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Class 9 Labor Supply

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Chat Monitor: Sadaf Hoss
Back Up / Volunteer: Ruthie Brock
Three Labor
Labor Supply Question 1:
How Many Hours Will You Work?
• Marginal principle: Should I work one more
• Cost-benefit principle: Yes, if the marginal
benefit exceeds the marginal cost.
• Marginal benefit of another hour of work: Hourly
• Opportunity cost principle: What is the
opportunity cost of an hour of work?
• An hour of leisure
Think about leisure broadly:
• Sleeping and personal
• 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.
is about
of to
• This
Labor marginal
workers are
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
• 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
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
• Market labor supply depends on:
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
• Students, retirees, or homemakers
may return to the workforce.
• People will choose to become hair
stylists rather than pursue other
What Shifts
Labor Supply Shifter 1:
Changes in Wages in Other Occupations
• Market for hair stylists is linked
to market for skin-case
• You are competing for talent, and
people can shift jobs and
• 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
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
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
You’ll do great!