Indifference curve analysis:
- budget line and "full income"
- income effect
- substitution effect
- Slutsky equation
- corner solution and the "reservation wage"
Distinguish between different types of labor supply:
- Marshallian labor supply
- Hicksian labor supply
- intertemporal wage changes
- labor supply to specific industries
- Over the long term, real wages have risen, but hours worked
and labor participation
have fallen for men, while hours and participation have risen for women.
One justification is that women used to work shorter (or even no) hours.
Thus the strength of the income effect is smaller for women than for men.
- Recent studies found that the decline in labor participation of
older men is mainly concentrated among those with low market wages, so
the decline in labor participation reflects the substitution effect as well.
- Cross section studies of male labor supply often
find that the income effect
dominates the substitution effect. The elasticity is about -0.1 to -0.2.
- For women, the real wage rate
is found to have a strong positive effect on
labor force participation.
- Economists typically assume that leisure
is a normal good, but hard evidence
for this is not so easy to come by. For one thing, non-labor income is not
well measured in survey data. For another, non-labor income in one period
may be the result of labor income in previous periods. So in a life-cycle
setting, non-labor income is really endogenous, which makes estimating the
income effect tricky. Hotz-Eakin,
Joulifaian, and Rosen (1993) did a study that makes use of data on inherited
wealth. They found that labor force participation among
people who received larger amounts of
inheritance (average US$346,200)
fell from 70% to 65%, while labor participation among people who
received small amounts of inheritance rose from 76% to 81% in the same
Even among the
labor force participants, people who received larger amounts of inheritance
a more likely to experience a fall in earnings than are people who received
less inheritance (perhaps because they work fewer hours or take a more
desirable job at lower wages once thay received the inheritance).
- Gerald Oettinger (1999) studied labor supply of food vendors at a
baseball stadium. These vendors are hired on a daily basis and they
are free to choose whether to work at any given game. Earnings from
sales fluctuate by the game, but these fluctuations are to some extent
predictable. These fluctuations tend to cancel out so the income
effect is probably not very strong (more precisely, one may think of
the labor supply response as a response to intertemporal wage
changes). Oettinger found that a US$10 rise in daily earnings (the
average was about $43) lured an extra 6 vendors (the average number
was about 45) to the stadium.