2. 3 To work or not to work The hours of work decision Reservation wage which makes her indifferent between working and not working a higher reservation wage makes it less likely that a person will enter the labor force. In addition, for given tastes and non-labor income(that is,for given reservation wage), a person with a higher market wage is more likely to work Figure p31 Commuting costs increase the reservation wage 11
11 2.3 To work or not to work? The hours of work decision • Reservation wage which makes her indifferent between working and not working • A higher reservation wage makes it less likely that a person will enter the labor force. In addition, for given tastes and non-labor income(that is , for given reservation wage), a person with a higher market wage is more likely to work. • Figure p31 • Commuting costs increase the reservation wage
Tangency condition: the slope of the indifference curve equals the slope of the budget line Labor supply function h *=h(w, V Leisure is a normal good: Non-labor income increase and hours of work(fall) reservation wage(rise) Income effect 12
12 Tangency condition: the slope of the indifference curve equals the slope of the budget line. • Labor supply function h*=h(w, V) • Leisure is a normal good: Non-labor income increase and hours of work(fall), reservation wage(rise) • Income effect
An interior solution to the labor-leisure Decision Consumption U2 U1 3 UO 50 100 Hours of eisure 13
13 U0 U1 U2 Hours of leisure P 12 8 3 50 100 An interior Solution to the labor-leisure Decision Consumption
Hours of work when the wage changes: An increase in the wage rate generates both income effect and substitution effect The income effect reduces hours of work while the substitution effect increases hours of work Substitution effect illustrates what happens to the optimal consumption bundle as the wage increases, holding utility constant 14
14 Hours of work when the wage changes: An increase in the wage rate generates both income effect and substitution effect. The income effect reduces hours of work, while the substitution effect increases hours of work. Substitution effect illustrates what happens to the optimal consumption bundle as the wage increases, holding utility constant
The labor supply curve gives the relationship between the wage rate and hours of work. The upward-sloping segment of the curve implies that substitution effects are stronger initially the backward-bending segment implies that income effects dominate eventually The relationship between hours of work and wage rates for women in U. s has a classic backward-bending shape Labor supply elasticity Commuting costs and hours of work. It is unlikely that a person will want to work for just a few hours 15
15 The labor supply curve gives the relationship between the wage rate and hours of work. The upward-sloping segment of the curve implies that substitution effects are stronger initially; the backward-bending segment implies that income effects dominate eventually. The relationship between hours of work and wage rates for women in U.S has a classic backward-bending shape. Labor supply elasticity Commuting costs and hours of work. It is unlikely that a person will want to work for just a few hours