Summary of Chapter 2: The Theory of Individual Labour Supply
In this chapter, McConnell, Brue & Macpherson identify how diversity exists when human beings supply labor. According to these authors, different people are comfortable in a variety of ways since they work at different rates. The chapter seeks to establish the cause of such disparities in supplying labor. The significance aspect in this chapter is the application of a basic theory of individual labor supply. This establishes why people are different in the way they spend time at the workplace and their leisure activities.
According to this theory, a person with specific skills and time has an optimal distribution of time divided between work and leisure. The authors have suggested two imperative data to establish a person’s optimal distribution of time between work and leisure. The first is the subjective or the psychological information about work-leisure preferences of an individual. The second perspective entails the objective market information seen through the budget constraint.
The authors of this book use the indifference curve to explaining the psychological disposition of a person on work-leisure preferences. This curve indicates a wide range of variables about the actual income and leisure time that may eventually lead to a level of utility to the person. When plotting the indifference curve, the vertical line represents leisure hours whereas the horizontal axis indicates the hours of work.
The authors argue that the curve should slope downward because additional satisfaction linked to more leisure balances by less income to maintain the utility as a constant. This convex curve represents a diminishing marginal rate of substitution of leisure for income. From the curve, any combination of the two variables has a constant level of satisfaction to the individual. The authors explain this curve from different perspectives. For instance, when taken from the negative slope point of view, the curve slopes downwards since leisure and actual income from work represent both sources of utility. It is from this curve that the chapter reveals the personal willingness to substitute between work and leisure. As a result, the willingness of an individual to substitute leisure for work, or otherwise, depends on the amount of leisure and income initially possessed.
An individual becomes substantially reluctant to give up income as it becomes increasingly scarce. According to the writers of this book, the indifference curve measurement entails the marginal rate of substitution of leisure for income (MRS L, Y), which is the amount of income an individual must give up in return for a unit of more leisure.
The difference that emanates from different people supplying labor at different rates emerges from the following reasons as indicated in the chapter: it may be entirely because of preference embedded in individual personality, difference in occupation and/or personal circumstances of an individual. For instance, considering a musician, it only requires a small increase in income to cause the musician to sacrifice an hour of leisure. Unpleasant work in the coalmine involves substantial disutility and this result to a large increase in income for the work to sacrifice an hour of leisure.
The budget constraint is a perspective that the authors have used to explain the variation in choice of individual to supply labor. In this case, authors draw many assumptions. The authors of this book imply that the choice of curves is in restriction when a person maximizes utility through attaining a position on the highest achievable indifference curve. The amount of income that is available causes an individual to constrain. In this case, the assumption stipulates that the person has no other source of income other than work. They also assume that the wages causing this individual to enter the labor market prevail to hinder a change in hourly rates paid for his services. This occurs by changing the number of hours worked. From these assumptions, a budget constraint line can be drawn to indicate variables of income and leisure that a worker night realize at a given income rate.
Hours of Leisure
The figure shows that the lines fan out clockwise from the right origin as the wage rate goes up. The explanation given in the chapter is that in each case, the wage rate reflects the objective or market rate of exchange between income and leisure. This implies that if the wage rate is $1, a person can exchange one hour of leisure for $1 worth of income. According to the authors, these differences in labor supply trigger individuals to attain utility maximization. As a result, they propose that utility maximization involves bringing together the subjective market information contained in each budget line.
Additionally, this chapter has focused on the wage rate changes in which case the authors have defined a number of effects that the rate change can cause in relation to labor supply. The first effect defined in this chapter is the income effect. According to these writers, the income effect refers to the alteration in the desired hours of work resulting from a change in income and the wage rate is constant. The substitution effect is the change in the desired hours of work resulting from change in the age rate, keeping the income constant. Ultimately, the authors have defined the net effect in this chapter as being the overall effect of an increase in the wage rate on the number of hours a person would like to work. This depends on the relative magnitude of the two effects.
The empirical evidence varies based on gender. The authors, male labor supply is insensitive to changes in wage rates. From a survey carried out, 10 percent increase in male wage rates would cause an increase for labor supplied by one percent. On the contrary, only 8 percent of married women gave similar results. For men; substitution effect appears to dominate the income effect. However, women indicate that substitution effect substantially dominate the income effect. This diversity between male and female workers, according to the chapter, depends on the current difference in the allocation of time. A larger percentage of men are in full-time jobs as opposed to women of the same age.
Apart from looking at how wage changes because a person to change the hours of work supplied, this chapter focuses on elasticity against changes in labor supply. Elasticity is the percentage change in quantity of labor supplied divided by percentage change in the wage rate. Based on this variable, authors of this book argue that changes in non-labor income (leisure) may result into a shift in the individual’s labor supply curve. A shift in an individual’s indifference map, results to an offset of the labor supply curve. Better working conditions, availability of childcare and/or a large medical bill may alter a person’s indifference map in such a way that it increases his/her labor supply.
The significance aspect in this chapter is the application of the model in solving daily issues that concern the supply of labor. The application affects the work-leisure decision of individuals. As such, the authors have gone a step further to look at the application of the model to the nonparticipants and the reservation wage. In this case, the authors propose that the discussion assumes that workers can individually determine the number of hours they work. However, this may not be entirely true according to the model. As a result, most individuals prefer maintaining their income to avoid cases of giving up their leisure hours. From the chapter, income maintenance programs are present though they face controversies. This emanates from differences among policy makers. Most policy makers reach a balance that such programs should ensure that poor people get out of poverty through maintaining motivation to work. This chapter has summed up by looking at the need to end welfare as an entitlement in the United State of America by President Clinton. This was through signing of the Personal Responsibility and Work Opportunity Reconciliation Act in 1996. This was to discourage dependence among individuals and work incentives in the country improved.
