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© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-1
Labour Supply Over the Life-cycle
Chapter Four
Created by: Erica Morrill, M.Ed Fanshawe College
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-2
Chapter Focus Labour supply patterns Lifetime planning and wage elasticity Labour supply over the lifetime Fertility and women’s labour supply decisions Retirement
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-3
Figure 4.1 Labour Force Participation Profiles
Men participation
increases in twenties peak at 30-50 declining at
retirement age participation of older
men has declined since 1971
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-4
Figure 4.1 Labour Force Participation Rates
Women data more complicated
to interpret society/economic
factors influence women’s participation rates
generally shaped like men’s participation
slower entry into labour market
has been rising since 1971
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-5
Dynamic Life Cycle Models
A model based on the assumption that individuals plan out their lifetime supply of labour given their expected economic environment (specifically wages and other income)
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-6
Dynamic Life Cycle ModelBasic Assumptions:
preferences over consumption and leisure today and in the future
maximize utility function optimize consumption an leisure in each
period of time given expected lifetime budget constraint
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-7
Figure 4.2 Dynamic Life Cycle Wage Changes
Two profiles Illustrates how
wages first increase and then decline
“blip” represents a temporary one-time wage increase at t
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-8
The Dynamic Life Cycle Model in ContextSubstitution and income effects differ
depending on permanent or temporary wage change anticipated or unanticipated wage change
Labour supply response will differ depending on the source of the wage increase
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-9
Figure 4.2 Dynamic Life Cycle Wage Changes
A B Permanent wage difference
B C Evolutionary wage change associated with aging
C D Evolutionary wage change associated with aging
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-10
Fertility and Childbearing
Important in understanding women’s labour supply
Variables affecting fertility decision income cost of child price of related goods tastes and preferences technology advances consumption vs. nonmarket time
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-11
Income
Positive relationship between income and the desired number of children
Contraceptive knowledge and the cost of having children tend to be related to the income variable
Difficult to separate the pure effect income on decision
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-12
Price and Cost of ChildrenThe demand for children is negatively
related to the price or cost of having children
The main cost is income foregone by spouse
potential earnings can have both an income and substitution effect on decision to have children
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-13
Price of Related GoodsDramatic changes in private costs can
impact the decision to have childrenA rise in the price of complementary
goods would reduce desired number of children
Fall in price (public subsidies) could encourage larger family sizes
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-14
Retirement Decisions and PensionsAn area of increasing concernRetirement could imply:
leaving the labour force reducing hours worked moving to a less difficult job
Impacts social policyConcerns of solvency of pension funds
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-15
RetirementTheoretical Determinants of Retirement
mandatory age wealth and earnings health and the nature of work and the
family pension plans
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-16
Figure 4.3 a No Retirement Test
YM
YB
EPEO
B
T
No Retirement Test
(retirement)
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-17
Figure 4.3 b No Retirement Test
YM
YBB
T
Full Retirement
(retirement)0
Y
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-18
Figure 4.3 c No Retirement Test
YM
YB
B
T
Partial Retirement Test
(retirement)0
Y
C
D
Cd
YB
YB
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-19
Employer-Sponsored Pension PlanEarnings Based Plans
3/4 of workersFlat Benefit Plans
18% of workersDefined Contribution Plans
9% of workers
Defined Benefit Plans
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-20
Defined Benefit Plans
Influences retirement decisionEncourages early retirementDiscourages postponed retirement
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-21
Figure 4.4 Pension Benefit Accruals
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-22
FeaturesBackloadingEarly/special retirement provisionsPostponed retirement provisions
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-23
BackloadingBenefits get larger as seniority-based
wage increases Young workers have an incentive to
stay with the firmOlder workers have an incentive not to
retire too soon
© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-24
End of Chapter Four