Analysis of work incentives Typical utility maximization problem includes a utility function (U, prices of goods(p), and income ( The key change in an analysis of labor supply and welfare programs is that rather than being endowed" with income, the person is endowed with time. T This is known as the time endowment-which can be used for either labor or leisure 16
16 Analysis of work incentives • Typical utility maximization problem includes a utility function (U), prices of goods (p), and income (I). • The key change in an analysis of labor supply and welfare programs is that rather than being “endowed” with income, the person is endowed with time, T. • This is known as the time endowment – which can be used for either labor or leisure
Analysis of work incentives The utility function consists of two goods, leisure and“ all other consumption goods"( which wi‖l simply be measured as income in the examples below) U=u(L, C)or equivalently U=u(L, )where L=Leisure C=Consumption goods =income 17
17 Analysis of work incentives • The utility function consists of two goods, leisure and “all other consumption goods” (which will simply be measured as income in the examples below). • U=u(L,C) or equivalently U=u(L,I) where – L=Leisure – C=Consumption goods – I=income
Analysis of work incentives This utility function shows that leisure is a good all else equal, people prefer more to less The reason why people work is to buy consumption goods If we denote hours of work. then L+HE=T The amount of leisure and hours of work equals the time endowment 18
18 Analysis of work incentives • This utility function shows that leisure is a “good” – all else equal, people prefer more to less. • The reason why people work is to buy consumption goods. • If we denote H=hours of work, then: – L+H=T – The amount of leisure and hours of work equals the time endowment
Figure 8.1 Slo 21 Time endowment Hours of leisure per month
Figure 8.1
Analysis of work incentives In Figure 8.1, the x-axis therefore simultaneously represents leisure(moving away from the origin) and hours of work(moving toward the origin) Oa represents hours of leisure, and aT represents hours of work The y-axis represents consumption goods or income(they are interchangeable
20 Analysis of work incentives • In Figure 8.1, the x-axis therefore simultaneously represents leisure (moving away from the origin), and hours of work (moving toward the origin). – Oa represents hours of leisure, and aT represents hours of work. • The y-axis represents consumption goods or income (they are interchangeable)