Econ labor market policy evaluation

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 affected 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 women’s fertility decisions I the decision to retire I the school-work decision

A Dynamic Model of Labour Supply

A Dynamic Model of Labour Supply

I Individuals plan out their lifetime labour supply, given their expected 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 effects 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 same magnitude

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 effects.

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 immediate income effect, rather the income effect is spread over the life cycle. The individual will still see a substitution effect as their wage increases.

I transitory unanticipated wage increase (C-D): this will yield a substitution effect at time t and a small income effect 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 affect 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 effect: higher income =⇒ more children I Substitution effect: 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 effect 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 to participate in the labour force I can mean leaving the labour market, reducing hours worked,

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

I Micro level effects: I financial status, psychological state

I Macro level effects: I unemployment, labour force participation, private savings

Factors Affecting Decision to Retire

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

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

I Wealth and earnings I wealth: income effect I earnings: income and substitution effect

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

employment I 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 Security I 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:

$570.52 I 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 contributions through payroll tax

I Benefits related to contributions based on payroll tax applied to past earnings, but funds come from payments from current workforce

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