© 2002 McGraw-Hill Ryerson Ltd.Chapter 4-1 Labour Supply Over the Life-cycle Chapter Four Created by: Erica Morrill, M.Ed Fanshawe College.

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-1

Labour Supply Over the Life-cycle

Chapter Four

Created by: Erica Morrill, M.Ed Fanshawe College

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-2

Chapter Focus Labour supply patterns Lifetime planning and wage elasticity Labour supply over the lifetime Fertility and women’s labour supply decisions Retirement

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-3

Figure 4.1 Labour Force Participation Profiles

Men participation

increases in twenties peak at 30-50 declining at

retirement age participation of older

men has declined since 1971

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-4

Figure 4.1 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

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-5

Dynamic Life Cycle Models

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)

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-6

Dynamic Life Cycle ModelBasic Assumptions:

preferences over consumption and leisure today and in the future

maximize utility function optimize consumption an leisure in each

period of time given expected lifetime budget constraint

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-7

Figure 4.2 Dynamic Life Cycle Wage Changes

Two profiles Illustrates how

wages first increase and then decline

“blip” represents a temporary one-time wage increase at t

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-8

The Dynamic Life Cycle Model in ContextSubstitution 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

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-9

Figure 4.2 Dynamic Life Cycle Wage Changes

A B Permanent wage difference

B C Evolutionary wage change associated with aging

C D Evolutionary wage change associated with aging

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-10

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 consumption vs. nonmarket time

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-11

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 income on decision

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-12

Price and Cost of ChildrenThe demand for children is negatively

related to the price or cost of having children

The main cost is income foregone by spouse

potential earnings can have both an income and substitution effect on decision to have children

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-13

Price of Related GoodsDramatic changes in private costs can

impact the decision to have childrenA rise in the price of complementary

goods would reduce desired number of children

Fall in price (public subsidies) could encourage larger family sizes

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-14

Retirement Decisions and PensionsAn area of increasing concernRetirement could imply:

leaving the labour force reducing hours worked moving to a less difficult job

Impacts social policyConcerns of solvency of pension funds

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-15

RetirementTheoretical Determinants of Retirement

mandatory age wealth and earnings health and the nature of work and the

family pension plans

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-16

Figure 4.3 a No Retirement Test

YM

YB

EPEO

B

T

No Retirement Test

(retirement)

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-17

Figure 4.3 b No Retirement Test

YM

YBB

T

Full Retirement

(retirement)0

Y

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-18

Figure 4.3 c No Retirement Test

YM

YB

B

T

Partial Retirement Test

(retirement)0

Y

C

D

Cd

YB

YB

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-19

Employer-Sponsored Pension PlanEarnings Based Plans

3/4 of workersFlat Benefit Plans

18% of workersDefined Contribution Plans

9% of workers

Defined Benefit Plans

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-20

Defined Benefit Plans

Influences retirement decisionEncourages early retirementDiscourages postponed retirement

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-21

Figure 4.4 Pension Benefit Accruals

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-22

FeaturesBackloadingEarly/special retirement provisionsPostponed retirement provisions

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-23

BackloadingBenefits get larger as seniority-based

wage increases Young workers have an incentive to

stay with the firmOlder workers have an incentive not to

retire too soon

© 2002 McGraw-Hill Ryerson Ltd. Chapter 4-24

End of Chapter Four