ECON 139 Set 3

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ECON 139 Set 3

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Lecture Note
University of California, San Diego
Econ 139 - Labor Economics

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April 2nd, 2013 April 14 2015 Last part of “ Labor Supply” Labor Supply Over the Life-Cycle • “Static” model of Chapter 2 is not a complete depiction of how we allocate our time • We want to consider how individuals make labor supply decisions over their lifetimes. • Wage rates change over the worker’s life cycle in a predictable way – Wages are low when young – Wages rise with time and peak around age 50 – Wages decline or remain stable after the age of 50 • Changes in wages over the life cycle are “evolutionary”. Responses to Evolutionary Wage Changes • Evolutionary wage changes are predictable (cuz we know in ten years our wage is gonna go up) – don’t lead to a change in expected life income cuz you know they are happening – no income effect associated with them, just substitution effect • In life-cycle model, hours of work increase when wages are higher. • The profile of hours of work over the life cycle will have the same shape as the age-earnings profile • Intertemporal substitution hypothesis: people substitute their time over he life cycle to take advantage of changes in the price of leisure The Life Cycle Path of Wages and Hours for a Typical Worker ECON 139 SP ‘15 Antonovics 3 4/14/15 1 2of 15 Contrast with Static Model of Labor Supply (the distinct between predictable changes in wage v.s. unexpected change) • In a life-cycle model, wage changes are predictable and do not increase a worker’s opportunity set. • The two models complement rather than contradict each other. Case 1 à SE > IE Case 2 à IE >SE Compare Professor Antonovics and Bill Gates: If IE dominates: Bill Gates is working less at every age level If SE dominates: Bill Gats is working more at every age level Labor Force Participation Rates over the Life Cycle, 2005 (Inverted U shape) 3of 15 Hours of Work Over the Life Cycle, 2005 Around age 45 – 50, you can see them hitting the peak and then decline Policy Application: LFP of Older Workers (No need for this slide) Labor Demand Labor Demand • A firm’s decision about how much labor to use in production is driven by the firm’s desire to maximize profits. Derived demand *** for employed it is always maximize profit • Firm’s thinking about whether to hire a worker (basic intuition) – Each worker produces a certain amount to output per hour – That output can be sold for money – So, each worker generates a certain amount of revenue per hour. – If that hourly revenue is greater than the hourly wage, then hire the worker. • Just another way of saying you will hire an additional worker whenever the marginal benefit of that worker is greater than marginal cost of that worker. The Production Function • The production function describes the technology that the firm uses to produce goods and service. • For simplicity, assume that there ...

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