Labour Economics

Show how the economic theory of consumer behaviour can be applied to study an
individual’s labour supply decision. Using simple graphs or otherwise, explain how
the impact of a rise in the wage rate can be understood using the Slutsky
decomposition. In lectures we studied the paper by Claudia Goldin (2006), “The
Quiet Revolution that Transformed Women’s Employment, Education, and Family.”
Explain in detail how supply and demand factors influenced developments in
female labour in the US through the twentieth century. In your answer explain how
shifts in the income and substitution effects can help us understand these
developments. Does Goldin argue that the catch up for women relative to men has
stalled in the more recent time period?
Classic consumer theory e.g. preferences for oranges and apples can be applied to
work, where consumer face a trade off and have a budget constraint as well as
making optimising decisions. With the fundamental assumption being that people
like leisure and consumption, disliking work. So, the consumers problem is to
maximise utility: U = U(C,L) where C = consumption and L = Leisure. However, they
face a budget constraint: C = wh + V where w = wage rate, h = hours worked and V
= endowment income. Endowment income is any extra income that you have.
In this figure you can see the mapped points
at which individual indifferent between
different combinations of consumption ad
leisure. So here, reducing consumption (Y4 –
Y3) needs to be offset by an increase in
leisure (H4 – H3) to maintain utility.
The Slutsky decomposition relates changes in Marshallian (uncompensated)
demand to changes in Hicksian (compensated) demand, which is known as such
since it compensates to maintain a fixed level of utility. The equation demonstrates
that the change in the demand for a good, caused by a price change, is the result of
two effects: the substitution effect and the income effect. The impact of an increase
in wage rate can be understood through the income and substitution effect.
Through the income effect there is more money to spend therefore it reduces the
labour supply as there is less need to work to be able to consume. Here we are
assuming that leisure is a normal good. In regards to the substitution effect, since
the wage rate has increased, the price of leisure has risen. Thus, when deciding
how to allocate time resources to work and leisure, leisure has become less
attractive.
Goldin begins to argue that prior to the 1940’s employed married women came
disproportionately from the lower part of the education distribution as their identities
weren’t found in their occupations and their decisions were made as secondary
workers. As the average married woman worker was less than the educated
population average, this suggested that the income effect was much larger than the
substitution effect. From the 1910’s to the 1940’s, the emergence of “nice jobs” and
growth in education level caused the supply of potential workers to increase greatly.
In addition to this, changes in household production technology throughout the
1920’s and 1940’s altered female labour supply, along with part-time work
becoming available. Thus, the income effect declined as work for women became
more accepted and the substitution effect increased due to a rise in part-time work.
Shifts in the supply function in this period increase labour force participation as
supply was quite inelastic. Whereas, in the second half of the 1920’s to 1940’s
labour supply became more elastic and both supply and demand played a role.
Goldin then continues by explain that during the next phase between the 1950’s
and the 1970’s, female labour force grew. For married women aged 35-44, the
labour force grew from 25%-46%, this was due to to increases in availability of parttime work which led to an increase in those working under 35 hours a week.
However, there was notch advancement within job roles, as women didn’t expect to
be employed for most of their lives and have a career. So, women labour force
involvement increase but wages didn’t increase by much as they were still
secondary household earners. From the 1970s onwards, female labour force
participation continued to grow, and more importance was placed on a career.
Goldin explain how there was an increase in number of female college graduates
and attendees comparative to men and there was a shift in studying more
professional subject as opposed to traditional ‘female’ subjects. This ensure
females gained greater experience and increased returns to experience
comparative to men. This caused an increase of women’s earnings relative of mens
from the 80’s onwards.
Goldin goes on to argue that the catch up for women relative to men has stalled in
the more recent time period. The female labour force participation rate was no
longer soaring, and levelled off around 1990. In addition, participation rates for
women with infants had declined. Also, the “natural rate” of participation has not
been reached in thirty-something year old groups. Additionally, women in their 20’s
had very high rates of participation, however the rate fell flat since 1990.

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