Question

Recent analysis of US labor market data from the last 3 decades shows the following 4 trends. Describe how each one of these trends might reflect allocation of labor supply (labor force participation, desired work hours and utility) responses to underlying changes in wage rates (applying net substitution and income effects) in the paid labor market:

A) among the relatively lower paid (below median) work force, there is both an increase in annual work hours among those who have some attachment to the work force while also a rise in those worked zero annual hours (i.e., non-labor force participation);

B) average annual hours among salaried workers are lengthening more than the hours among hourly-paid workers;

C) rates of labor force participation among teenagers has declined;

D) rates of labor force participation among women with children rose markedly but then leveled off (became constant)

Answer 1

Labor force participation is the economically active population and among this labor force participation, the ones who have a job are called employed.

A)  An increase in annual work hours among those who have some attachment to the work force will increase the labor force participation. As this increase results in increasing the labor supply, at a given or same level of labor demand, there will be a fall in wage rates. It is because higher participation creates excess supply of labor, so there is a fall in wages so that market remains in equilibrium.

B) Increase in average annual hours among salaried workers will according to the theory have no effect on wage rates in the paid labor market mainly for 2 reasons:

• Wages of a salaried workers are decided on contract basis for an already specified period of time and hence can not be changed in the short-run.
• Increase in average annual hours among salaried workers will have no effect on wages of other type of labor (less-skilled or say daily wage workers) because their demand and supply remains intact.

C) If rates of labor force participation among teenagers declines, there will be a fall in labor supply, and for same labor demand, wages of existing workers must rise, to cover for excess demand. So wage rates rise.

D) Rates of labor force participation among women with children rose markedly but then leveled off (became constant): In this case, there will be one-time increase in wage rates as labor supply increases, and then wages stay at the same level. So, there will be one-off increase in wage rates.

Note that in all the above cases, it is not necessary that an increase (decrease) in wage will definitely result in increasing (decreasing) labor supply also. It depends on the magnitude of substituition and income effect. If substituition effect is more, individuals supply more labor once the wages increase. But if the income effect is more, as a result of higher wage, overall labor supply falls. It is because of the fact that the worker can earn the same income by working less hours.