within the labour supply model.
39.
Award: 10.00 points
Consider a worker who is working overtime hours in order to take advantage of the pay premium,
even though she does not really feel like it. This choice is most closely associated with:
A reservation wage effect
A substitution effect
An income effect
A labour force participation effect
A backward bending supply curve
References
Multiple Choice Difficulty: Medium Learning Objective: 02-05 Interpret the
economic and other factors affecting a
married woman's decision to work, and
show how this decision can be captured
within the labour supply model.
40.
Award: 10.00 points
A major and recurring theme of this textbook is the role of empirical research in labour economics.
Conceptual models exist to analyze many labour market phenomena, but often the predictions that
emerge are ambiguous. It is the objective of empirical research to test the validity of these
predictions, and to try to sort out the multiple effects, which may work simultaneously. Such is the
case for the theory of individual labour supply. Discuss the major conceptual implications of this
model as well as the results from the empirical literature with correspond to them. The key is to link
the predictions, which flow from the model, to the hypotheses that have been examined in the
literature. In particular, your response can follow the following outline:
• Without getting bogged down in technical details (i.e., don't give a graph), explain intuitively the
role of preferences and constraints in determining the optimal choice of hours worked.
• What is the impact on the choice of hours worked by an individual if the level of non-market
income changes?
• Briefly describe the income effect and the substitution effect of a wage change, and relate this to
the backward bending supply curve.
• A large number of econometric studies have estimated the shape of the labour supply curve, the
sign of the wage elasticity of labour supply, and the income elasticity of labour supply. What have
they found, generally speaking, regarding the slope of the supply curve? Does the slope differ
between men and women?
• Figure 2.3 in the textbook shows what appears to be a slight negative empirical relationship
across countries between per capita national income and male labour force participation rates,
coupled with a slight positive empirical relationship across countries between per capita national
income and female labour force participation rates. It might be possible to interpret these observed
empirical patterns in terms of substitution effects and income effects.
The consumer choice model is used to analyze an individual's labour supply decision. Consumers'
preferences are represented by the indifference curve of consumption and leisure. Consumers'
constraints are given by their wage income from working hours as well as a time constraint which is
a combination of working hours and leisure hours. Consumers' objective is to maximize their total
utility from consumption by choose their preferred combination of income/consumption and leisure,
as represented by their opportunity set or budget constraint. If this optimum occurs at zero hours of
work, the individual does not participate. If optimal hours are positive, the individual participates,
and the marginal rate of substitution between leisure and consumption equals to the wage rate.
The reservation wage is given by the marginal rate of substitution between leisure and
consumption, at zero hours of work, which is a critical wage in determining the participation
decision. For wage above the reservation wage, the consumer will choose to work. Otherwise, the
consumer will not participate.
The budget constraint of a consumer is composed of two parts: non-labour income and wage
income from total working hours. Therefore the change of non-labour income and wage rate will
affect a consumer's labour supply decision. If non-labour income increases, there will be a pure
income effect, an individual who choose not to participate before will remain out of participation and
an individual who has positive working hours will reduce his/her working hours and enjoy more
leisure time. The change of the wage rate, however, will have a more complex effect on one's labour
supply decision. For those who do not participate before, if the increase of the wage rate exceeds
the reservation wage, they will choose to participate and the working hours is determined by the
marginal rate of substitution of consumption and leisure and the wage rate. For those individuals