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Assets,
and
Subsistence,
Curve
By
The
Supply
Labor
of
621
622
SEPTEMBER 1973
C and R as C=C'-S
and R= R'-T. We
VOL. 63 NO. 4
dC
R
-f(C,
R)
(2)
- = f(C, R)f1(C, R)
dR2
f2(C, R) > 0
R + L = D-T
= D'
C +wR = wD'+
where w=W/P.
A-S
if we carry the
unit, such as a
our analysis is
as to self-em-
623
(5)
is satisfied, C and R cannot both be positive, and the functionf is not defined.
We assume that the individual chooses
the most preferred combination that he
can attain, given that he is able to survive.8 Necessary and sufficient conditions
for this to be the bundle (Co, R0), given
(5), are that COand Ro satisfy the equations (2) and (4), together with
f(Co, Ro) = w
(6)
--
(8)
--=
aw
f/(ffl-f2)
(D'
R)-
AA
dlR
d9R
(9w
-1/(ffl
-f2)
(D'
R)
(9:AA
(9)
= 1/(ffl
aw
-f2)-
(D' - R)-
AR
dA
624
wv
(C+ 7R)
AL
(10) -
c)w
[C(o--1)+(A -S)]
where o-is the elasticity of substitution between net consumption and net leisure.10
So the slope of the supply curve depends
on the signs of (u-1) and of (A-S).11 In
the special case o-=1, where the preferences imply a Cobb-Douglas type of utility
function, the sign of the slope of the supply
curve hinges entirely on the sign of
I
SEPTEMBER
1973
3T
dw
where
=-(1
x
-as)
h"(x) *x
h' (x)
and h(x) is the marginal rate of substitution as defined in the Appendix. Then,
using the definition of T, we have
dw
and since our assumptions about the preference map impose no restrictions on the
sign or magnitude of E, nothing a priori
can be said about the direction of change
of o- as wages vary. Thus, if we do not
restrict a- to a constant value, the supply
curve can assume virtually any shape and
therefore will have no testable implications.
The second step in specifying preferences, then, is to constrain a- to a constant
value. This will also further simplify matters and allow for easy graphical interpretation. The marginal rate of substitution
takes the particular form
(11)
f(C, R) =
1/a
/1 -\SC\
_) ()
for d
=
defined for O<a < l and -1 <d < oo. The elasticity of
substitution is then equal to 1/(l-+F). This specification is a generalization of the class of utility functions
generating the so-called linear expenditure system of
demand equations introduced by Laurence Klein and
Herman Rubin, and more recently adopted by Richard
Stone.
VOL. 63 NO. 4
625
a >1
=1
www
(A-
_ f;
>
A-S)1/e;
---4
--X
D'
D'
oD'
D'
,,;D'
D'
D'
L'
www
(A-S)0
IVVI
D'
w
jw
v|::
(A - S) ' O
DL
L
cKD'
D'
FIGURE1
626
SEPTEMBER
1973
(12)
Y)
A)
t(Yb-
(14)
f(C, R)
(1- t)7v
1
R
aL
- 1)= w [C + (1-t)wR]
9w
+ [(1-t)A
-(S-tYb)1}
VOL. 63 NO. 4
the guaranteed minimum income. As before, the sign of the term in the outer
brackets determines the sign of d&LI&w.
For the case where o-= 1, the supply curve
is positively sloped if net nonlabor income
exceeds the "net" subsistence term. It is
not possible to determine a priori the effect
of the tax plan on this final term, since the
tax lowers net nonlabor income while the
existence of the income floor weakens the
force of the survival requirements.
Given, however, the notion of a minimum survival requirement, it would seem
that if a guaranteed income has any meaning at all, it has to at least suffice for survival. We want, then, to examine the case
where I Yb > S. The terms in square
brackets in equation (15) must then be positive. The possible cases then reduce to
those in the first row of Figure 1 (with trivial modifications in interpretation of the
terms). The supply curve will always
slope upwards initially, and may slope upwards throughout. Only when o- is sufficiently less than one is it possible for the
labor supply to turn into a negatively
sloping curve.
To understand the effects of the plan
more completely, it is helpful to find the
effect of a change in the tax rate on the
supply of labor. This can be done by differentiating equations (13) and (14) partially with respect to the tax rate t. The
result of these operations is shown in
equation (16).
(16)
- = R[C(1-v) + (S-_Yb)]
At
(I1-t) [C + (1- t)wR]
raL
Again the effect on the labor supply cannot be determined a priori, and it would
take another series of nine figures to depict
all of the possibilities. Notice that it is
the break-even level of income, and not the
floor (tY&) on income, that is opposed to
survival consumption S. Since the breakeven level Yb must be greater than the floor
tYb, and the floor in turn must exceed sub-
627
a(Yb
AL
-
-tR
[C + (1-t)wR]
628
SEPTEMBER
1973
VOL. 63 NO. 4
60
200
58.
log. w
175
54
629
57
0 55
53
*52
50
51
150
49.
48.
*46
*47
125
40
39
\.
38
100
34
*42
41
37
335
*36
33?12
*31
30
75
29
26
.
23
19
13
50
42
44
46
485052
5456
58
60
FIGURE2
630
SEPTEMBER 1973
that as wages go up the divergence with respect to hours of work tends to disappear
as between the capitalist and noncapitalist
classes, i.e., between those with A -S>O
and those with A - S < 0. Casual notions
suggest that working habits of wealthier
individuals in the United States do not
differ much from those of less well-off
individuals. Casual notions also suggest
that the "leisure" class is quite prominent
in poor countries where the real wages are
low. These notions, if correct, tend to support the hypothesis that av= 1. Of course, a
more careful and systematic analysis of the
evidence is necessary to determine whether
these casual notiong are correct.
V. Some Further Comments
The attainable (survival) consumption
set used in the preceding analysis was of a
simple, "fixed coefficient" nature. A more
complicated (and perhaps more realistic)
formulation, allowing some substitution
between the two commodities in meeting
the requisites of survival, would in principle cause few difficulties in the formal
theory.22 However, the notion of net
consumption (above survival) would then
have little intuitive appeal, and it thus
might be impossible to find a formulation
of preferences yielding simple expressions
like equations (8) and (9) for the slopes
of the demand curves. The assumptions
used do, however, seem to strike a reasonable balance between complicating the
analysis severely and ignoring subsistence
needs completely, since they allow simple
types of preferences to generate a wide
variety of types of demand (supply)
curves.
Thus Hanoch verges on an error when
he asserts (p. 639) that CES utility functions cannot produce backward bending
22 Provided that the new attainable set is convex.
Otherwise, it may be impossible to even define convex
preferences over the entire set of attainable consumption bundles. See Arrow and Gerard Debreu (1954)
and Debreu.
VOL. 63 NO. 4
631
To derive equation (10) it will be convenient to solve explicitly for the effects of
asset changes on the demands for C and R.
We can differentiate equations (4) and (6)
totally to get
dC + wdR =dA
f,dC+ f2dR
+ (D'
R)dw
dw
= fi/(ffl-f2)
aA
[-(D'-R)]
-a=fli(ffl-f2)
fll(ffl
f2)
*--
(C+S-
A)]
23
epY -
_A
11=-;I
f = Rf2
R=
C h'
R R
632
SEPTEMBER 1973
and we have
Ih' (C + hR)
=R->
R
R
(A4)
(A 4) ffl-f
(A 10) L
(A 5)
R
(C+wR)
and
AC
AA
(C+wR)
R(i)
dflf
Ch'
Rh
= Co
h/
fi
Equations (A5) and (A7) may then be substituted into (A2) to yield (A8).
(A 8)
1
AL
R
- = -2v (C + wR)
'aw
- [C(y- 1) + (A -S) ]
ACC
aw
(A 11)
L = aD'-
/A -S\
(1a)
(C + wR)
[R(o-
90.
Rh
which reduces to
REFERENCES
K. J. Arrow and G. Debreu, "Existence of
an Equilibrium for a Competitive Economy," Econometrica, July 1954, 22, 265-
(A 7)
\w
4R)
,=C
'
(1a
(A 6)
(j
7v,+ w
1) + D']
It can also be shown that no weaker specifications on the individual's preferences will
give these results.
The further assumption that the elasticity
of substitution is a constant yields the explicit supply function
VOL. 63 NO. 4
633