Transcript chapter 1: introduction to labor economics

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CHAPTER 3:
POPULATION, PARTICIPATION RATES
AND HOURS OF WORK
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DETERMINANTS OF TOTAL LABOR
SERVICES AVAILABLE
1. Population
• Birth
• Death
• Net immigration
2. Labor force participation rate
• Qty of labor
3. Hours of work
4. Quality of labor
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POPULATION BASE – WHY IT GROWS?
1. Excess of birth
2. Death rates are less variable – decline slowly
3. Net immigration
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EXTENSION OF BECKER’S MODEL:
THE ALLOCATION OF TIME
Recall chapter 2: Becker’s model – “work / leisure”.
Extension of this model:
1. Household perspective
• Think about household, no longer individual
2. Allow for multiple uses of time
• Time can be used for
• Work – sold in the labor market to get income
• Household production
• Consumption of goods and services
Example: if both spouse are working, more time for
work, less time for household production and
consumption.
HH produces UTILITY-YIELDING COMMODITIES
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COMMODITY CHARACTERISTICS
1. Time intensive commodities
• Use large amount of time, small amount of goods
• E.g: sightseeing
2. Goods intensive commodities
• Use small amount of time, large amount of goods
• Having meal at restaurant
Household may sacrifice TIME INTENSIVE COMMODITIES to obtain
goods intensive commodities = work more!
As labor market time becomes MORE VALUABLE, HH SUBSTITUTE
time intensive commodities for goods intensive ones.
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HOUSEHOLD CHOICES
How the households allocate time?
• Based on their COMPARACTIVE ADVANTAGE – efficiency and
productivity
• Examples:
• Female – more productive in household production (caring
for children, cooking, cleaning, etc)
• Due to education, expertise and skills – more productive at
works
• Due to discrimination – husbands can be more productive at
work – earn more compared to the wives.
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INCOME AND SUBSTITUTION EFFECTS
Income effect:
• More income – more consumption
• More time used to consume g&s
• Prefer time-intensive commodities
Substitution effect:
• More income – feel motivated to work more
• More time used to work rather than other purposes.
• Prefer goods-intensive commodities
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PARTICIPATION RATES
Labor force participation rate (LFPR) = compare the ACTUAL
LABOR FORCE with POTENTIAL LABOR FORCE
Actual = those who are employed and unemployed but actively
looking for jobs
Potential = age 16 and above who are not institutionalized.
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PARTICIPATION RATES
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WHY THERE IS A REDUCTION IN LFPR
FOR OLDER MALES (>65)
1. Increase real wage rate and earnings
• Choose to substitute work with leisure
• Retire
2. Social security and private pensions
• Pensions, KWSP – more money
3. Disability benefits
• Those who receives lower wage rate have a tendency to
seek for disability benefits, rather than participate in LF
4. Rising educational levels
• Educated – more wages – early retirement
5. Rising labor force participation of older wives
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WHY THERE IS RAPID RISE IN
WOMEN’S LABOR PARTICIPATION?
1.
Increase real wage for women
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Skills, education
2.
Changing preferences and attitude
3.
Increase household productivity
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Availability of machines – help women to reduce time in doing
household works.
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Allow them to engage in employment.
4.
Decline birthrates – due to changing lifestyles
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Educated – more wages – early retirement
5.
Increase divorce rates
1.
Expand job accessibility
1.
Attempts to maintain standard of living
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CYCLIC CHANGES IN PARTICIPATION
RATES
Consider this scenario:
Husband is working, while the wife is not working.
If there is a recession in the economy – the husband may lose his job.
The net effect on overall participation rates depends on:
1. Added worker effect
2. Discouraged worker effect
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CYCLIC CHANGES: ADDED WORKER
EFFECT
Consider this scenario:
Husband is working, while the wife is not working.
If there is a recession in the economy – the husband may lose his job.
The effect:
• The wife may temporarily enter the labor force (to sustain the family
income)
• The husband who lose the job may reduce the contribution of his
income to the wife (non-labor income for the wife) – forcing the wife to
enter the LF.
• Net effect: INCREASE PARTICIPATION RATE
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CYCLIC CHANGES: DISCOURAGED
WORKER EFFECT
Consider this scenario:
Husband is working, while the wife is not working.
If there is a recession in the economy – the husband may lose his job.
The effect:
• The wife may feel pessimistic in finding job. Why?
• Lower wage rate (due to recession) demotivates the wife to work.
• Both become non-participant.
• Graph: substitution effect – chapter 2
• Net effect: DECREASE PARTICIPATION RATE
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PROCYLIC LABOR FORCE CHANGES
Consider this scenario:
Husband is working, while the wife is not working.
If there is a recession in the economy – the husband may lose his job.
Which one is dominant? Added worker or discouraged worker effect?
• Discouraged worker effect is DOMINANT. Why?
• Unemployment rate increases, the LFPR declines
• Increase unemployment rate and decrease in wage rate may
DEMOTIVATE actual and potential LF participants in ALL HH.
• Examples of scenarios: Recession…
• Young people decide to continue their studies, not looking for
employment. Why?
• Wage rate seems to be less attractive
• Difficult to find jobs