CHAPTER 2 HOURS OF WORK OVERVIEW OF CHATPER

1
CHAPTER 2- HOURS OF WORK OVERVIEW OF CHATPER

• The Pattern of Hours of Work
• The Theory of the Labor/Leisure Choice
• Income Maintenance Programs and Labor Supply
• Qualifications to the Labor/Leisure Model
• The Time-Series Pattern of Hours of Work
• POLICY APPLICATION 2-1  Supply-Side Economics and
  Labor Supply
• EMPIRICAL EVIDENCE 2-1  Labor Supply Curves
  Estimated from Cross-Sectional Data
• APPENDIX 2A  The Hours of Work Decision for
  Salaried Workers
• APPENDIX 2B  Constrained Optimization and the
  Labor/Leisure Choice Model
• APPENDIX 2C  Estimating a Labor Supply Curve with
  Linear Regression

2
INTRO

• Focus on labor supply
• Quantity quality of labor

3
THE PATTERN OF HOURS OF WORK

• 40 work exactly 40 hours
• 25 work part-time
• In 1900 53 hrs/week
• In 1998 42.9 hrs/week (full-time)

4
Distribution of Employed Persons by Hours of
Work, 2001 Average Weekly Hours of Work,
19002001
SOURCE Bureau of Labor Statistics, Employment
and Earnings (January 1981, 1991, 2002) and G.
Moore and J. Hedges, Trends in Labor and
Leisure, Monthly Labor Review 94, no. 2
(February 1971) 5.
Figure 2.1
5

DATA

• Cross-sectional data collected at a point in
  time for a of separate individuals, snapshot
• Time-series data show the change over time in a
  statistical series

6

THEORY OF LABOR/LEISURECHOICE

• Wide variation in the of hours worked
• 168 hours in a week (68 for biological needs
  100 for work leisure)
• Work hours devoted to a paying job
• Leisure remainder of time used for all other
  activities (nonmarket activity)

7

THEORY OF LABOR/LEISURECHOICE CONT.

• Later will subdivide nonmarket work from leisure
• Supply of labor discretionary time demand for
  leisure

8

PREFERENCES INDIFFERENCE CURVES

• Individuals psychological feelings about an
  items desirability
• Varies by person, but consistent for a person
• Indifference curve plots all the combinations
  of income leisure that yield the same level of
  utility

9

INDIFFERENCE CURVES

• Negative slope
• Convex to origin
• Indifference map
• Never intersect
• Differ for each individual

10

INDIFFERENCE CURVES

• Marginal Rate of Substitution rate at which a
  person is psychologically willing to trade
  leisure for
• ?Y/ ? leisure

11
A Set of Indifference Curves
Figure 2.2
12
Inconsistent Preferences and Differences in
Preferences for Income versus Leisure
Figure 2.3
13
WAGES, INCOME, THE BUDGET CONSTRAINT

• Even if no monetary cost to leisure, there is an
  opportunity cost
• The higher the wage, the higher the opportunity
  cost
• Budget constraint shows all the combinations of
  hours of work income available to a person,
  given the wage rate amt. of nonlabor income

14
BUDGET CONSTRAINT

• Slope is negative
• Slope the negative of the wage rate
• Change in wage rate rotates budget constraint
• Change in nonlabor income makes a parallel shift
  in budget constraint

15
A Set of Budget Constraints
Figure 2.4
16
EQUILIBRIUM HOURS OF WORK

• We maximize utility where IC BC are tangent
  (slopes )
• MRS W
• Psychological valuation of leisure wage

17
Equilibrium Hours of Work
Figure 2.5
18
HOURS OF WORK CHANGES IN NONLABOR INCOME

• Leisure is considered a normal good
• Income effect change in hours of work resulting
  from a change in income, holding the wage rate
  constant
• Income effect (? H / ?Y) lt 0 with W constant
  (assumes leisure is a normal good)
• Parallel shift of BC

19
The Effect on Hours of Work of an Increase in
Nonlabor Income
Figure 2.6
20
HOURS OF WORK CHANGES IN WAGE RATE

• Substitution effect change in hours of work
  resulting from a change in the wage rate, holding
  income constant
• Substitution effect (? H / ?Y) gt 0 with income
  held constant
• Rotation of BC

21
A Wage Change Leading to Increased Hours of Work
Figure 2.7
22
A Wage Change Leading to Decreased Hours of Work
Figure 2.8
23
THE SUPPLY CURVE OF LABOR

• Represents the relationship between the wage rate
  the hours of labor supplied to the market.
• Backward-bending labor supply curve has both
  positive negatively sloped section

24
A Positively Sloped and Negatively Sloped Labor
Supply Curve
Figure 2.9
25
INCOME MAINTENANCE PROGRAMS AND LABOR SUPPLY

• Focus on how public policy affects labor supply
  through of hours worked
• Types of Income Transfer Payments
• Social insurance programs replace income lost
  from events that are largely outside an
  individual' control i.e., old age, illness,
  disability, or unemployment. Dont have to show
  financial need to qualify
• Income maintenance programs assure a minimum
  level of economic support to those with little
  other income welfare programs must have
  financial need to qualify

26
Expenditures for Social Insurance and Income
Maintenance Programs
SOURCES U.S. Department of Health and Human
Services, Social Security Bulletin, Annual
Statistical Supplement, 2000 (Washington, D.C.,
Government Printing Office, 2000)
lthttp//www.ssa.gov/statistics/Supplement/2000/gt
Table 2.1
27
TANF THE SUCCESSOR TO AFDC

• AFDC began in 1935 to help women with children so
  they would not have to work outside the home
  (mostly widows)
• Temporary Assistance to Needy Families (TANF)
  implemented in 1996
• TANF is a block grant more influence by state
  and local govt
• 2 5 year limits
• Stricter work requirements

28
TANF THE HOURS OF WORK

• Benefits affects a persons budget constraint
  work incentives
• Income guarantee (G)
• Level of disregard (D)
• Implicit tax rate (t)
• Break-even point (BE) BE G/t
• Effect of TANF on Labor Supply

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Hours of Work with a TANF Program
Figure 2.10
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ISSUES IN WELFARE REFORM

• Three goals of any welfare program
• Income provision
• Work incentives (low implicit tax rate)
• Cost minimization
• Impossible to achieve goals simultaneously

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IN THE NEWS TRANSITION FROM WELFARE TO WORK

• Hurdles
• Inability to find work
• Lack of skills
• Poor work habits
• Mental illness or drugs
• Lack of child care
• Lack of transportation

32
QUALIFICATIONS TO THE LABOR/LEISURE MODEL

• Three violations of neoclassical labor leisure
  model
• Fixed work schedules
• Time money costs of working
• Salaried workers

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Fixed Work Schedules and Desired Hours of Work
Figure 2.11
34
Costs of Working and Desired Hours of Work
Figure 2.12
35
TIME-SERIES PATTERN OF HOURS OF WORK

• Process of Hours Reduction
• Role of mkt forces
• Role of institutional forces
• Fair Labor Standards Act (FLSA) 1938

36
The Long-Term Decline in Hours of Work
Figure 2.13
37
Slower Decline of Work Hours in the Postwar Period

• Growth of Paid Time Off
• Increase in Leisure over the Life Cycle
• Other Factors

38
RECENT INCREASE IN WORK HOURS

• Changing Age Profile
• Decline in Real Wage Changes in Consumption
  Patterns
• Moonlighting

39
POLICY APPLICATION - SUPPLY SIDE

• Income Taxes Aggregate Labor Supply

40
The Effect of an Income Tax on Hours of Work
Figure 2.14
41
EMPIRICAL EVIDENCE SUPPLY CURVES FROM
CROSS-SECTIONAL DATA
42
Estimated Labor Supply Curves in Five Studies
SOURCE Robert E. Hall, Wages, Income and Hours
of Work in the U.S. Labor Force, in Glen G. Cain
and Harold W. Watts, eds., Income Maintenance and
Labor Supply (Madison, WI Institute for Research
on Poverty, 1973) 102162. The wage rate figures
on the vertical axis are expressed in 2000
dollars.
Figure 2.15
43
SUMMARY

• You should review the chapter and write up the
  key points in this section of your notes. Please
  see me if you have any questions.

44
APPENDIX 2A HOURS OF WORK DECISION FOR SALARIED
WORKERS

• Differences in Tastes
• Difference in Reward Structures

45
Hours of Work for an Hourly and a Salaried Worker
Figure 2A.1
46
Hours of Work for a Salaried Worker When Work and
Leisure Are Perfect Substitutes
Figure 2A.2
47
Hours of Work for a Salaried Worker Given Future
Earnings from Work
Figure 2A.3
48
APPENDIX 2B CONSTRAINED OPTIMIZATION THE
LABOR/LEISURE CHOICE MODEL

• Equilibrium Hours of Work
• Slope of the IC
• Income Substitution Effects
• You may just skim this section

49
APPENDIX 2C ESTIMATING A LABOR SUPPLY CURVE
WITH LINEAR REGRESSION

• Regression Line
• Standard Error of the Regression Coefficient
• Coefficient of Determination
• Calculating Labor Supply Elasticities
• Example of Labor Supply Function
• You may skip this section, but if you are taking
  econometrics, please read.

50
Estimating a Labor Supply Curve with Linear
Regression
Figure 2C.1
51
An Example of a Labor Supply Function Estimated
with Linear Regression
SOURCE Jane Leuthold, The Effect of Taxation on
the Hours Worked by Married Women, Industrial
and Labor Relations Review 31, no. 4 (July 1978)
52026.
Table 2C.1