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Toolkit: Section 17.3 "The Labor Market" The real wage is the relative price of labor in terms of consumption goods: Dividing the time budget constraint by the price level, we get the budget in line in part (b) of Figure 3.15 "Choosing between Work and Leisure". leisure hours × real wage + consumption = 24 × real wage. As you move along the budget line, you trade hours of leisure for consumption goods. The slope of the budget line is the negative of the real wage. If you give up an hour of leisure, you obtain extra consumption equal to the real wage. Put differently, the opportunity cost of an hour of leisure is the amount of consumption you give up by not working. Once we have worked out how much leisure you consume, we have equivalently worked out how much labor you supply: labor hours = 24 − leisure hours. Part (a) of Figure 3.16 "The Effect of a Real Wage Increase on the Quantity of Labor Supplied" shows what happens when the real wage changes. When the real wage increases, the vertical intercept of the budget line is higher because the vertical intercept tells us how much consumption an individual could obtain if she worked for all 24 hours in the day. The horizontal intercept does not change as the real wage changes: if an individual does not work, then the level of consumption is zero regardless of wages. It follows that the budget line is steeper as the real wage increases. If an individual gives up an hour of leisure time, he or she gets more additional consumption when the real wage is higher. The opportunity cost of leisure in terms of forgone consumption is higher. Figure 3.16 The Effect of a Real Wage Increase on the Quantity of Labor Supplied (a) An increase in the real wage causes the budget line to rotate. Income and substitution effects are both at work: the income effect encourages more leisure (less work), while the substitution effect encourages more work. The substitution effect generally dominates, so higher real wages lead to more work. This means that the labor supply curve slopes upward, as shown in (b). Part (b) of Figure 3.16 "The Effect of a Real Wage Increase on the Quantity of Labor Supplied" shows the individual labor supply curve that emerges from the labor-leisure choice.
Toolkit: Section 17.3 "The Labor Market" The individual labor supply curve shows the number of hours that an individual chooses to work at each value of the real wage. In fact, there are conflicting incentives at work here. As the real wage increases, the opportunity cost of leisure is higher, so you are tempted to work more. But at a higher real wage, you can enjoy the same amount of consumption with fewer hours of work, so this tempts you to work less. This is another example of substitution and income effects. The substitution effect says that when something gets more expensive, we buy less of it. When the real wage increases, leisure is more expensive. The income effect says that as the real wage increases, you can buy more of the things you like, including leisure. We know from our study of demand that, for normal goods, the income and substitution effects act in the same direction. In the case of supply, however, income and substitution effects point in different directions. Consistent with this, most economic studies find that, though the labor supply curve slopes upward, hours worked are not very responsive to changes in the real wage. Some jobs do not give you any control over the number of hours that you must work. Labor supply then becomes a “unit supply” decision, analogous to the unit demand decisions we considered previously. Should you take a job at all and, if so, what job? To the extent that you can choose among different jobs that offer different hours of work, your decision about whether or not to work will still reflect a trade-off between leisure and consumption. Individuals and Households We have discussed almost everything in this chapter in terms of an individual’s decision making. However, economists often think in terms of households rather than individuals. In part this is because—as we saw with the budget studies—much more economic data are collected for households than for individuals. Also, many of the decisions we have discussed are really made by a household as a whole, rather than by the individual members of that household. For example, many households have two working adults. Their decisions about how much to work will usually be made jointly on the basis of the real wages they both face. To see some implications of this, consider a two-person household in which both are working. Now suppose that the real wage increases for one person in the household. One person will probably respond by increasing the number of hours worked. However, the other person may choose to work less. Imagine, for example, that there are household chores that either could do. By working less, one person can do more of these chores and thus compensate the other person for the extra hours worked.This is an application of an important economic idea called comparative advantage, which we discuss in more detail in Chapter 5 "eBay and craigslist". Most of the time, though, we do not need to worry about the distinction between the individual and the household, and we often use the terms interchangeably. Time Studies Table 3.6 "Allocation of Hours in a Day" shows the allocation of time to certain activities for individuals in three countries: the United States, the United Kingdom, and Mexico. It shows the time allocated on average per day for each of four activities: work, study, personal care, and leisure. Table 3.6 Allocation of Hours in a Day Country Age Work Study Personal Care Leisure United States 15–24 2.65 2.2 9.95 5.46 United Kingdom 16–24 3.00 1.39 9.96 5.13 Mexico 20–29 4.49 0.72 10.37 3.1 For the United States and the United Kingdom, the average number of hours worked is between 2.65 and 3.00. This is an average: some people in this age group may work a full-time job, while others may be students who are not working for pay at all. The sample from Mexico differs from the US and UK samples. First, the group is slightly older. Second, Mexico is notably poorer than the United States and the United Kingdom. For these two reasons, individuals sampled in Mexico are more likely to be working and less likely to be studying and enjoying leisure—which is indeed what we see. Combining Your Time and Spending Choices
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Figure 5.15 Surplus in Equilibrium
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Figure 5.20 Hannah’s Production P
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EXERCISES 1. Would you expect to ge
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Figure 6.3 The Profits of a Firm We
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Figure 6.6 The Elasticity of Demand
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Figure 6.8 Finding the Demand Curve
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Figure 6.10 Revenues Gained and Los
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Figure 6.12 Marginal Revenue and De
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CHECKING YOUR UNDERSTANDING 1. Earl
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Figure 6.15 An Example of a Cost Fu
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Figure 6.17 Setting the Price or Se
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Table 6.5 Costs of Production: Incr
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EXERCISES 1. We suggested that a gr
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Tigers’ Merchandise Off to Roarin
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Figure 7.5 Market Equilibrium In a
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Figure 7.6 A Shift in the Supply Cu
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Comparative Statics The approach th
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Figure 7.15 Surplus Away from the M
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The demand for credit decreases as
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Toolkit: Section 17.3 "The Labor Ma
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KEY TAKEAWAYS The supply-and-demand
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Figure 7.21 An Increase in Marginal
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KEY TAKEAWAYS Even if markets are n
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The supply-and-demand framework can
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Figure 8.2 Walmart: Growing Jobs? S
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Figure 8.5 The Technology of a Firm
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marginal product of labor. In creat
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Figure 8.8 The Cost Function The co
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Figure 8.12 The Effect of a Change
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Figure 8.14 The Effect of a Change
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Production" are based on the follow
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EXERCISES 1. A statistic called “
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Road Map This chapter begins with a
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Outcome (Number of Oranges) Probabi
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KEY TAKEAWAYS The value of an asset
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Figure 9.9 Equilibrium Asset Prices
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Road Map Because the minimum wage s
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Figure 10.14 Effects of an Increase
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adults.) Figure 10.18 "Teenage Unem
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economists, particularly because th
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EXERCISES 1. List three jobs you th
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some value. In addition, if the mar
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Toolkit: Section 17.11 "Efficiency
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possible to start bringing supplies
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Suppose you want to purchase a book
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Tariffs Where quotas are the equiva
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“Hiding in the Shadows: The Growt
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Measure 1989 Quintile 1994 Quintile
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Incentives Redistribution is more t
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the Cuyahoga River in Ohio was so p
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Standard Oil Trust in 1911.Justia.c
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monopoly profits. Notice that a fir
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current prices. This problem is esp
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authorities are too permissive in a
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delay the purchase of a new car, ch
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(There is a subtlety you may be won
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Figure 16.3 "The Incidence of a Tax
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What was the sticker price of the c
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next year” is $100. The value of
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For example, suppose you are offere
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Chapter 12 "Superstars" Chapter 16
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Chapter 15 "A Healthy Economy" 17.1
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market. Tax incidence is the way in
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Key Insights The production possibi
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Key Insights As the exchange rate i
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