David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

10.4 The supply of labour
Table 10.3
Participation rates (0/o)
1994 2008
Men Wo men Men Women
UK 85.1 67. 1 83.4 70.2
-
France 74. l 59.3
65.2
Germany 79.8 60.9 82.1 69.7
-
--
us 84.3 69.4 81.4 69.3
74.3
EU15 78.4 56.5 79.7 65.3
Note: EU 15 refers to the average for the 15 countries that were in the European Union on 1 January 1995.
Source: OECD, Employment Outlook, 2009.
do. Economists have tried three techniques in an attempt to discover how people actually behave. Interview
studies ask people how they behave. Econometric studies, of the kind discussed in Chapter 2, try to
disentangle the separate effects from data on actual behaviour. And experiments have been conducted by
giving different people different amounts of take-home pay and recording their behaviour.
The empirical evidence for the UK, the US and most other Western economies is as follows. For adult men,
the substitution effect and the income effect almost exactly cancel out. A change in the real wage has
almost no effect on the quantity of hours supplied. The supply curve of hours worked is almost vertical. 1
For women, the substitution effect just about dominates the income effect. The supply curve for hours
slopes upward. Higher real wages make women work longer hours.
Workers care about take-home pay after deductions of income tax. Lower income tax rates raise after-tax
real wages. The empirical evidence on labour supply implies that lower income tax rates should not be
expected to lead to a dramatic increase in the supply of hours worked.
Individual labour supply: participation rates
The effect of real wages on the supply of hours is smaller than often supposed. The more important effect
of real wages on labour supply is on the incentive to join the labour force.
Table 10.3 gives data on participation rates for different countries in 1994 and in 2008.
Most men of working age are in jobs or are seeking employment, but this percentage
is gradually falling in some countries like the UK and the US, while in others it is
quite stable. On the other hand, there has been a rise in labour force participation
by women in the last 15 years. Can our model of choice explain these trends?
The participation rate is
the fraction of the population
of working age who join the
labour force.
We now develop a model in which labour force participation is higher (a) the more their tastes favour the
benefits of working (goods or job status) relative to the benefits ofleisure, (b) the lower their income from
non-work sources, (c) the lower the fixed costs of working, and (d) the higher the real wage rate.
Figure 10.5 plots leisure on the horizontal axis. The maximum leisure a day is 24 hours. The vertical axis
plots total real income from work and other sources. This shows the ability to buy consumer goods and
1 This conclusion applies to small changes in real wage rates. In most Western countries, the large rise in real wages over the
past 100 years has been matched by reductions of ten hours or more in the working week.
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