TopHat Join Code: 474236 Chat Monitor: Sadaf Hoss Back Up / Volunteer: Ruthie Brock Three Labor Supply Decisions Labor Supply Question 1: How Many Hours Will You Work? • Marginal principle: Should I work one more hour? • Cost-benefit principle: Yes, if the marginal benefit exceeds the marginal cost. • Marginal benefit of another hour of work: Hourly wage • Opportunity cost principle: What is the opportunity cost of an hour of work? • An hour of leisure Think about leisure broadly: • Sleeping and personal maintenance • Hanging out with friends • Raising kids • Cooking, cleaning, etc. • Studying Rational Rule for Workers • Work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure. Labormeans supplythe is about benefit of to leisure. • This Labor marginal workers are willing supply is all about their marginal benefit of leisure. • If you follow the rational rule, your labor supply curve is also your marginal benefit of leisure curve. Will a Higher Wage Lead You to Work More or Less? • Two effects of a higher wage on labor supply decisions: • Substitution effect: A measure of how people respond to a change in relative prices. • Higher wage makes work relatively more attractive. Work longer hours. • Income effect: A measure of how people’s choices change when they have more income. • Higher income makes leisure more attractive. Work fewer hours. Will a Higher Wage Lead You to Work More or Less? Income Effect Dominates Income and Substitution Effects Offset Substitution Effect Dominates Individual Labor Supply Curve: A BackwardBending Labor Supply Curve Labor Supply Question 2: Should You Work in the Labor Market? • Opportunity cost principle: What are the alternatives to work? • For each of the following groups, consider the benefits of not working: • Students • Benefits: Boost future earnings • Homemakers • Save money by cooking meals, cleaning • Satisfaction of raising kids and supporting partner’s career • Retirees • Draw a pension • More leisurely pace of life, no physical demands • Cost-benefit principle: Compare benefits with cost of forgoing a wage. Labor Supply Question 3: How Should You Choose Your Occupation? • Apply the cost-benefit principle to figure out the right occupation for you. • Wages matter, but so do other factors. • Benefits • • • • • Non-wage benefits Gaining valuable skills Enjoyment and meaning Wage trajectory Working conditions • Costs • • • • Career risk Physical risk Wage volatility Hours The Market Supply Curve • Market labor supply curves are upwardsloping, so the higher the wage is in a particular occupation, the more people will be willing to work in that occupation. • Market labor supply depends on: 1. 2. 3. How many hours existing workers put in How many new workers enter the workforce Which occupations people choose Market Labor Supply Curve for Hair Stylists • The market labor supply curve reflects three influences. When the wage is higher: • Existing hair stylists may choose to work more hours (the substitution effect), although some may work fewer hours (due to the income effect). • Students, retirees, or homemakers may return to the workforce. • People will choose to become hair stylists rather than pursue other occupations. What Shifts Labor Supply? Labor Supply Shifter 1: Changes in Wages in Other Occupations • Market for hair stylists is linked to market for skin-case specialists • You are competing for talent, and people can shift jobs and occupations. • If wages in other jobs rise • Decrease supply of baristas • If wages in these other occupations fall • Increase supply of baristas Labor Supply Shifter 2: Changing Number of Potential Workers • As the population grows, the potential labor supply also grows. Population can grow: • Through natural increase (when more babies are born and fewer people die) • Through immigration • Population growth typically increases labor supply, and a decrease in the population decreases labor supply. Labor Supply Shifter 3: Changing Benefits of Not Working • A government program makes college more affordable. • Something lowers the cost of child care. • Congress decides to reduce Social Security retirement payments to older Americans. • Can you think of other reasons? Labor Supply Shifter 4: Nonwage Benefits, Employment Subsidies, and Income Taxes • Consider all nonwage benefits and subsidies which increase the benefit of each extra dollar you earn. • increase in income taxes decreases the benefit of working another hour Key Takeaways Test 1 – Monday, Feb. 22 at 10:40am • • • • • • • • • • • • Moodle “Quiz” in test area of class Moodle page. The test covers all material through Friday…Chapters 1,2,3,4,5,8 and 11. We are not having class on Monday. The test will be available at 10:40am You have 50 minutes to complete the test Test will close at 11:40am. (This is in case you start 10 mins late.) 20-25 multiple choice questions. Open book. Open note. Condense and organize your notes so they are easy to reference. You may NOT work with other people or get/give answers from/to others. You may NOT post questions or answers anywhere. You may NOT search for answers on the internet. All these things are violations of the NC State Academic Integrity Code of Conduct. If you miss the test you will have a 0. Don’t miss the test! Grades will not be available immediately. I will email you when grades are released. You’ll do great!