ECON 370 - Chapter 4 - Labour

Economics

Maggie Jones

Labour Supply Over the Life Cycle

Labour Supply Over the Life Cycle

I So far we have assumed that individuals do not consider the

future when they are making current labour supply decisions

I can be an unrealistic way to think about decision making

I This chapter considers labour supply schedules when

individuals consider their entire life

I Are labour supply schedules of men and women the same over

time?

I What do we have to change in our labour supply framework

when considering the life cycle?

I How have labour-saving technologies a↵ected the evolution of

female labour supply?

Male Labour Force Participation

Female Labour Force Participation

Labour Force Participation Over the

Life Cycle

I We will focus on understanding whether the observed labour

force patterns over the life cycle can be explained by changes

in the economic environment in a way predicted by theory

I We will consider three additional life cycle phenomena that

warrant individual attention

I the school-work decision

I women’s fertility decisions

I the decision to retire

A Dynamic Model of Labour Supply

A Dynamic Model of Labour Supply

I Individuals plan our their lifetime labour supply, given theirexpected lifetime economic environment

I Starting point:I individuals live and potentially work for N periods

I no uncertainty regarding future economic variables

I prefs are defined over consumption and leisure in every period

u = U(C1, C2, . . . , CN , l1, l2, . . . , lN )

I budget constraints defined over all periods

C1 + C2 + · · ·+ CN = W1 ⇥H1 +W2 ⇥H2 + · · ·+WN ⇥HN

Income and Substitution in the

Dynamic Framework

I Income and substitution e↵ects are more complicated in the

dynamic framework

I We will consider three types of changes in a simplified

framework:

I permanent unanticipated wage increase (A-B)

I evolutionary anticipated wage increase (B-C)

I transitory unanticipated wage increase (C-D)

Dynamics of Life Cycle Wage Changes

*Note: each wage change is supposed to represent the samemagnitude

Income and Substitution in the

Dynamic Framework

I permanent unanticipated wage increase (A-B): this type of

wage change leads to standard income and substitution e↵ects.

I evolutionary anticipated wage increase (B-C): the anticipated

wage change is factored into the individual’s decision making

at the beginning of period 1. This means there will be no

income e↵ect, as the individual is already making decisions

based on their lifetime budget constraint. The individual will

still see a substitution e↵ect as their wage increases.

I transitory unanticipated wage increase (C-D): this will yield a

substitution e↵ect at time t and a small income e↵ect spread

over the life cycle.

Fertility and Childbearing

Fertility and Childbearing

I Clearly, from our previous diagram, fertility is an important

determinant of female labour supply

I But the arrival of children is not a random occurrence

I Many individuals make their decision of when to have children

based on economic considerations and do so in a forward

looking manner

I Starting point is the Becker/Mincer model:

I applies the principles of consumer theory to the decision to

have children

I children are a “good” that are “consumed”

Fertility and Childbearing

Several factors may a↵ect a woman’s fertility decisions that we can

consider in the context of our dynamic labour supply model

I Income

I Cost of children

I Price of related goods

I Tastes and preferences

I Technology

Income and Fertility

I Theoretically positive relationship between children and

income

I assumption: children are a normal good

I problem: income correlated with other things, like knowledge

of contraception, opportunity cost of having children

I often we see a negative relationship between income and

fertility

I Income e↵ect: higher income =) more children

I Substitution e↵ect: higher income usually correlated with

higher wages =) higher opportunity cost of having children

I Once potential earnings have been accounted for, empirical

evidence suggests that yes, children are like normal goods

Cost of Children

I Not surprisingly, if the price of having children increases, the

number of children should decrease

I Price includes many things:

I food, clothing, housework associated with raising a child

I forgone income

I As we saw previously, an increase in the potential earnings of

wives leads to both an income and substitution e↵ect of having

children

Price of Related Goods

I Complementary goods: medical expenses, daycare, education,

etc.

I A rise in the price of any complementary good should decrease

the number of children

Tastes and Preferences

I Over time we have seen large changes in attitudes towards

women’s employment, religion, family planning, contraception,

etc.

I These can all be viewed as changing preferences for children -

in this case, they would lead to a reduction in family size

I Increased educational attainment may also change preferences

by changing the set of “alternative goods”, e.g. travel,

entertainment, etc.

Technology

I Decrease in family size: contraceptive devices, medical

advances (vasectomies, tubal ligation), reduction in infant

mortality

I Increase in family size: medical advances that decrease risks of

pregnancy, processed food and diapers

The Decision to Retire

The Decision to Retire

I The decision (typically among older workers) not toparticipate in the labour forceI can mean leaving the labour market, reducing hours worked,

moving to a less onerous jobI can be a gradual process or a discrete change in employment

I Micro level e↵ects:I financial status, psychological state

I Macro level e↵ects:I unemployment, labour force participation, private savings

Factors Affecting Decision to Retire

I Mandatory retirement ageI typically in North America, age 65; individuals are not

actually forced to leave the labour marketI variability across jobs, provinces, countries

I Wealth and earningsI wealth: income e↵ectI earnings: income and substitution e↵ect

I Health and the nature of work and the family:I poor health can lead to early retirementI shift from blue collar to white collar jobs may increase lifetime

employmentI decline of extended family, rise in dual income families,

deinstitutionalization of health care

Social Support Programs

I In Canada there are 3 main types of pension programs:I Universal Old Age SecurityI Canada/Quebec Pension Plan (CPP/QPP)I Employer sponsored occupational pension plans

I Individuals can also save on their own through RRSPs

Universal Old Age Security

I Financed by general tax revenue

I Demogrant paid to those 65+I Max monthly benefit as of June 2016 for a single person:

$570.52I benefits reduced for high earners (expected to save)

I May be supplemented by a Guaranteed Income Supplement(up to $773.60)

Social Insurance Pension:

Canada/Quebec Pension Plan

I Financed by compulsory employer and employee contributionsthrough payroll tax

I Benefits related to contributions based on payroll tax appliedto past earnings, but funds come from payments from currentworkforce

I Max monthly benefit in June 2016: $1093

I Virtually universal participation

Employer-Sponsored Occupational

Pension Plans

I Financed by employer, sometimes with employee contributions

I Benefits depend on type of plan

I Covered 32% of LF and 38% of paid workers in 2013