U U N IT

2
Labour Supply

Unit Overview

In labour markets, the number of hours that individuals are willingly to provide is
determined by workers. The number of hours worked is jointly decided by workers
and firms. Workers respond to incentives offered by the real wage, non-wage benefits,
social safety net programs and their own preferences for work and leisure. In this unit,
we will first determine the size and characteristics of the labour force before examining
the neoclassical model of labour and leisure. We will then apply the neoclassical model
to real-world situations.

Learning Objectives

By the end of this Unit, you will be able to:

1. Compare trends in the labour force participation rate among Caribbean

countries and with the United States;

2. Explain indifference curves and budget constraints.

3. Outline how the utility maximizing choice is determined using the neoclassical
labour supply model;

4. Explain how individual and aggregate supply curves are constructed;

5. Examine policies which influence the worker’s labour-leisure decision.

19  © 2017 University of the West Indies Open Campus

 This Unit comprises three sessions as follows:

Session 2.1: Measuring the Labour Force.

Session 2.2: The Worker’s Preferences.

Session 2.3: The Labour Supply Curve: Theory and Applications.

Readings and Resources

Note to Student:

Some hyperlinks to resources may not open on clicking. If any link fails to open,
please copy and paste the link to your browser to view/download the resource.

Required Reading(s)

Borjas, G. (2013). Labor Economics (6th ed.). New York: The McGraw-Hill
Companies. Available at: [Link]
publications/books/LE/[Link]

Wiswall, M. (n.d.). Labor Economics (Undergrad) lecture notes. Available at: http://
[Link]/user/wiswall/teaching/undergrad_labor_lectures.pdf

Required Videos

EconplusDal. (2016, May 3). Individual labour supply curve (backward bending
labor supply curve. [Video File]. Available at: [Link]
watch?v=V9FtLDdtAgk

EconplusDal. (2016, May 7). Labour supply curve (Market and firm). [Video File].
Available at: [Link]

EconplusDal. (2016, May 13). Elasticity of the labour supply curve. [Video File].
Available at: [Link]

Prante, T. (2015, June 9). Unemployment rate and labor force participation rate. [Video
File]. Available at: [Link]

WSUECO6480. (2010, September 26). Labor Supply Theory Part 1A. [Video File].
Available at: [Link]

WSUECO6480. (2010, September 26). Labor Supply Theory Part 1B. [Video File].
Available at: [Link]

20  ECON3029 Labour Economics – UNIT 2

 WSUECO6480. (2010, September 26). Labor Supply Theory Part 2. [Video File].
Available at: [Link]

Suggested Readings

CARICOM. (2014). Women and men in CARICOM member states, labour force
statistics, volume I - Data series for 1980, 1990 and 2000 round of censuses.
Available at: [Link]

CARICOM. (2014). Women and men in CARICOM member states, labour force
statistics, methodological guide volume II - 1980-2002. Available at: [Link]
[Link]/[Link]

Kane, J. (n.d.). Notes for Chapter 6. In Introduction to labor economics course lectures.
Available at: [Link]

Kim, N. (2007). The impact of remittances on labor supply: The case of Jamaica. World
Bank Policy Research Working Paper, No 4120. Available at: [Link]
[Link]/curated/en/926051468044132562/pdf/[Link]

Imbens, G., Rubin, D., & Sacerdote, B. (2001). Estimating the effect of unearned
income on labor earnings, savings and consumption: Evidence from a survey of
lottery players. American Economic Review, 91(4), 778-794. [Available via
UWIlinC]

Juhn, C., & Kim, D. (1999). The effects of rising female labor supply on male wages.
Journal of Labor Economics, 17(1), 23-48. [Available via UWIlinC]

Suggested Videos

Marginal Revolution University. (2016, November 17). Labor Force Participation.

[Video File]. Available at: [Link]

21  ECON3029 Labour Economics – UNIT 2

22  ECON3029 Labour Economics – UNIT 2
 SSession 2.1

Measuring the Labour Force

Introduction
To correctly characterize the labour market, it is important to define key labour force
concepts and statistics. These concepts and statistics help us to understand the extent
to which labour is being utilized and hence they aid in understanding how the labour
market is performing. Once key labour force statistics have been defined, we will
then examine labour markets in the Caribbean to characterize recent trends in labour
supply in the region.

Key Labour Force Statistics

The supply of labour, or how many workers (hours) can be used by firms in the
production process, is determined by the size of the labour force. How do we determine
who is in the labour force? First, we consider the total population. Note that not
all members of the population are counted in the labour force due to household
characteristics or regulations which govern the labour market. For example, a 14-year
old might want to work full time but the regulations in the Caribbean do not allow
persons under the age of 16 to work in such jobs. To be counted in the labour force,
you must be of working age.

Of those who of working age and are legally allowed to work, some are excluded from
the labour force because they do not have jobs and are not actively looking for one.
This means that only persons who are of working age and who have a job (employed)
or are actively looking for one (unemployed) are counted in the labour force. The
relationship between these different measures are summarized in Figure 1.1 and the
official definitions which follow.

23  ECON3029 Labour Economics – UNIT 2

 Figure 2.1: Relationships between labor force concepts

Here are official definitions of these concepts (the numbers in parentheses correspond
to the numbers in Figure 1.1):

(1) The population is divided into two groups:

• The working-age population—the number of persons aged 16 years and older

who are not in jail, hospital, or other institutions.

• Persons too young to work (under 16 years of age) or in institutional care.

(2) The working-age population is divided into two groups:

• Persons in the labour force – number of persons available to work

• The labour force is the sum of employed and unemployed workers.

• Persons not in the labour force – number of persons not available to work

(6) To be counted as unemployed, a person must be in one of the following categories:

a. Without work but has made specific efforts to find a job within the last 4 weeks

b. Waiting to be called back to a job from which he or she has been laid off

c. Waiting to start a new job within 30 days.

24  ECON3029 Labour Economics – UNIT 2

 (7) An employed (E) person is an individual who is in the WAP and who has paid
employment – either by working for another individual or firm or by working for
themselves.

Labour Market Indicators

• The unemployment rate is the percentage of the labour force that is unemployed.
(U/LF)*100

• The employment rate is the percentage of the labour force that is employed.
(E/LF)*100

• The labour force participation rate is the percentage of the working-age

population who are members of the labour force. (LF/WAP) * 100 OR (U+E)/
WAP * 100

The Hidden Unemployed

The unemployment rate is supposed to measure the underutilization of labour
resources. However, this may be an imperfect measure because it excludes:

(a) Discouraged workers

A discouraged worker is a person who currently is neither working nor looking for
work but who has stopped looking for a job because of repeated failure to find one.

(b) Part-time workers who want full-time jobs

Many part-time workers want to work part time, but some part-time workers would
like full-time jobs. Therefore, some part-time workers are underemployed.

Critics argue that by including these measures, the unemployment rate would be a
better reflection of actual labour market conditions. Others argue that the employment
rate is a better indicator of conditions in the labour market because it shows how well
labour resources are being utilized. But there are persons who have no intention of
working in the formal market in the near future, such as students and home-makers,
who would not be represented by this measure.

Basic Facts about Labour Supply in the Caribbean

In the previous unit, you read a study on challenges and policies in labour markets in
the Caribbean by Downes (2006). A summary of labour market facts from that study
is presented here.

• Labour force participation rates have remained steady with only slight increases
over time in most countries. Recently, however the LFPR has declined slightly
in many countries. This pattern is similar for men and women. The labour force
participation rates for men is greater than that for women in the Caribbean.
(See Figure 1.2)

25  ECON3029 Labour Economics – UNIT 2

 • Youth unemployment rates have increased from 1991-1999. Youth
unemployment is therefore a serious economic issue for the region.

• Informal employment has increased in the Bahamas, Barbados, Belize, Grenada

and St. Lucia but has decreased in Jamaica and Trinidad and Tobago from 1991-
2000.

Figure 2.2: Labour Force Participation Rates in the Caribbean

Created using data from Table 2, Downes, A. S. (2006). Caribbean labour market challenges and
policies. CEPAL – SERIE Macroeconomia del desarrollo. Available from:

[Link]

26  ECON3029 Labour Economics – UNIT 2

 Reading
To learn more about measurements of the labour force, read the following
resources. The examples cited are from the United States but similar
definitions are used in the Caribbean.
Wiswall, M. (n.d.). Labor Economics (Undergrad) lecture notes, Section 2.3,
pages 10-17. Available at:

uu [Link]
[Link]

Suggested Reading
It is important to have reliable sources of unemployment data in the
Caribbean. The following is one such source. While each country will have
its own statistical agency which collects this data, the Caricom secretariat
compiles this data so data from all member countries can be easily
accessed. Please examine the section on Caricom for an overall picture
of the labour market in the region and the section on at least one of the
member states.
CARICOM. (2014). Women and men in CARICOM member states, labour
force statistics, volume I - Data series for 1980, 1990 and 2000 round of
censuses. Available at:

uu [Link]
Also read the accompanying guide which defines the labour force statistics
and explains the methods used to collect the data.
CARICOM. (2014). Women and men in CARICOM member states, labour
force statistics, methodological guide volume II - 1980-2002. Available
at:

uu [Link]

27  ECON3029 Labour Economics – UNIT 2

 FOOD FOR THOUGHT
We mentioned above that there is a recent trend of declining labour
market participation rates for men and women. There are competing
explanations for why this might be happening. However, what is the
long-term impact of declining labour force participation rates? Will wages
rise? Or will migration to the affected countries increase the labour force
participation rates?

Play Video
Watch the following video which explains how the unemployment rate
and labour force participation rates are calculated. Note that in calculating
the labour force participation rate, the presenter uses the term ‘eligible
population’ rather than the working age population.
Prante, T. (2015, June 9). Unemployment rate and labor force participation
rate. [Video File]. Available at:

uu [Link]

28  ECON3029 Labour Economics – UNIT 2

 ACTIVITY 2.1
Topic: Using Labour Statistics

1. The adult population of a city in Islandville is 9, 823,000 and there are

3,340,000 persons who are not in the labour force and 6,094,000 who are
employed.

(a)Calculate the number of adults who are in the labour force and the
number of adults who are unemployed.

(b)Calculate the labour force participation rate and the unemployment

rate.

2. Watch the following video and compare the trends in labour force
participation in the United States, as presented, with the trends in the
Caribbean as shown in Figure 2.2 or CARICOM (2014).
Marginal Revolution University. (2016, November 17). Labor Force
Participation. [Video File]. Available at:

uu [Link]

Session 2.1 Summary

In this Session, we defined some key concepts and statistics which characterize the
labour force. We applied these concepts and statistics to the labour market in the
Caribbean to determine current trends in the labour supply in the region by age and
by gender. Now that we have characterized the labour force, we will examine the
neoclassical model in Session 2.2 to understand how the statistics we observed in this
session are determined

29  ECON3029 Labour Economics – UNIT 2

30  ECON3029 Labour Economics – UNIT 2
 SSession 2.2

The Worker’s Preferences

Introduction
In this session, we will analyze the worker’s preferences and the ways in which this
impacts labour supply decisions. We will do so using the neoclassical model of labour-
leisure choice. This model explains how workers select the optimal combination of
leisure and work given limitations on their income.

The Neoclassical Model of Labour-Leisure Choice

The model assumes a worker who is representative of all workers in the economy. The
following characterizes the model:

• The worker consumes goods, C, and leisure, L. Note that leisure is time spent
not working.

• C is also the cost of the goods consumed (the cost of consumption goods is
normally p X C where p is the price of consumption goods; here we assume p
= 1) while L is the number of leisure hours consumed.

Indifference curves
• The Utility curve: U = f (C,L)

• There is an indifference curve for each level of utility:

• Indifference curves are downward sloping because consumers like both C and L.

• Higher indifference curves represent higher levels of utility.

• Indifference curves do not intersect.

• Indifference curves are convex to the origin.

The slope of the indifference curve represents the rate at which the consumer trades C
for L given a constant level of utility:

• The marginal utility of leisure, MUL, is the change in utility enjoyed by

the consumer when an additional unit of time is devoted to leisure, while
keeping C constant.

31  ECON3029 Labour Economics – UNIT 2

 • The marginal utility of consumption, MUC, is the change in utility enjoyed
by the consumer when an additional dollar is spent on consumption while
keeping L constant.

• The marginal rate of substitution (MRS) is the absolute value of the slope of
the indifference curve and is the ratio of marginal utilities:

The Budget Constraint

The worker cannot consume unlimited amounts of consumption goods and leisure
because of constraints on time, income (wage * hours worked or w*h) and non-labour
income, V.

• W is constant,

• Total time (T) is spent on work and leisure: T = h + L

• The budget constraint can therefore be written as:

C = wh + V = w(T-L) + V= (wT+V) – wL

• Combinations of C and L that are above or on the budget line lies in the consumer’s
opportunity set and are affordable.

• Because the worker has non-labour income, there is a combination of goods and
leisure that can be consumed if the worker does not enter the labour market.

• There is also the reservation wage which is the minimum wage acceptable to the
worker to induce him or her to supply at least one unit of labour.

• The slope of the budget constraint is w because this is the cost of…one hour of
leisure when the worker gives up one hour of work.

• A budget constraint can be kinked:

• A convex kink can occur if there is a tax exemption which applies up to a

specific income level. After this income level, additional income is taxed.
Workers who are like minded but who have different indifference curves will
cluster the outer portions of the kink. In this case, a small change in taxes or
wages will not change workers’ behavior.

• A concave kink can occur if workers receive over-time pay. Workers who
are like minded with different indifference curves will separate and move
to opposite sides of the budget line. In this case, a small change in taxes or
wages will have large effects on workers’ behavior.

32  ECON3029 Labour Economics – UNIT 2

 Implications of the model

• Differences in preferences are shown by the slope of the indifference curves (the
MRS):

• Steep indifference curves imply a high MRS and the worker is consuming
more goods and little leisure. The worker requires a high amount of C to give
up an additional unit of leisure.

• Flatter indifference curves means the MRS is low and the worker is
consuming more leisure and little goods. The worker requires a high amount
of L to give up an additional unit of consumption.

• The indifference curve exhibits diminishing rate of marginal utility.

The Hours of Work Decision

• The worker chooses the combination of consumption goods and leisure that
provides the highest level of utility given the income level.

• To maximize utility, the worker therefore chooses the bundle at the tangency of the
indifference curve with the budget constraint.

• This is also an interior solution because the tangency does not occur at either
corner of the opportunity set.

• This is also where the slope of the indifference curve is equal to the slope of the
budget constraint: w = –

• Note that for non-participants, tangency of the indifference curve and the budget
constraint is a corner solution because L = T.

Let us now consider the effects of a change in non-labour income and wages:

a. The effect of a change in non-labour income – suppose non-labour income,

V, increases so there is an upward and parallel shift of the budget constraint,
the worker moves to higher indifference curve. If leisure is a normal good (as
income increases, the quantity of the good consumed increases), the number
of hours worked, h, falls. If however, leisure is an inferior good (as income
increases, the quantity of the good consumed falls), h increases.

b. The effect of a change in wages – suppose w increases, then the budget

constraint pivots upward about the endowment point. (Please see Wiswall
(n.d.), Figure 6, page 8). The worker moves to a higher indifference curve. Due
to the increase in income, if leisure is a normal good, the worker buys more
of C and L. With more leisure, the number of hours worked, h, falls. This is
the income effect. There is also a substitution effect because the increase in
income makes leisure more expensive so consumers substitute leisure for work

33  ECON3029 Labour Economics – UNIT 2

 and h increases. Therefore, if the income effect dominates, h falls but if the
substitution effect dominates h increases.

Reading
Read the following to learn more about worker’s preferences as expressed
through the indifference curve and the budget constraint. Pay particular
attention to the example that is worked through in section 4.8.

Wiswall, M. (n.d.). Labor Economics (Undergrad) lecture notes, Sections

4.1-4.8, pages 46-63. Available at:

uu [Link]
[Link]

The following contains the graphs to accompany the resource listed above.
Wiswall, M. (n.d.). Labor Economics (Undergraduate) lecture notes*Figures,
pages 6-8. Available at:

uu [Link]
[Link]

FOOD FOR THOUGHT

The neoclassical model of the labour-leisure choice assumes that a
rational representative worker can provide insights as to how all workers
in the labour market behave. It also assumes that there are no frictions
which may hinder the optimal level of labour hours that workers are
willing to supply, save for government programs. This ignores the
role of childcare costs, commuting costs and other non-time costs of
employment. Can you think of other non-time costs of employment which
may affect the labour supply decision in the Caribbean?

34  ECON3029 Labour Economics – UNIT 2

 Suggested Reading
For another discussion of the neoclassical supply model, read the following
material. Some policy issues discussed, like the Earned Income Tax Credit
are American but can be useful in understanding how various policies affect
the labour supply decision.
Kane, J. (n.d.). Notes for Chapter 6. In Introduction to labor economics
course lectures. Available at:

uu [Link]

Play Video
The following video is the first in a series on the theory of labour supply. Pay
attention to the explanations given for the motivation behind the decision to
work, the leisure-labour trade off and indifference curves.
WSUECO6480. (2010, September 26). Labor Supply Theory Part 1A. [Video
File]. Available at:

uu [Link]

The following video is the second in a series on the theory of labour supply.
Focus on how the tangency condition determines the number of hours the
worker devotes to leisure vs work and how the income and substitution
effect influences how the worker responds to a rise in wages. The video also
previews how the neoclassical model can be applied to income maintenance
programs from 7:44 to 9:51 minutes that will be covered in greater detail in
Session 2.3.

WSUECO6480. (2010, September 26). Labor Supply Theory Part 1B. [Video
File]. Available at:

uu [Link]

35  ECON3029 Labour Economics – UNIT 2

 Play Video (contined)

The following video is the third in a series on the theory of labour supply.
It explains why some of the model’s assumptions are not always observed
in practice such as the non-time costs of working like childcare and
commuting. Focus on these observed conditions in the labour market affects
the neoclassical model. Further, we have focused on a static model which
describes the labour supply decision at one point in time. Note how the
model can be used to examine trends over time.

WSUECO6480. (2010, September 26). Labor Supply Theory Part 2. [Video

File]. Available at:

uu [Link]

36  ECON3029 Labour Economics – UNIT 2

 ACTIVITY 2.2
Topic: Review Questions

1. What is the significance of the slope of the worker’s budget line?

2. For persons who are currently not in the labour force, where on the
budget line is their optimal choice located? (Hint: consider the interior vs
the corners of the budget constraint)

3. How does a worker determine the optimal number of hours to work, if

any?

4. What is the significance of the slope of the indifference curve?

5. What happens to the budget line when the wage rate increases?

6. Are workers indifferent among all their indifference curves?

7. Which effect will cause the worker to enjoy less leisure time and work
more?

Discuss your answers with your peers in the Unit 2 discussion forum.

Session 2.2 Summary

In this Session, we examined the neoclassical model of labour-leisure choice. We

learned that the optimal labour-leisure decision is determined by the intersection of
the worker’s indifference curve which represents the workers’ preferences and the
budget constraint. However, the worker receives non-wage income in many cases
which means that consumption is rarely zero if the worker supplies no labour hours.
In the next session, we will apply the neoclassical model of labour-leisure choice to
real world situations.

37  ECON3029 Labour Economics – UNIT 2

38  ECON3029 Labour Economics – UNIT 2
 SSession 2.3

The Labour Supply Curve: Theory and

Applications

Introduction
So far, we have discussed how key labour market statistics are calculated, and how
workers decide how many hours that they are willing to supply in the labour market.
In this unit, we will apply the neoclassical model to real world situations. Specifically,
the neoclassical model of leisure-labour choice will be used to examine the impact of
various policies on the labour market.

The Labour Supply Curve

• The relation between the number of hours worked and the wage rate is summarized
in the supply curve. The shape of the supply curve depends on the income and the
substitution effect:

• If the substitution effect dominates at lower wages and the income effect
dominates at higher wages, the supply curve is upward sloping at the initial
portions of the supply curve but backward sloping at the upper portions of
the supply curve.

• At every wage level, if we horizontally sum the number of hours worked for each
worker, the aggregate supply curve can be derived.

• The workers must be offered a wage greater than the reservation wage to entice
them to enter the labour market.

The Labour Supply Elasticity

The responsiveness of the number of hours worked to changes in the wage rate is
defined as the labour supply elasticity:

The labour supply elasticity expresses the percentage change in the number of hours
worked when there is a 1% increase in the wage rate. When the absolute value of σ < 1,
the labour supply elasticity is relatively inelastic. The number of hours worked does
not change significantly when wages increase. On the other hand, when the absolute

39  ECON3029 Labour Economics – UNIT 2

 value of σ > 1, the labour supply elasticity is elastic and the number of hours worked
changes significantly when there is a change in income. Many studies have estimated
the labour supply elasticity and the consensus is that σ = – 0.1 for male labour supply.

Policy Applications
We will now apply the neoclassical model of labour-leisure choice.

(a) Welfare Programs and work incentives: Welfare programs can alter incentives.
Consider a cash grant given to needy families. Eligible families are given the cash
grant as long as they are unemployed, work few hours or earn low-wages. Once
the family starts working more or earning more, they are stripped of the cash grant
altogether or have the grant reduced. The cash grant increases the reservation
wage. With this increased reservation wage, the family chooses the labour-leisure
bundle that is different than the one that would be observed without the cash
grant. That is, it may be more beneficial to the family to stay out of the labour
force, or work fewer hours to maintain the benefit. [See Kane (2001) for a graphical
demonstration]

(b) The Earned Income Tax Credit EITC): Families earning below a certain income
threshold, receive a tax credit. This reduces the tax burden and increases net
income. Since the credit is only given to persons who work, the higher net income
induces an increase in the labour supply. But the EITC also affects people who
would have chosen to enter the workforce without the EITC but realize that they
can take advantage of the credit and work fewer hours than intended. This reduces
the intended labour supply.

(c) The decline in labour force participation by older workers: This may be
attributable to pension benefits. If workers are guaranteed a decent pension, they
retire as soon as they are eligible to do so.

40  ECON3029 Labour Economics – UNIT 2

 Suggested Reading
For another discussion of the neoclassical supply model, read the following
material. Some policy issues discussed, like the Earned Income Tax Credit
are American but can be useful in understanding how various policies affect
the labour supply decision.
Imbens, G., Rubin, D., & Sacerdote, B. (2001). Estimating the effect
of unearned income on labor earnings, savings and consumption:
Evidence from a survey of lottery players. American Economic Review,
91(4), 778-794. [Available via UWIlinC]

Read the following for an application of how the neoclassical model is used
to determine the impact of societal changes in the labour market. In this
case, the paper examines whether the increase in the number of women in
the labour force has affected the wage of men, primarily those earning low
wages. Section II contains some advanced Mathematics but still provides an
important discussion of the theory behind the model. Pay close attention to
how the elasticities presented in Table 4 and Table 5 are calculated.
Juhn, C., & Kim, D. (1999). The effects of rising female labor supply on
male wages. Journal of Labor Economics, 17(1), 23-48. [Available via
UWIlinC]

FOOD FOR THOUGHT

The preceeding discussion has asserted that some workers will reduce
their intended labour supply hours to keep whatever benefits received
from government programs. Critics argue that this unfairly characterizes
the behaviour of low-income families. Can you think of government
programs in a Caribbean country that may have unintended labour
market outcomes?

41  ECON3029 Labour Economics – UNIT 2

 Play Video
Watch the following video to understand how the individual worker’s choice
to work or engage in leisure is represented by the labour supply curve. In
particular, pay attention to how the income and substitution effects determine
the shape of the individual labour supply curve.
EconplusDal. (2016, May 3). Individual labour supply curve (backward
bending labour supply curve. [Video File]. Available at:

uu [Link]

The following video discusses why the shape of the individual labour supply
curve differs from the shape of the industry labour supply curve. Note the
shape of the industry supply curve is dependent on an assumption made
and the structure of the industry (whether it is competitive, monopolist or
monopsonist).

EconplusDal. (2016, May 7). Labour supply curve (Market and firm). [Video
File]. Available at:

uu [Link]

The following video explains the factors which influence the elasticity of the
industry labour supply curve. This concept is key to explaining how changes
in wages affect particular industries.

EconplusDal. (2016, May 13). Elasticity of the labour supply curve. [Video
File]. Available at:

uu [Link]

42  ECON3029 Labour Economics – UNIT 2

 ACTIVITY 2.3
Topic: Practice Question
Suppose that most workers are on the backward bending portions of
their own supply curves, explain why it is plausible that the aggregate or
market supply of labour will still increase as the wage rate rises.

Reading Economics: Caribbean Labour Markets

Read the following paper which studies the impact of remittances on
labour supply in Jamaica and answer the questions which follow.
Kim, N. (2007). The impact of remittances on labor supply: The case
of Jamaica. World Bank Policy Research Working Paper, No 4120.
Available at:

uu [Link]
[Link]

(a)What has happened to the labour force participation rates in Jamaica?

(b)What impact has the changes in the labour force participation rates have
on the labour supply?

(c) How have remittances influenced the reservation wage? Use graphs to
aid your explanation.

(d)What has happened to the unemployment rates in Jamaica over time?

(e)How have remittances influenced the distribution of employment in

sectors?

(f) What type of empirical analysis is used to produce the results in Table 3?
Give a brief explanation of the method and its appropriateness for this
type of study.

(g)What are the main conclusions of the study?

Post your response in the Unit 2 discussion forum and respond to at least
two of your peers’ posts.

43  ECON3029 Labour Economics – UNIT 2

 Session 2.3 Summary

In this session, we discussed how the neoclassical model of labour-leisure choice can
be applied to real world situations. We learned that some programs designed to help
low-income families may provide disincentives to work causing recipients to work
less hours than intended. Therefore, some public policies may have unintended labour
market outcomes.

Unit Summary

In this unit, we discussed basic issues in labour economics. First, we defined some
concepts and statistics that are useful for characterizing the labour force. Then we
examined the neoclassical model of leisure-labour choice. We learned that the tangency
of the budget constraint and the indifference curves, which represent workers’
preferences, determines the number of hours that workers are willing to supply. Then
we used this model to analyze the labour market impact of various public policy
programs and concluded that some programs can decrease the number of hours that
workers are willing to supply because of the desire to maximize the benefits received
from the programs. We have now concluded our study of labour supply. We will
examine labour demand in the next unit.

44  ECON3029 Labour Economics – UNIT 2

 References

Borjas, G. (2013). Labor Economics (6th ed.). New York: The McGraw-Hill Companies.

Smith, R. S. & Ehrenberg, R. G. (2012). Modern labor economics (11th ed.). New York:
Routledge.

45  ECON3029 Labour Economics – UNIT 2