The LaborLeisure Model An Alternative View Fall 2018

The Labor-Leisure Model An Alternative View Fall 2018

LABOUR and LEISURE Framework u 24 hours a day u There is only two things you can do with your time – Work (paid labour market) – Leisure – Ignores housework (extension possible) u You divide all you time between these two activities. u When you work in the paid labour market, you are paid a market wage.

LABOUR and LEISURE 24*w = w*Leisure + p*Consumption Where 24*w is the value of initial endowment, w*Leisure is the amount of the endowment spent on leisure and p*Consumption is the amount of endowment spent on consumption Rearranging: C= 24 w/p – (w/p)Leisure

LABOUR and LEISURE What happens if the wage rate increases? C Slope = -w/p 24 h Leisure

LABOUR and LEISURE What happens if the wage rate increases? C w 24 w 1/p 24 w 2/p W 2 > W 1 The budget line pivots out from here 24 h Leisure

LABOUR and LEISURE More labour or more leisure……. ? Use income and substitution effects C NB: Is leisure a normal or an inferior good? w 24 w 1/p 24 h Leisure

LABOUR and LEISURE More labour or more leisure……. ? C 24 w 1/p A 24 h Leisure

LABOUR and LEISURE More labour or more leisure……. ? Total Effect ? C Depends (to some extent) on whether Leisure is assumed to be normal or inferior w 24 w 1/p A 24 h Leisure

LABOUR and LEISURE More labour or more leisure……. ? SE: A to B C IE: Depends on whether Leisure is assumed to be normal or inferior w 24 w 1/p A 24 h Leisure

LABOUR and LEISURE More labour or more leisure……. ? SE: A to B C IE: Depends on whether Leisure is assumed to be normal or inferior w 24 w 1/p B A 24 h Leisure

LABOUR and LEISURE More labour or more leisure……. ? Overall we could end up here if leisure is “very normal” C w 24 w 1/p B A C 24 h Leisure

LABOUR and LEISURE More labour or more leisure……. ? SE: A to B C IE: B to C w Depends on whether Leisure is assumed to be normal or inferior 24 w 1/p B A C 24 h Leisure

LABOUR and LEISURE Increase in wage rate Substitution effect: w price of leisure and labour supply Income effect: w income (value of the initial endowment) leisure and labour supply IF LEISURE IS A NORMAL GOOD Overall effect: Leisure? ? Labour Supply? ?