EC306 Labour Economics. Chapter 4" Labour Supply over the Life Cycle

Transcription

1 EC36 Labour Economics Chapter 4" Labour Supply over the Life Cycle

2 Objectives Labour Supply Patterns Lifetime Planning and Wage Elasticity Labour Supply Over the Lifetime Household Production and Economics of Family Fertility and Women s Labour Supply Decisions Retirement Decision and Pensions Old Age Security CPP/QPP Employer-Sponsored Occupational Pension Plans

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5 Women s participation at each age, by birth cohort Source: Schirle 28.

6 Labour Force Participation Rates Women Data more complicated to interpret Society/economic factors influence women s participation rates Generally shaped like men s participation Slower entry into labour market Has been rising since 1971

7 Dynamic Life Cycle Model A model based on the assumption that individuals plan out their lifetime supply of labour given their expected economic environment (specifically wages and other income). Thus, the labour supply decision in any one time period is connected to the decisions made in all time periods.

8 Dynamic Life Cycle Model Basic Assumptions: preferences over consumption and leisure today and in the future maximize utility function optimize consumption and leisure in each period of time given expected lifetime budget constraint

9 Dynamic Life Cycle Model Using income-leisure model over life time: U = u( C1, C2, C3,, CN;,,,, ln) l1 l2 l3 Where, U = Utility function over life time, N C = Consumption l = Leisure Maximize utility subject to lifetime budget constraint.

10 Dynamic Life Cycle Model two periods See handout 2 9

11 Solving the model

12 Dynamic Life Cycle Model - results Consumption Smoothing Inter-temporal substitution

13 Dynamic Life Cycle Model and Wage Changes Substitution and income effects differ depending on permanent or temporary wage change anticipated or unanticipated wage change Labour supply response will differ depending on the source of the wage increase 12

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15 Household production Objectives Model choices about market work, household production, leisure How do women choose to spend time? What does that decision depend on? What happens when the economic environment changes? Note departure from text

16 Model Assumptions Spend time either in: M = Market (hours working for pay in the labour market) H = Household (hours working in the household) L = Leisure time (hours) M + H + L = T Assume M and H are not liked or disliked, utility is gained from the goods consumed

17 Model Assumptions w = wage rate I = non-labour income Unrestricted choice of hours Utility derived from C (market goods), G (household production goods) and L (leisure time) à U = U(C,G,L)

18 The Marginal Value of Time Leisure: MVT L =ΔU/ΔL Household work: MVT H =ΔU/ΔH Market work: MVT M =ΔU/ΔM Assume diminishing marginal utility of leisure time

19 Household production time Household production function G = g(h;z) G = output produced H = time spent in household production Z = available capital goods (eg. Washing machine and microwave) and is not a choice

20 Household production time Household work: MVT H =ΔU/ΔH MVT H =ΔU/ΔH = [ΔU/ΔG x ΔG/ΔH] = MU G (G) x MP H (H) Marginal utility of household goods Marginal product of household time Assume diminishing marginal utility and diminishing marginal product MVT H falls with increase in H Additional hours yield smaller product Additional product yields less utility

21 Market Work Time Market work: MVT M =ΔU/ΔM MVT M =ΔU/ΔM = [ΔU/ΔC x ΔC/ΔM] = MU C (C) x w/p Marginal utility of market goods (diminishing) w/p = real wage Assume workers get paid the value of their marginal product and this is constant MVT M falls given diminishing marginal utility

22 Marginal value of time curves Value Value Value MVT L MVT H MVT M L H M 22

23 Utility maximization problem Choose time allocation to Maximize U(C,G,L) s.t. pc = wm+i (market goods) G = g(h;z) (household goods) M + H + L = T (time) Think of the solution in stages 23

24 Leisure vs. Household production Consider the choice between L and H, Ignore M 1. Compare the value of an hour spent in L vs. the value of a hour spent in H 2. Always choose the time use with higher MVT 3. Result: equalize marginal values 24

25 Leisure vs. HHld production Marginal value MVT H L = 24? MVT* L=2? L=12? MVT L L*, H* optimal 24 L* H* L H 25

26 Labour force participation MVT H Marginal value Non- Participation when MVT M (1) < MVT* MVT* MVT M MVT L 24 L1 H1 24 L H M=1 24L 24 H 26

27 Labour Force Participation Marginal value MVT Marginal value Participation when MVT M (1) > MVT* H MVT* MVT M MVT L 24 L* H* 24 L H M=1 24 M* L H

28 Optimal choice for time Choose M*, H*, L* s.t. MVT M (M*) = MVT H (H*) = MVT L (L*) How do changes in exogenous variables affect the time allocation? 28

29 Changes in non-labour income Non-labour income used to purchase market goods. Enjoy C without spending time in M. pc = wm+i How would this affect the marginal value of time? MVT M = MU C (C) x w/p If I is high, C is already high when M=, MU C (C) will be lower for an additional hour of work 29

30 Increase in non-labour income Marginal value Marginal value MVT H MVT* MVT M MVT L 24 L* H* 24 L H M=1 24 M* 24 3 L H

31 Increase in non-labour income Marginal value Marginal value MVT H MVT* MVT M MVT L 24 L* L* H* 24 H* L H M=1 24 M* L H

32 Changes in the wage rate MVT M =ΔU/ΔM = [ΔU/ΔC x ΔC/ΔM] = MU C (C) x w/p Raises the amount of consumption goods that can be purchased for one hour of work. 32

33 Increase in the wage rate Marginal value Marginal value MVT H MVT* MVT M MVT L 24 L* L* H* 24 H* L H 24 M=1 M* L H

34 Improvements in household technology G = g(h;z) Washer and dryer, dishwasher, microwaves, telephones, vacuum cleaners MVT H =ΔU/ΔH = [ΔU/ΔG x ΔG/ΔH] = MU G (G) x MP H (H) Technology increases MP H (H) Change in MVT H may not be obvious 34

35 Improvements in household Value technology MVT H29 Raises MP MVT H1925 May reduce the extent to which output is valued at higher levels of output H 35

36 Improvements in household technology Marginal value Marginal value MVT H1925 MVT H29 MVT* MVT29* MVT M MVT L 24 L* H* L* H* 24 L H 24 M* L H

37 Young children Marginal value MVT H young kids Marginal value MVT H no kids Departure from the labour force MVT M MVT L 24 L* H* 24 L H 24 M* 24 L H 37

38 Fertility and Childbearing Important in understanding women s labour supply Variables affecting fertility decision income cost of child price of related goods tastes and preferences technology advances 16

39 Fertility and Childbearing Income Positive relationship between income and the desired number of children Contraceptive knowledge and the cost of having children tend to be related to the income variable Difficult to separate the pure effect of income on decision 17

40 Fertility and Childbearing Price and Cost of Children The demand for children is negatively related to the price or cost of having children The main cost is income foregone by spouse Increase in potential earnings can have both an income (positive) and substitution (negative) effect on decision to have children

41 Fertility and Childbearing Price of Related Goods Dramatic changes in private costs can impact the decision to have children A rise in the price of complementary goods (medical, daycare, education, etc.) would reduce desired number of children Fall in price (public subsidies) could encourage larger family sizes (e.g. public education, daycare subsidies, free or subsidized health care, family allowance, child tax credits)

42 Fertility and Childbearing Tastes and Preferences Women s liberation movements Family planning Change in values Cultural/background/religious effects Recently encouraged smaller family size (improvement in quality vs. quantity of having children)

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44 Retirement Decisions and Pensions An area of increasing concern Retirement could imply: leaving the labour force reducing hours worked moving to a less difficult job Impacts social policy Concerns of solvency of pension funds 44

45 Retirement Decisions and Pensions Effects of Retirement: Private savings Unemployment Size of labour force National income implications 45

46 Retirement Decisions and Pensions Theoretical Determinants of Retirement: Mandatory retirement age Wealth and earnings Health and the nature of work and the family Public and private pension plans 46

47 Retirement Decisions and Pensions Mandatory Retirement Age: 1. Compulsory Retirement Age: Requires retirement at certain age but allows continuation of service usually on a year to year basis. 2. Automatic Retirement Age: Requires retirement, no longer allowed to provide the service 47

48 Retirement Decisions and Pensions Wealth and Earnings Increase in Wealth: Income effect, hence more leisure Increase in Earnings: Both income and substitution effects the effect on leisure/retirement indeterminate Health, the Nature of Work, and Family Poorer Health: Induces early retirement Hard Physical Work: Induces early retirement Family: Two vs. one income earner effect 48

49 Canada s Public and Private Pension 1. Universal Old Age Security Pension 2. Social Insurance: CPP/QPP 3. Employer-Sponsored Occupational Pension Plan 4. Other Arrangements: Private savings, privately arranged pensions, RRSPs 49

50 Canada s Public and Private Pension Universal Old Age Security Pension Financed by general tax revenue Demogrant or flat amount paid to all persons over age 65 May be supplemented by income-tested Guaranteed Income Supplement, based on need 5

51 Canada s Public and Private Pension Social Insurance Pension: CPP/QPP Financed by compulsory employee and employer contributions Benefits related to contributions based on payroll tax applied to past earnings Universal participation 51

52 Canada s Public and Private Pension Employer-Sponsored Occupational Pension Plan Financed by employer, sometimes with employee contributions Benefits on type of plan: Flat benefit plan Earning-based benefit plan Defined-contribution plan 52

53 Formal Income-Leisure Model Application to Pension Yp = B + W (T - l) pw(t - l) tw(t - l), or Yp = B + (1 p t)w(t - l) Where: Yp = Income of a pension receiver B = Pension W = Wage rate T = Time l = leisure, thus (T - l) = hours of work P = payroll tax rate t =implicit tax (clawback) 53

54 Budget Constraint under Social Insurance Pensions (assume p=) Case a: No Retirement Test, t = (e.g. CPP/QPP) Y M E O E P Y B B T (retirement) 54

55 Budget Constraint under Social Insurance Pensions (assume p=) Y Case b: Full Retirement, t = 1% Y M Y B B T (retirement) 55

56 Budget Constraint under Social Insurance Pensions (assume p=) Y Case c: Partial Retirement Test, T= and then t = 5% Y M D T = 5% Y B T = Y B C Y B B (retirement) d C T 56

57 Other Provisions of Pension Plans Backloading Early/special retirement provisions Postponed retirement provisions 57

58 Other Provisions of Pension Plans Backloading Benefits get larger as seniority-based wage increases Young workers have an incentive to stay with the firm Older workers have an incentive not to retire too soon 58

59 Other Provisions of Pension Plans Early/special retirement provisions: Typically at age 55 with at least 1 years service In most earning-based plans May be unsubsidized due to reduced number of years of service compared to the normal retirement age Special Provisions: Typically at age 6 62 with at least 2 years of service. Covers about 3% of earning based private pensions. Extensively subsidized. 59

60 Other Provisions of Pension Plans Postponed retirement provisions Typically involves pension penalties for postponing the retirement past the retirement age. See handout 3 6

61 Reading and references Required " BGLR Ch. 4, handouts" Suggested" CBC Archives - the birth control pill 572/ and the housewife and the working girl " Modelling household and market time closely follows the presentation by Hoffman, Saul D. and Susan L Averett, Women and the Economy: Family, Work and Pay, 2 nd Ed. (Addison Wesley), pp