’
H* H’
Extending the Model
A Temporary Decrease
SLR
SSR
w*
w’
D
D’
H’
H*
Extending the Model
A Temporary Decrease
SLR
w*
w’
Wage rate down,
hours down.
SSR
D
D’
H’
H*
Extending the Model
Summary
Demand for Labor
Permanent Increase in
Demand for Labor
Temporary Increase in
Demand for Labor
Permanent Decrease in
Demand for Labor
Temporary Decrease in
Demand for Labor
Wage
Rate
Hours of
Work
w+ Hw+ H+
w- H+
w- H-
Extending the Model
End
©2004 Charles W. Upton.
All rights reserved
Extending the Model