Labor Economics (ECON3071)
Dr Sebastian Ille
Significant changes over
the past 75 years
• Labor force: baby boomers 1946-1964 followed by
baby bust
• Growing percentage of immigrants
• Dual-worker families
• Doubled divorce rate
• Decrease of work week during first half of 20th century
Determinants of Labor Supply
Becker’s Model of Labor Supply
1. Consider households instead of individual decisions: how is
time spent as a collective
2. Multiple uses of time:
1. Sold in the labor market
2. Used in household production
3. Used in actual consumption of goods and services
• Meal then entails the following:
• Market time
• Production time
• Consumption time
Commodities
Household Choices
• What are the choices that a household has to make?
• Which commodities do you want to consume?
• How do you want to produce these commodities?
• How should members of your household allocate their time
among labor market participation, home production,
consumption, etc.?
Time Allocation: Comparative Advantage
Daily Production without
Specialisation:
Childcare
Job Income
Childcare
Job
Ms Robinson
Mr Crusoe
Total
Ms Robinson
Daily Production with
Specialisation:
Mr Crusoe
Total
0
0
Childcare
Childcare
A Graphical Presentation of the Production Possibilities and Gains from Specialization
Job income
Ms Robinson
0
Job income
Mr Crusoe
Income and Substitution in the Becker Model
• Becker’s Income Effect: Higher wage rate-> consumption of goods
increases at the cost of more time and less hours of work
• Becker’s Substitution Effect: Higher wage rate -> time more
valuable in the labor market + more valuable for production and
consumption -> changes in goods consumed. How?
Participation Rates
• Total working-age population (potential labor force): The % of
the adult (16+) noninstitutionalized civilian population.
• OECD definition of working-age population: those aged 15 to 64
• (Actual) labor force): People who are employed or are seeking a
job
• Labor Force Participation Rate =
Labor force
Total working-age population
Unemployment Rate
• Unemployement Rate =
Unemployed
Unemployed + Employed
Labor Force Participation
Labor Force Participation Rates in
Egypt
Males vs
Female
Participation
Rates
Male Participation Rates by Age
• What the reasons for
different participation
of men across different
age brackets?
Reasons for Participation Variance of Men 1/2
• Rising Real Wages and Earnings: In the case of older men, the
income effect dominates the substitution effect.
• Social Security and Private Pensions: Social Security and private
pension schemes + retirement benefits prior to age 65 are subject
to a substantial benefit reduction rate.
• Disability Benefits: Low-wage workers are more inclined to seek
disability benefits as an alternative to labor market participation > also explains decline in participation rates of older AfricanAmerican.
Reasons for Participation Variance of Men 2/2
• Rising Education Levels: More educated individuals have higher
labor force participation rates because their wage rates are higher
+ far fewer physical demands than their less-educated
counterparts.
• Rising Labor Force Participation of Older Wives: Labor force
participation decisions of older married women influence the
participation rates of their husbands in two ways (according to
Tammy Shirle).
• greater family income -> an income effect
• absence of wife renders free-time less attractive
• What the reasons
for the increase in
female
participation
rates?
Reasons for Female Participation Rates 1/2
• 2/3 married women
• Rising income of men should have reduced female participation,
but other factors
• Rising Real Wages for Women: higher skilled -> higher wage
rate
• Changing Preferences and Attitudes: feminist movements and
antidiscrimination legislation
• Rising Productivity in the Households: higher productivity on
the labour market + better capital goods in the household
Reasons for Female Participation Rates 2/2
• Institutional Changes: childcare centers
• Declining Birthrates: opportunity costs of child rearing + birth control
techniques
• Rising Divorce Rates: protection against poverty or need for welfare
support
• Expanding Job Accessibility: reduction of pure “male” jobs, new jobs
which are gender indifferent, part-time opportunities, work from home
• Lower Living Standards: real weekly earnings have been declining ->
pressure to make ends meet
Complexity of Dynamics of Female Participation
Fertility
Labor Market
Participation
Divorce Rate
Arguments Against Reasons – Victor Fuchs
• Growth of female participation rates predates both feminist
movement and the passage of antidiscrimination laws
• Time-saving equipment result of rising female participation rates
• Consequently, rise caused by
• Expansion of female jobs in service sector
• Increased risk of divorce
• Recent decrease of female participation: For women with college
degrees, half of the drop in labour supply can be explained by
increase in the number of children
Racial Differences
• participation rate of African- American women exceeded that of
white women (up to 15%), now nearly identical.
• Since 1950s, growing gap between the participation rates of
African- American males and white males -> by 2000 the
participation rate of white males was 75 percent compared to only
69 percent for African-American males. Arguments Finis Welch:
• Poorer labor market opportunities for African-American male
• Non-labor market opportunities have improved
• Illegal activities more attractive -> African-American males six to seven
more likely to end up in jail
• Differences in health status
Cyclical Changes
• Added Worker Effect: if breadwinner loses job, family members
will pick up job -> income effect
• Discouraged Worker Effect: During recession, those seeking
employment become pessimistic about opportunities. Is this a
substitution effect?
• Discourages worker effect dominants -> procyclical employment
• In addition, women attached to labor market more likely to join in
boom periods.
Workweek
Workweek Decline until 1940 and Stability
Thereafter
• Is the declining workweek is simply a supply response to historically
rising real wages and earnings?
• Kniesner argues that educational attainment has played an important
role in the constancy of the workweek since World War II. Why?
• Decisions to acquire more education and leads to higher income -> therefore
may reflect a change in tastes favoring a stronger commitment to labor market
work.
• Higher education -> better work conditions
• A more educated workforce may increase employer resistance to a declining
workweek -> employers incur more fixed costs in recruiting more educated
workers and in training them. (Really?)
• Are there other potential reasons?
Other Reasons for 40 Hour Week
• Fair Labor Standards: Need to pay premium for hours worked in
excess
• Rise of Marginal Income Tax: Why?
• Increase in advertising increased consumption
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