The Supply of Labor:

1
Chapter 5

• The Supply of Labor
• Hours of Work

2

• Using the labor supply model to predict hours of
  work
• A large reduction in hours between 1900 and 1940
• Hours have drifted slowly downward since then
• International differences in work hours
• U.S. stands out among OECD countries with higher
  work hours and a growing work year
• Use model of individual labor supply as outlined
  in the last chapter
• max Uf(Y,l) s.t. YwLZ
• What happens to hours worked if non-work income
  increases (pure income effect)?
• What happens to hours worked when the wage is
  increased?

3

• Income effect when wage increases, income effect
  works to decrease hours of work
• Intuition more wealth means demand for leisure
  increases
• Substitution effect when wage increases,
  substitution effect works to increase hours of
  work
• Intuition Higher wage means that leisure is more
  expensive, which reduces the demand for leisure
• Use the model to derive and individual labor
  supply curve.
• Downward slope income effect dominates
  substitution effect
• Upward slope substitution effect dominates
  income effect
• Backward bending labor supply

4

• Decompose impact of a wage increase into
  substitution (S) and income (I) effects
• Applications
• Why the increase in hours in the U.S?
• What happens when I d S and real wages fall?
  (Male workers I d S)
• (Female workers S d I)
• What about when S d I?
• What happens to hours when I d S and marginal tax
  rates decrease?
• What about when S d I