LABOR SUPPLY : THEORY AND EVIDENCE

Hewi-Lin Chuang, Ph.D.

2012/03/07

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安胎假 王如玄：多數盼兼顧工作 雇主成本不會大增   2010-03-08 新聞速報 【中廣新聞／繆宇綸】

2010-03-08 工商時報【記者呂雪彗／台北報導 】

今天是國際婦女節，政府打算 5 月底修訂完成勞工請假規則，擴大住院病假定義，推出安胎假。安胎假﹕懷孕婦女，只要取得醫生證明須在家安胎休養，得留職停薪且續享有勞保保障， 一經提出雇主不得拒絕。

勞委會主委王如玄表示，過去孕婦請假常會遭到刁難，陷入為保全胎兒而辭職，或是冒著母子安全危險繼續工作的兩難。安胎假有助推動婦女工作與家庭平衡。

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安胎假 王如玄：多數盼兼顧工作 雇主成本不會大增 勞資雙方各有不同反應﹕

資方尤其擔心會增加人事成本勞工團體擔心安胎假會「看得到吃不到」

王如玄表示，其實並不會出現每個懷孕婦女都會請滿 9個月安胎假的情形，不會如雇主所想像，增加那麼多的人事成本。相信多數資方團體經過溝通說明後是可以接受的。如果婦女休完安胎假返回職場遭到排擠，這違反性別工作平等法，可以處 4 到 50 萬元罰鍰，如果婦女需要職業技術銜接，政府也會提供職訓。

資料來源﹕

http://news.chinatimes.com/2007Cti/2007Cti-News/2007Cti-News Content/0,4521,50203025+132010030800856,00.html

http://news.chinatimes.com/2007Cti/2007Cti-News/2007Cti-News-Content/0,4521,50203025+122010030800151,00.html

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LABOR SUPPLY : THEORY AND EVIDENCE

Labor supply decisions can be roughly divided into two categories:

(1) Decisions about whether to work at all, if so, how long to work.

(2) Decisions about the occupation or general class of occupation in which to seek offers and the geographical area in which offers should be sought.

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1. SOME STYLIZED FACTS ABOUT LABOR SUPPLY

Trends in LFP:

(1) 女性勞動參與率由 1964 年的 34% 逐漸上升 至 1986 年的 45% ， 1986-1999 年則維持在 45% 左 右，

1999 年開始逐漸上升，至 2008 年已達到 49.67% 。 男性勞參率由 1978 年的 77.96% 逐漸下降至

2008 年的 67.09% 。(2) 15-19 歲組勞參率由 1978 年的 45% 顯著下降至 2003 年的 12% ，至 2008 年都維持在 10% 上下。 20-24 歲組勞參率由 1978 年的 65% 逐漸下降至 2005 年的 53% ， 自 2005 年始到 2008 年為止都在

53% 上下起伏。 其他各年齡組均呈現上升或持平之趨勢。

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台灣歷年勞動力參與率 - 按年齡組別分　 15~24 歲 25~44 歲 45~64 歲 65 歲以上

　 總 男 女 總 男 女 總 男 女 總 男 女

1978 53.53 56.79 50.78 69.54 97.39 40.90 61.01 86.43 27.07 9.48 16.82 2.47

1979 53.11 55.96 50.74 69.69 97.55 41.05 61.24 86.32 28.03 9.26 16.74 2.00

1980 51.84 53.87 50.20 69.93 97.52 41.62 60.55 84.94 28.62 8.48 15.27 1.78

1981 50.94 52.53 49.65 69.74 97.54 41.27 60.05 84.67 28.46 8.55 15.24 1.86

1982 50.25 51.73 49.05 70.37 97.32 42.81 59.78 83.80 29.23 8.48 14.88 2.01

1983 50.75 51.49 50.15 72.47 97.11 47.34 60.52 83.07 32.24 9.11 15.35 2.70

1984 50.25 50.54 50.02 73.66 97.18 49.68 60.98 82.87 33.99 9.07 15.04 2.80

1985 49.05 48.90 49.16 74.01 96.91 50.62 60.55 81.98 34.51 9.74 15.72 3.36

1986 49.57 48.52 50.44 75.55 96.74 53.91 60.61 81.04 36.20 10.53 16.66 3.89

1987 49.31 47.98 50.41 76.61 96.74 56.07 61.18 81.65 37.10 10.59 16.70 3.88

1988 47.10 45.43 48.47 76.44 96.86 55.59 60.87 81.92 36.48 9.64 15.21 3.43

1989 46.29 44.69 47.61 76.51 96.77 55.84 60.64 82.13 36.08 10.34 16.03 3.92

1990 43.93 42.19 45.36 76.19 96.53 55.43 59.65 81.08 35.62 9.77 14.80 4.02

1991 42.63 41.05 43.93 76.53 96.57 56.06 59.74 81.80 35.54 9.93 14.92 4.12

1992 41.55 40.83 42.15 77.39 96.61 57.71 60.24 82.39 36.34 9.69 14.48 4.07

1993 39.65 38.46 40.68 77.68 96.28 58.74 60.09 82.17 36.63 9.83 14.72 4.00

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台灣歷年勞動力參與率 - 按年齡組別分　 15~24 歲 25~44 歲 45~64 歲 65 歲以上

　 總 男 女 總 男 女 總 男 女 總 男 女

1994 39.78 38.84 40.60 78.15 96.12 59.87 60.24 82.37 37.12 9.68 14.38 4.04

1995 38.46 37.93 38.93 78.21 95.83 60.35 60.83 82.96 38.11 9.79 14.39 4.24

1996 37.40 36.44 38.25 78.60 95.41 61.60 60.87 82.44 39.04 8.95 13.05 3.98

1997 36.88 36.07 37.59 78.80 95.38 62.04 61.20 83.01 39.34 8.76 12.87 3.86

1998 35.96 34.76 37.01 79.17 95.18 62.98 60.81 82.80 38.91 8.51 12.45 3.89

1999 36.56 35.29 37.69 79.36 94.81 63.72 60.35 81.09 39.70 7.92 11.49 3.84

2000 36.28 35.28 37.18 79.60 94.54 64.52 59.80 80.12 39.62 7.71 11.25 3.73

2001 35.47 33.56 37.21 79.71 94.09 65.31 59.13 78.93 39.47 7.39 10.91 3.52

2002 35.29 32.75 37.59 79.97 93.57 66.33 59.04 78.35 39.91 7.79 11.54 3.78

2003 33.91 30.79 36.76 80.34 93.12 67.55 59.58 78.05 41.31 7.78 11.38 4.01

2004 33.52 30.77 36.05 81.25 93.30 69.25 59.96 78.10 42.03 7.42 10.83 3.93

2005 32.61 29.65 35.35 81.87 93.19 70.62 60.24 78.12 42.59 7.27 10.66 3.86

2006 31.48 28.46 34.35 82.98 93.34 72.75 60.01 77.61 42.68 7.58 11.18 4.04

2007 31.10 28.13 33.96 83.41 92.99 73.98 60.55 77.25 44.13 8.13 11.95 4.45

2008 30.17 27.81 32.47 83.81 92.94 74.83 60.83 76.89 45.08 8.10 11.74 4.64

2009 28.62 25.72 31.48 84.19 92.98 75.58 60.25 75.65 45.17 8.05 11.95 4.40

2010 28.78 26.46 31.06 84.72 93.15 76.51 60.31 75.36 45.61 8.09 12.07 4.43

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台灣歷年勞動力參與率 - 按年齡組別分

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台灣歷年勞動力參與率 - 按教育組別分　 國中及以下 高中職 大專及以上

　 總 男 女 總 男 女 總 男 女

1978 59.36 83.86 37.13 54.36 62.82 43.64 63.34 68.37 53.79

1979 59.17 83.74 37.05 55.29 64.27 44.24 62.92 68.56 52.48

1980 58.43 82.82 36.67 55.07 64.32 44.25 64.08 70.19 53.03

1981 57.61 81.99 35.85 55.33 65.22 43.90 64.83 71.15 53.91

1982 57.60 81.68 36.09 55.75 65.62 44.61 65.09 71.02 54.85

1983 58.93 81.36 38.92 57.15 66.61 46.66 66.09 71.26 57.44

1984 59.17 80.61 40.06 58.13 67.72 47.66 66.51 71.84 57.67

1985 58.80 79.78 40.04 57.96 67.55 47.60 66.77 71.87 58.42

1986 59.43 79.00 41.81 59.46 68.40 50.04 67.35 72.20 59.47

1987 59.72 79.04 42.29 60.46 69.20 51.27 67.74 72.02 61.17

1988 58.46 78.35 40.61 60.42 69.44 51.02 67.58 72.27 60.45

1989 57.96 77.88 40.07 60.91 70.51 50.99 67.52 72.54 59.94

1990 56.69 76.86 38.71 60.51 70.48 50.23 66.40 71.19 59.29

1991 56.22 76.40 38.12 60.65 70.66 50.39 66.80 71.46 60.01

1992 56.13 75.91 38.33 60.93 71.23 50.44 67.22 72.18 60.12

1993 55.11 74.65 37.63 60.70 70.45 50.76 66.71 71.32 60.22

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台灣歷年勞動力參與率 - 按教育組別分　 國中及以下 高中職 大專及以上

　 總 男 女 總 男 女 總 男 女

1994 54.80 73.96 37.56 61.00 70.90 50.94 67.52 71.21 62.42

1995 54.04 73.03 36.88 60.94 70.91 50.82 67.65 71.50 62.60

1996 52.69 71.04 36.24 61.12 70.64 51.40 68.27 72.10 63.45

1997 51.98 70.02 35.82 61.08 71.09 50.96 68.75 73.21 63.24

1998 51.05 69.06 34.84 61.12 71.11 51.11 68.36 72.70 63.16

1999 50.26 67.71 34.62 61.36 71.21 51.50 67.98 71.96 63.21

2000 49.42 66.73 33.94 61.40 71.30 51.49 67.65 71.26 63.35

2001 48.51 65.70 33.14 61.38 70.68 52.14 66.40 69.79 62.41

2002 47.96 64.95 32.77 61.90 71.14 52.81 65.91 69.16 62.14

2003 47.24 63.47 32.64 62.43 71.64 53.42 65.43 68.51 61.95

2004 46.39 62.38 31.96 63.41 72.66 54.43 65.75 68.83 62.32

2005 45.53 61.43 31.24 63.45 72.67 54.46 66.40 69.18 63.35

2006 44.34 59.72 30.53 63.52 72.34 54.93 67.38 70.21 64.30

2007 43.88 59.01 30.34 63.95 72.24 55.82 67.63 70.36 64.71

2008 42.87 57.85 29.46 63.64 72.02 55.40 68.18 70.85 65.35

2009 41.67 56.22 28.61 62.61 71.13 54.22 68.40 70.82 65.89

2010 41.62 56.00 28.67 62.25 70.87 53.78 68.43 71.17 65.64

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台灣歷年勞動力參與率 - 按教育組別分

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台灣歷年勞動力參與率 - 按婚姻別分　 未 婚 有配偶或同居 離婚、分居或喪偶

　 總 男 女 總 男 女 總 男 女

1978 59.18 58.44 60.19 60.50 89.60 31.94 30.88 55.07 19.00

1979 61.38 62.26 60.30 60.48 89.56 31.87 29.13 52.65 17.87

1980 60.20 60.80 59.48 60.36 88.95 32.19 28.49 50.56 18.21

1981 59.75 60.41 58.95 59.91 88.65 31.72 28.32 49.39 18.45

1982 59.24 59.93 58.41 60.29 88.13 32.97 28.35 48.66 19.07

1983 59.58 59.82 59.29 62.12 87.77 36.96 30.25 49.52 21.13

1984 59.04 59.49 58.50 63.06 87.44 39.04 31.85 50.14 23.14

1985 58.31 58.76 57.78 63.10 86.91 39.68 32.10 49.81 23.63

1986 58.49 58.47 58.51 64.42 86.74 42.52 33.05 49.83 24.79

1987 58.98 59.17 58.75 65.07 86.55 43.91 33.46 49.77 25.49

1988 58.17 58.80 57.42 64.33 85.91 42.98 33.31 49.61 25.48

1989 58.11 59.13 56.88 64.16 85.63 42.94 33.96 50.72 25.73

1990 56.78 58.01 55.30 63.40 84.76 42.30 34.44 51.06 26.07

1991 56.30 57.77 54.53 63.50 84.84 42.47 34.90 51.20 26.69

1992 56.01 58.04 53.55 64.00 84.67 43.65 35.20 51.55 26.94

1993 54.58 56.33 52.45 63.98 83.97 44.29 34.62 50.18 26.72

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台灣歷年勞動力參與率 - 按婚姻別分　 未 婚 有配偶或同居 離婚、分居或喪偶

　 總 男 女 總 男 女 總 男 女

1994 54.96 56.92 52.56 64.02 83.20 45.13 34.53 50.05 26.71

1995 54.60 56.65 52.12 63.84 82.80 45.18 34.80 50.50 26.87

1996 54.14 55.96 51.94 63.71 81.73 45.95 34.91 50.52 27.17

1997 54.01 56.27 51.32 63.68 81.55 46.09 34.41 49.53 26.89

1998 53.85 55.83 51.50 63.45 81.12 46.06 33.75 48.43 26.70

1999 54.51 56.28 52.40 62.89 79.80 46.28 33.66 48.42 26.50

2000 54.69 56.35 52.71 62.40 79.00 46.14 33.97 48.79 26.68

2001 54.25 55.33 52.98 62.02 78.00 46.26 33.60 48.04 26.56

2002 54.85 55.67 53.89 61.91 77.37 46.64 34.15 48.93 26.88

2003 55.04 55.49 54.52 61.78 76.67 47.10 35.10 49.53 27.87

2004 56.00 56.62 55.28 61.92 76.21 47.77 35.56 50.39 28.12

2005 56.86 57.18 56.49 61.72 75.77 47.75 35.87 50.19 28.97

2006 57.38 57.56 57.17 61.70 75.12 48.35 36.49 51.59 29.24

2007 58.02 58.14 57.89 61.84 74.68 49.10 37.19 51.59 30.22

2008 58.64 58.88 58.38 61.53 73.99 49.11 37.59 51.60 30.88

2009 58.81 58.88 58.74 60.93 73.05 48.92 37.52 51.11 30.93

2010 59.74 60.01 59.43 60.70 72.54 49.03 37.63 51.78 30.76

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台灣歷年勞動力參與率 - 按婚姻別分

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Trends in Hours of Work:

(1) 平均每人每週主要工作工時在 1993-2000 年間均為 46 小時左右，在 2001-2007 年維持在 44 小時附近，到 2009 年七月時下降至為 43.46 小時， 2010 年 1 月則上升至 44 小時。

男性平均工時由 1978 年的每週 50 小時下降至 2003 年的 44.96 小時，之後有稍微增加，到2010 年 1 月時又降為為每週 44.2 小時。

女性平均工時則由 1978 年的每週 46 小時上升為 1993 年的 46.47 小時，之後下降至 2008 年的43.35 小時，到 2010 年 1 月時為 43.73 小時。 15

臺灣地區就業者平均每人每週主要工作時數

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年份 總計 男 女 年份　 總計 男 女

1993 47.36 47.90 46.47 2002 44.64 44.74 44.50

1994 46.18 46.65 45.42 2003 44.75 44.96 44.44

1995 47.02 47.46 46.31 2004 45.14 45.48 44.67

1996 46.46 46.78 45.97 2005 44.97 45.34 44.46

1997 45.26 45.51 44.87 2006 45.12 45.56 44.53

1998 46.34 46.56 45.99 2007 45.02 45.46 44.45

1999 46.30 46.45 46.07 2008 43.83 44.19 43.35

2000 46.09 46.25 45.86 2009 43.42 43.60 43.19

2001 44.93 45.05 44.74 2010 43.60 43.96 43.15

2. A THEORY OF THE DECISION TO WORK

The decision to work is ultimately a decision about how to spend time.

Spend time in pleasurable leisure activities Use time to work (working for pay)

The discretionary time we have (24 hours – time spent eating and sleeping) can be allocated to either work or leisure.

Demand for Leisure Supply of Labor.17

Basically, the demand for a good is a function of three factors:

1. The opportunity cost of the good.

2. One’s level of wealth.

3. One’s set of preference.

The demand （ D ） for a normal good can be characterized as a function of opportunity cost （ C ） and wealth （ V ）

D = f（ C, V ）18

Where f depends on preferences.

Demand for Leisure:

(1) The opportunity cost of an hour of leisure is very closely related to one’s wage rate.

For simplicity, we shall say that leisure’s opportunity cost is the wage rate.

(2) Economists often use total income as an indicator of total wealth, since the two are conceptually so closely related.

Demand for leisure function becomes

DL = f（ W, Y ）19

(1) If income increases, holding wages （ and f） constant, the demand for leisure goes up.

If income increases （ decreases ） , holding wages constant, hours of work will go down （ up ） .

Income effect on hours of work is negative.

Income Effect =

ww

20

0

WYH

THE EFFECT OF A CHANGE IN NONLABOR INCOME ON HOURS OF WORK

An increase in nonlabor income leads to a parallel, upward shift in the budget line, moving the worker from point P0 to point P1. If leisure is a normal good, hours of work fall.

F1

P1

$200

U1

U0

E1

E0

P0

70 80 110

F0

$100

Consumption ($)

Hours of Leisure

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THE EFFECT OF A CHANGE IN NONLABORINCOME ON HOURS OF WORK

An increase in nonlabor income leads to a parallel, upward shift in the budget line, moving the worker from point P0 to point P1. If leisure is inferior, hours of work increase.

F1

P1

$200

U1

U0

E1

E0

P0

7060 110

F0

$100

Consumption ($)

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(2) If income is held constant, an increase （ decrease ） in the wage rate will reduce （ increase ） the demand for leisure, thereby increasing （ decreasing ） work incentives.

Substitution effect on hours of work is positive.

Substitution Effect =

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0

YWH

Both Effect Occur When Wages Rise

Income effect: For a given level of work effort, he/she now has a greater command over resources than before because more income is received for any given number of hours of work.

Substitution effect: The wage increase raises the opportunity costs of leisure, and thereby increases hours of work.

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MORE LEISURE AT A HIGHER WAGE

When the income effect dominates the substitutioneffect, the worker increases hours of leisure inresponse to an increase in the wage.

G

U1

QD

D

R

P

U0

V

F

E

8575 1100 70 Hours of Leisure

Consumption ($)

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MORE WORK AT A HIGHER WAGE

When the substitution effect dominates the incomeeffect, the worker decreases hours of leisure inresponse to an increase in the wage.

G

D

D

F

E

U1

Q

R

P

U0

V

8070 1100 65

Consumption ($)

Hours of Leisure

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If income effect is dominant, the person will respond to a wage increase by decreasing his/her labor supply.Should the substitution effect dominate, the person’s labor supply curve will be positively sloped.

Wage

Desired hours of work

Backward-bendingW*

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3. A Graphic Analysis of the Labor-Leisure Choice

Two categories of goods: Leisure （ L ） and Money Income ( M )Since both leisure and money can be used to generate satisfaction, these two goods are to some extent substitutes for each other.

M

L

IC1

IC2

A

B

CD

Indifference Curve:

A curve connecting the various combinations of money income and leisure that yield equal utility.

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Indifference curves have certain specific characteristics:

1. Any curve that lies to the northeast of another one is preferred to any curve to the southwest because the northeastern curve represents a higher level of utility.

2. Indifference curves do not intersect.3. Indifference curves are negatively sloped.4. Indifference curves are convex. When money income is relatively high and leisure

hours are relatively few, leisure is more highly valued than when leisure is abundant and income relatively scarce.

5. Different people have different sets of IC’s 29

M

L

M

L

Person who place high value on an extra hour of leisure

Person who place low value on an extra hour of leisure

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The resources anyone can command are limited.

Budget constraint reflects the combinations of leisure and income that are possible for the individual.

M

L0

E

D

The slope of the budget constraint is a graphic representation of the wage rate.

Wage rate = OE/OD

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GRAPHING THE BUDGET CONSTRAINT

T

EV

wT+V

0Hours of Leisure

Consumption ($)

Budget Line

32

Note: Full income = wage rate * T →It represents the maximum attainable income.

M

L

IC1

IC*IC2

E

D

A*

B

C

At point B: MUL/MUM>W or MUL>W*MUM

L should increase

At point C: MUL/MUM<W or MUL<W*MUM

L should reduce, or H should increase

•An indifference curve that is just tangent to the constraint represents the highest level of utility that the person can obtain given his or her constraint.

IC2 ： impossible under current condition IC1 ： possible, but higher level of utility can be attainedIC* ： utility-maximized levelA* ： utility-maximization point

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The Decision Not to WorkWhat happens if there is no point of tangency?

M

L

E

D

The person’s IC are at every point more steeply than the budget constraint.Pt. D is not a tangency point. There can be no tangency if the IC has no points at which the slope equals the slope of the budget constraint.

At this point （ D ） the person chooses not to be in the labor force.

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TO WORK OR NOT TO WORK?

Are the “terms of trade” sufficiently attractive to “bribe” a worker to enter the labor market?

Reservation wage: the lowest wage rate that would make the person indifferent between working and not working.

Rule 1: if the market wage is less than the reservation wage, then the person will not work.

Rule 2: the reservation wage increases as nonlabor income increases 35

THE RESERVATION WAGE

H

Y

GX

UH

E

U0

Hours of LeisureT0

Has Slope -whigh

Has Slope -w

Consumption ($)

36

The Income Effect

Nonlabor income: Even if this person worked zero hour per day, he/she will have this nonlabor income.

M

L

IC1

IC2

E

D

AB

Note that the new constraint is parallel to the old one.

→The increase in nonlabor income has not changed the person’s wage rate.

Pure income effect: The income effect is negative; as income goes up, holding wages constant, hours of work goes down.

37

Income and Substitution Effects with a Wage IncreaseThe wage increase would cause both an income and a substitution effect; the person would be wealthier and face a higher opportunity cost of leisure.

N1→N3: income effect → L↑, H↓N3→N2: substitution effect →L↓, H↑N1→N2: observed effect

Substitution effect dominates. L↓, H↑

Income effect: Had the person received nonlabor income, with no change in the wage, sufficient to reach the new level of utility, he/she would have reduces work hours from N1 to N3.

38

N1→N3: income effect →L↑, H↓N3→N2: substitution effect →L↓, H↑N1→N2: observed effect

Income effect dominates. L↑, H↓

Note: The differences in the observed effects of a wage increase are due to differences in the shape of the indifference curve. i.e., different preference.

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• Empirical Findings on the Labor/Leisure Choice

(1)The time-series study can be used to look at trends in labor force participation rates and hours of work over time.

(2)The cross-section study can be used to analyze the patterns of labor supply across individuals at a given point in time.

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4. POLICY APPLICATION

Virtually all government income maintenance programs-from welfare payments to unemployment compensation-have work-incentive effect.

(1) Income Replacement Programs

Unemployment insurance, worker’s compensation, and disability insurance might be called income replacement programs. →All these programs are intended to compensate workers for earnings lost owing to their inability to work.Note: All these programs in the U.S. typically replace roughly just half of before-tax lost earning. The reason for incomplete earnings replacement has to do with work incentives. 41

Replacing all of lost income could result in overcompensation by generating a higher level of utility than before the loss of income, and would motivate the recipients of benefits to remain out of work as long as possible.

M

L

IC1

IC2

E0

T

When employment ceases, the worker receives benefits equal to E0, he/she will be at pt. T on a higher IC.

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（ 2 ） Actual Income Loss vs. “Scheduled” Benefits Actual Income Loss: Workers who are either totally or partially disabled receive benefits that replace their actual lost earnings.

M

L

D

A

BCE0

If the injured worker earned E0 before injury and workers’ compensation replaced all earnings loss up to E0, then workers’ compensated budget constraint would be ABCD line.

Note: Throughout the horizontal segment BC, the individual’s net wage is zero. When people cannot increase their income by working, there is usually no incentive to work.

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Grand benefit according to some schedule without regard to the individual’s actual earnings loss.→ Budget constraint BE.

Using an impersonal schedule of disability benefits preserves at least some incentive to work because benefits are not reduced if earnings increase.

→ There are greater incentives to work if benefits are scheduled than if benefits are calculated to completely replace earnings losses.

Scheduled benefits cause only an income effect. However, if actual earnings loss were to become the benefit, there would be an income effect and substitution effect, and both would work in the same direction. The benefits would simultaneously increase income while reducing the wage rate to zero.

L

D

A

BC

M

G

E

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5. CHILD CARE, COMMUTING, AND THE FIXED COSTS OF WORKING

(1) Fixed Monetary Costs of Working

not work: at point a with utility U1

ab: fixed per-period monetary cost

→ If the individual works, the budget line starts from point b. 45

a. How large does the wage rate need to be to induce this person to work for pay?

→The slope of the budget line bd represent the wage such that any decrease in this wage will cause the individual to drop out of the labor force. This is because utility U1 will no longer be attainable if he/she work any hour.

→The wage represented by the slope of bd is this person’s reservation wage-the lowest wage for which he/she will work.

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b. What would happen to the reservation wages if the fixed costs were to increase to ae?

→An increase in the fixed costs of work will tend to raise the reservation wage of potential workers. Consider the change from bg to ef:

→Increasing fixed costs of work will tend to increase the hours of work for some workers but cause others to drop out of the labor force.

→The net effect on labor supply is ambiguous a priori.47

(2) Fixed Time Costs of WorkingIf the individual does work he/she incurs fixed time costs ab. →The maximum number of hours a day available for work or leisure is T1.

At wage represented by bh, he/she would be indifferent between working (pt D) and not working (pt a). reservation wage 48

Suppose that the fixed time costs of work increase from ab to ad, then as long as leisure and income are both assumed to be normal goods, hours of both work and leisure time will be reduced.

The increase in fixed time costs of work has an income effect that reduces the worker’s demand for both leisure and the goods income will buy. Given a constant wage rate, a fall in income implies that hours of work have been reduced.

Note: The increase in time cost has two important consequences:

（ a ） It reduces full income from og to ok.（ b ） It reduces total time available for either leisure or work so long as the individual continues to work. 49