Collective Labor Supply and Household Production - Essay Example

Microeconomics of labour supply In the study of labour economics the use of microeconomic principles for the analysis of macro-economic principles will allow a closer study of the role of individuals and individual firms in the labour market. Labour supply can be perceived in a way similar to other microeconomic problems in terms of their working hours, opportunity costs and their ability to trade their skills for work. This analysis allows us to see the incentives and choices of the labour force which ultimately affect the intensity of work and wage differentials.The supply and demand of labour will thus have a strong bearing upon the wage rate and the number of people employed. From a microeconomic perspective the labour market differs from other markets in terms of the factors of demand and supply mainly because there will be a limited supply of the resource i.e. "working hours",involved which may be further varied by many situations like epidemics,migration and increased vacations or even the wage rates currently being offered.The article discusses the correlation between employment and Labour demand and supply in the United Kingdom with the latest statistics and compares them to the employment rate in the 1970's.This has been attributed to the labour market performance which has increased since 1997 The national statistics (http://www.statistics.gov.uk/) have some good news for the British economy as they show that not only has employment increased but people are increasingly not claiming unemployment.This is because more jobs have been created and average earnings, excluding bonuses have increased (http://www.statistics.gov.uk/). Now coming to the basic model of Microeconomic supply of labour,the labour supply curve in the microeconomic model is upward sloping because higher wages will attract more and more workers .This includes the labour supply emanating from the pool of labour supply which is working for other industries or the untapped sources of labour like housewives and the younger pool of labour force who were previously lacked the incentive to work.This also has been influenced by the elasticity of labour supply. So what are these factors affecting labour supply Current wage rate prevalent in the industry is definitely an issue here as it will bring out the untapped reserves of labour.This will also be affected strongly by work opportunities,pension schemes,share option offers as well as a sanitary and safe work place free of stress and harassment.Labour supply responds to wage differentials within competing jobs so if a similar or substitute vocation will be offering better pay and benefits the labour will tend to shift to that sector.In the recent years there has been an increase in the exodus of the British labour supply to management oriented Jobs because they offer better work packages and perks like company cars and flats.However it should be noted that there can certain barriers to an industry labour supply especially if it is qualification or license based.For example one reason the wages/remuneration of lawyers and chartered accountants is so high is because they have to spend a long time training for their degrees and spend a lot of money of achieving their technical licenses.The supply of labour will increase due to occupational and geographical mobility as well mainly because then the labour will not only be able to switch jobs easily from one industry to another but they will also be better equipped to travel to far off areas to work for their jobs.Other factors include the fact whether the industrial conditions are conducive to women with families or young people struggling to get an education while earning a living.Lack of job security and future career development can play an immense role in increasing/boosting the supply of labour.Things regarding geographical mobility have changed a lot eversince UK's accession to the European Union as people from disadvantaged EU member states have a large influx into Britain and they are competing for Jobs with them.It should also be noted that elasticity of labour supply is high in low skilled jobs rather than those requiring higher skills.The diagram below shows the elasticity of supply curves for the industry. Another theme here is the " work-leisure trade off" which indicates that at what wage rate people will be willing to stop working or prefer to work extra hours and this will be determined by the real wage.Real wage is the wage which is the net wage workers get minus the effects of inflation and tax cuts.But it should be noted that the worker will need rest and leisure and despite monetary incentives still be prepared to work for a limited time.The diagram below illustrates this attitude of the worker. In this diagram it is obvious that although higher wages will lead to an increase in the work hours the labourer is willing to supply there will be time that they will refrain from doing so and thus the curve is not straight but bendy representing diminishing hours.Another theme apparent here is the income and substitution effect.The income effect spells into higher wages causing a greater tendency for the worker ti work less which is true and a realistic assumption but at the same time the substitution effect will allow the people to understand the opportunity cost of not working is greater now.These are conflicting concepts.What will the hypothetical rational worker doMake a lot of money in one hour and go home happy or realise that by going home he is letting go of double the money he could have made in the next one hour. Before moving ahead to policy matters and points of critical importance it would be worth looking at the extended version of the simple labour model in the form of the house hold model which depicts the household as a supplier of labour. Hypothetically in this model people will take rational decisions(i.e. take steps to increase utility which will be a consequence of the interaction between income and leisure as well as the time the labour is prepared to spend working) The utility function can be computed through this formula where U(w L + , A) such that L + A k where W is hourly wage,K is total waking hours,L is working time, Pii is other means of income and A is leisure.The diagram below show that there is a limited amount of time that is 24 hours available for work and allocation will be done on the basis of utility (Point A). Based on all the above I have been asked to comment upon whether the presence of income support for workless households, and income taxes for working households etc will have an effect on the supply curve.My answer to this is affirmative.Britain is known for its so called lazy "work supply" where people find that if the have to pay 42% of their wages in taxes they can have the same money effortlessly as an umemployment benefit.So the benefits and taxes are not conducive to a competitive willing to work labour supply at all.We are also stuck with another sort of dilemma here. There is a concept of a "poverty trap" especially for women as they work for a few hours,face uncomfortable working conditions and still have to pay large amounts of taxes.In this regard I would recommend that there should be a policy of positive discrimination in the form better child and personal benefits for the woman who not only looks after the house but the children aswell. . This is particularly true for the female labour supply which has been fluctuating eversince the 1960's and as apparent from the Unitary/ household model where the household is utilised as a unique unique decision-making unit with its shortage of money and contribution of all family members the problem has become grave as women and old people are blatantly feeling the cut in their income in the name of man woman equality. Now coming to the last part of my essay that is my recommendations for future public policies I would like to say that policy makers must have an idea of the impact of some familial orindividual policies on the household model and therefore these policies must impact upon the equation between spouses and household members so each family member can genuinely be expected to think rationally without being pestered by intra-family inequalities. Other decision premises are based upon much more profound considerations like the young labourer expecting to save money for studies or weddings.The older people trying to save a few pounds for their turbulent and lonely old age.It is inevitable that in the light of all the pressures there will be a trade off or a set off between income and substitution effects and then the question of real wages creeps into the back ground. However the supply of labour is waiting to be increased,maybe tempted out of their houses and poverty which does not allow them to prefer work to getting unemployment benefits.One idea would be that which steps from the classical conception of corporate governance is to recognise that employees/workers are a high stakeholders in both public and private enterprises. Firms have to recognise that employees are an important asset and where as data and technology is susceptible to theft and piracy a good employee is one of the most important assets of a firm.The employees will be central to a company's competitive advantage. If the work force is well qualified,trained and experienced this will play a critical role in the effective development and execution of strategies of an economyAs important stakeholders if these employees will be able to share a company/public enterprise's fortunes and achievements they will be better equipped to work harder and for their own benefits. The question has also asked me to consider the basic model of labour supply as an extension of the household instead of an individual in the light of income support(discussed above) and taxes being provided and the case of Home Production.(all concepts have been discussed and criticised later below) The diagram below shows how the household model (as an extension of the individual model bases decisions on utility rather than the issues of home production and other cultural problems(discussed below later on) and can be regarded as too simplistic in this regard The synopsis in this regard is rather simple. Firstly it is imperative to note that income/wage problems in economic theory will always affect all members of a household proportionately and have a large impact on quantity of labour supplied by a household. An important concept in this regard is that of the Home production which goes unaccounted for: The diagram below shows how the income support and increased taxation act to reduce the labour supply because it acts as a disincentive to work. Last but not the least there is a large criticism of the so called rational decisions of the household model which ignored that fact that humans can be irrational and it is likely that there will cultural and emotional constraints on the workers to work for example the concept of the stay at home housewife.Also people who rant about unemployment miss the fact that at a certain time people will be taking career breaks,sifting through job offers,or getting further education to get better jobs.The unpaid work of the household mother is oft ignored and here other factors come into play which include fertility, child raising and home production which should inevitably now form the basis for policy makers in Britain. (see diagram above for home production).The present rate of high inactivity is apparent from the national statistics which state that The inactivity rate for people of working age was 21.0 per cent for the three months to December 2007, down 0.2 over the previous quarter but unchanged over the year. The number of economically inactive people of working age decreased by 54,000 over the quarter but increased by 51,000 over the year to reach 7.92 million. The number of economically inactive students has reached a record high of 1.94 million while the number of economically inactive people looking after the family or home has reached a record low of 2.26 million.(http://www.statistics.gov.uk/) Therefore Britain should be celebrating its increased rate of employment but should look out for the inactive pools of labour whose inactivity can ultimate have negative repercussions for the economy. References .Apps, P.F. and R. Rees (1997), Collective Labor Supply and Household Production , Journal of . Political Economy, 105, 178-190. Becker, G. (1981) A Treatise on the Family, Cambridge, Mass.: Harvard University Press. Chiappori, P.-A. (1988),Rational Household Labor Supply , Econometrica, 56, 63-89. Chiappori, P.-A. (1992), Collective Labor Supply and Welfare , Journal of Political Economy, 100,10.437-467. Chiappori, P.-A. (1997), Introducing Household Production in Collective Models of Labour Supply . Journal of Political Economy, 105, 191-209. Bourguignon, F. and P.-A. Chiappori, (1992) Collective Models of Household Behavior ,European Economic Review, 36, 355-364. http://www.statistics.gov.uk/ Diagrams draw by Microsoft PAINT and their accuracy has been matched with images from Tutur2u.net, Wikipedia and The diagrams provided in the Lecture Slides. Perloff, Jeffrey M. (2007), Microeoconomics, Fourth, international edition, Boston: Pearson Education International, Chapters 1 - 7 & 15 Read More