A Major and Recurring Theme of This Textbook Is the Role

question 26

Essay

A major and recurring theme of this textbook is the role of empirical research in labour economics. Conceptual models exist to analyze many labour market phenomena, but often the predictions that emerge are ambiguous. It is the objective of empirical research to test the validity of these predictions, and to try to sort out the multiple effects, which may work simultaneously. Such is the case for the theory of individual labour supply. Discuss the major conceptual implications of this model as well as the results from the empirical literature with correspond to them. The key is to link the predictions, which flow from the model, to the hypotheses that have been examined in the literature. In particular, your response can follow the following outline:
• Without getting bogged down in technical details (i.e., don't give a graph), explain intuitively the role of preferences and constraints in determining the optimal choice of hours worked.
• What is the impact on the choice of hours worked by an individual if the level of non-market income changes?
• Briefly describe the income effect and the substitution effect of a wage change, and relate this to the backward bending supply curve.
• A large number of econometric studies have estimated the shape of the labour supply curve, the sign of the wage elasticity of labour supply, and the income elasticity of labour supply. What have they found, generally speaking, regarding the slope of the supply curve? Does the slope differ between men and women?
• Figure 2.3 in the textbook shows what appears to be a slight negative empirical relationship acros countries between per capita national income and male labour force participation rates, coupled with slight positive empirical relationship across countries between per capita national income and female labour force participation rates. It might be possible to interpret these observed empirical patterns in terms of substitution effects and income effects.

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Definitions:

GDP

Gross Domestic Product, the total value of all goods and services produced within a country's borders in a specific time period.

Living Standards

The level of wealth, comfort, material goods and necessities available to a certain socioeconomic class or geographic area.

Annual Interest Rate

The percentage that is applied to a sum of money, including loans or savings, indicating the amount earned or paid over a year.

Interest Rates

The cost of borrowing money or the return for investing money, usually expressed as a percentage of the principal amount.