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• Retirement
• Household Production
2
Introduction
3
labour supply over the life cycle
4
Theoretical issues of evolutionary wages
5
The Life Cycle Path of Wages and Hours for a Typical
Worker
50 Age 50 Age
6
Intertemporal Substitution Hypothesis
7
Hours of Work over the Life Cycle for Two
Workers with Different Wage Paths
Wage Rate Hours of Work
100
Labor force participation rate
90
Male
80
70
Female
60
50
40
30
15 25 35 45 55 65
Age
9
Hours of Work over the Life Cycle, US data
(2005)
2,500
Male
Annual hours of work
2,000
Female
1,500
1,000
500
15 25 35 45 55 65
Age
10
labour supply over the business cycle
• Added-worker effect
- So-called “secondary” workers currently out of the
labour market are affected by a recession because
the main breadwinner becomes unemployed or
faces a wage cut
11
labour supply over the business cycle
12
Retirement
13
The retirement decision
Point E gives a
Consumption ($) worker’s leisure-
consumption bundle if
V80 F he retires at age 60.
Point F gives the
leisure-consumption
P
bundle if the worker
U1 never retires. A utility-
U0
maximizing worker
V60 E chooses point P, and
retires for 10 years.
0 10 20
Years of
Retirement
14
Effect of an increase in the wage on the
retirement decision
15
Effect of an increase in pension benefits on
retirement decision
An increase in pension
benefits rotates the
budget line around F.
Consumption ($)
It too generates income
and substitution effects,
but both effects
encourage the worker to
U1 retire earlier.
U0
F R
H
E
10 15 20 Years of
Retirement
16
Household Production
17
Allocation of Weekly Hours to Various Activities,
By Gender and Marital Status
19
Jack and Jill – unmarried opportunity sets
Market Market
Goods ($) Goods
($)
200
150
100 HH 250 HH
Goods ($) Goods ($)
(a) Jack’s Budget (b) Jill’s
Line Budget Line 20
Budget Lines and Opportunity Frontier of Married
Couple
At point E, Jack and Jill
Goods Market allocate all their time to
($) the HH sector. If they
wish to buy market
350 G goods, Jack gets a job
because he is relatively
more productive in the
labour market,
F generating segment FE
200
Jack’s of the opportunity
150
frontier. After he uses up
Jill’s all his time in the labour
E′ market, Jill then gets a
E job, generating segment
100 250 340 350 HH GF of the frontier.
Goods
($)
21
Who Works Where?
P
U P
U
P
U
HH HH HH
Goods ($) Goods ($) Goods ($)
(a) (b) (c)
22
Division of labour in the Household
23
Increases in the Wage Rate or Household
Productivity Lead to Specialisation
An increase
Market in Jack’s
Goods ($)
wage moves
the
P′
household
from point P
U′ to point P′
and Jack
specializes
in the labour
P U
market
HH
Goods
($)
24
Increases in the Wage Rate or Household
Productivity Lead to Specialisation
An increase in
Jill’s marginal
product in the
Market
Goods ($)
household
sector moves
the household
from point P to
point P′ and
P Jill specializes
P′
U U′ in the
household
sector.
HH
Goods ($)
25