THE STATIC MODEL OF LABOUR SUPPLY
The analysis of labour supply is an application of consumer demand theory to the allocation of time between market and non-market activities. Consumer theory teaches that exceptions to the “law of demand” are rare and for the most part inconsequential, though possible if the good is inferior, makes up a large proportion of the consumer’s budget, and the substitution effect is stronger than the income effect.
But what if the consumer comes to the market not just as a buyer but also a seller? For buyers of a normal good the income and substitution effects work in the same direction, but for sellers in the opposite direction.
In this lecture we examine the theory of labour supply and recognize that its predictions of the change in labour supply in the face of a price change—a change in the real wage rate—are ambiguous. This places all the more emphasis on solid empirical analysis and on the challenges of in estimating the elasticity of labour supply.
Your main goal in this lecture is to thoroughly understand the static theory of labour supply, including an ability to manipulate budget constraints as well as to predict the impact of tax and transfer policies. Your learning goals also involve developing an appreciation of the econometric challenges, and a sense of the advantages and disadvantages of randomized controlled trials though a study of the Canadian Self-Sufficiency Project.
Download a pdf of the lecture presentation, which will also offer you citations to the important readings.