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Determinants of Supply of Labor

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❶Over half of all respondents claim their job has no flexibility with respect to hours. The main concept behind the intensive margin is the individual preferences regarding leisure and work.

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If people are willing for the geographical and occupational mobility then the supply of labor will be more. Fringe benefits, job satisfaction, future promotion, willingness of the individuals also play a vital role in determining the supply of labor. Quality of Human capital: Investment on human capital through education, training, public health etc. So by this we have completed with the section of the factors which are affecting supply of labor.

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Do not include your name, "with regards" etc in the comment. Write detailed comment, relevant to the topic. However, evidence in Bondar suggests that individuals with high pre-retirement earnings as estimated based on PIA amount are most likely to continue to work and earn high post-retirement earnings.

Therefore, discussions about the government's role in ensuring adequacy of retirement income have focused on the Social Security program and its ability to meet the needs of a growing elderly population. Researchers have also become increasingly aware of the Social Security system's inability to adequately provide for many women in their retirement. This is due partly to the societal norms under which the system was designed i.

PIA is the primary insurance amount. In order to increase labor force participation and decrease the burden on the Social Security system, current Social Security policy dictates an increase in the normal retirement age from 65 to Those born in will be the last group with a normal retirement age of Those born in will be the first with a normal retirement age of Many believe that this increase is too gradual.

In addition, the level of benefit reduction at age 62 will gradually increase from 20 percent to 30 percent. The earnings test will be liberalized; it currently affects only individuals below age To try to reduce some of the perceived inadequacies of the Social Security system, an earnings-sharing proposal where the Social Security benefit is based on the earnings of the household, not just on individuals and a two-part payment system have also been suggested.

The latter is an attempt to meet the dual roles of the Social Security system—to provide a basic amount of coverage to all elderly not just wage earners and their spouses and to provide an additional payment proportional to wages. As mentioned earlier, additional proposals include caregiving and homemaker credits, but the current design of supporting wage earners in retirement based on revenues from current wage earners does not suggest an obvious answer to the question of who will pay for such credits.

The earnings test component of Social Security, which applies to individuals below age 70 the age limit was 72 prior to , is viewed as a significant barrier to continued work. In addition, the earnings test is more liberal for Social.

Security recipients above age 65 than for those aged 62 to In , the benefit reduction rate was decreased for individuals 65 and over from one-half to one-third. Bondar studies individuals affected by the earnings test in Among Social Security beneficiaries, 75 percent were retired workers; 36 percent of these had their entire benefit withheld. He notes that in addition to Social Security beneficiaries, there is a potentially large group of individuals who are discouraged from applying for Social Security benefits because they know their benefits will be withheld.

This group is unobservable and their existence therefore limits the accuracy with which predictions about potential policy changes can be made.

It is estimated that approximately 40 percent of insured men and women age 62—64 do not file for benefits and that about 5 percent of men and 15 percent of women age 65 and older do not. Honig and Reimers argue that the returns to eliminating the earnings test are decreasing with the proliferation of private pensions, which often encourage individuals to withdraw completely from the labor force. This suggests that in modeling the impact of Social Security policy, it is important to include private pensions; omitting this crucial interaction may prove misleading.

Evidence of this is also given in Stock and Wise a and Lumsdaine, Stock, and Wise a , who demonstrate via simulation, using data from two individual Fortune firms, that for individuals with pension plan availability, changes in Social Security policy will have very little effect. They attribute this to the relative magnitudes of pension versus Social Security benefits.

However, for individuals who rely solely on Social Security, changes will have a much larger effect. In addition, Lumsdaine, Stock, and Wise a show that even for individuals who have access to both a pension plan and Social Security, the complete elimination of Social Security would have a significant impact on labor supply behavior. These other contributing factors that encourage or enable retirement appear to be dominant.

In order to promote continued work and to partially offset the effect of the earnings test for workers age 65 to 69, the delayed retirement credit the amount added to one's annual Social Security benefit to take into account nonreceipt in previous months, due either to the earnings test or to postponement of applica-. It will continue to increase by 0. This is designed to be approximately actuarially fair using current mortality probabilities.

Although this is an alternative to the relaxation of the earnings test, it may achieve similar results, aiding those with higher benefits earnings more. In terms of behavioral impact, however, the two may differ substantially depending on the structure of individual preferences see Honig and Reimers, Whether or not this policy will succeed in its goal of eliminating the cost associated with continuing to work depends on assumptions about the future, both at a macroeconomic level e.

Research seems to suggest that the labor supply impact of these liberalizations will not be substantial Gustman and Steinmeier, ; Leonesio, Gustman and Steinmeier conduct a simulation study using the Survey of Consumer Finances SCF to assess the impact of changing the delayed retirement credit from 3 percent to 8 percent and of eliminating the earnings test.

The SCF has the advantage of also containing information about pension plans. Gustman and Steinmeier incorporate many details such as pensions that other studies omit and include a number of stochastic terms representing such things as health status. Their results suggest that the impact on labor supply would be modest, increasing labor force participation by about 3. In particular, the average date of retirement would increase by about 3 weeks. They argue that this is because individuals will adjust to policy changes by altering their time of application for benefits rather than modifying their labor supply behavior.

In addition, they argue that no single delayed retirement credit is appropriate for all individuals. Mitchell considers four changes in the Social Security benefit formulas: All are intended to increase labor force participation and delay retirement and are representative of policy currently being implemented. Mitchell simulates the retirement response to these changes via a logit model.

Despite drastic changes in benefit amounts, the predicted impact of an increased penalty for early retirement is modest; retirement for men is delayed by 3 months.

The other simulations yield smaller results; these findings are consistent with those of Gustman and Steinmeier and Lumsdaine, Stock, and Wise , b. For women, the impacts are even less pronounced.

Using time series data, Stewart predicts a much larger effect than previous studies based on microdata of changes in Social Security provisions.

In particular, he attributes nearly 40 percent of the decline in labor force participation rates to Social Security. Of the four changes considered, Mitchell finds it is the final. Stewart concurs, citing liquidity constraints as the reason many individuals wait for the Social Security early retirement age to exit the labor force. Increasing the penalty for early retirement will cause more individuals to be liquidity constrained and therefore unable to finance an exit from the labor force. In particular, there is evidence that such changes will have a substantial effect on the fraction of elderly families at or near the poverty level, precisely those that are likely to be liquidity constrained.

Leonesio b describes other Social Security policies that have been proposed in an attempt to encourage prolonged work by the elderly. His conclusion is that ''changes in Social Security programs of the type and magnitude that are politically feasible in the foreseeable future are unlikely to produce large changes in retirement patterns" p. This brings into question the expenditure invested in examining Social Security policy.

Perhaps the focus should be in areas thought to have greater effects. In documenting previous results by a variety of researchers e. In fact, the effects of all policy changes he reviews are described in terms of months, not years. He argues, however, that this is because it is also necessary to examine the effects of Social Security policy changes on related decisions that may affect the retirement decision.

While much of the literature on Social Security and retirement behavior more generally has used reduced-form models, which can document correlations and explanatory power, structural models are important for assessing potential policy impacts. As noted by Rust , early research on Social Security used a life-cycle consumption model, which, in its simplest form, predicts that individuals will decumulate their wealth towards the end of their lives.

This is contrary to observations on savings behavior of the elderly. However, a more general life-cycle model, with rigidities such as liquidity constraints or a bequest motive, provides a dynamic context in which to model behavior. Rust formulates a dynamic programming model in which workers use an optimal decision rule to choose their retirement date.

The control variables are consumption expenditures and the decision regarding retirement; the model allows for uncertainty in the state variables, which are things like life expectancy, health status, and retirement earnings.

One of the elements missing from Rust's model is pension benefits. Despite significant research devoted to the impact of Social Security provisions, debate still continues as to the relative importance of Social Security on the retirement decision and retirement income. Part of the difficulty lies in attempts to predict responses in a heterogeneous population. Inferences depend crucially on the sample studied and on additional factors and sources of income.

There is also disagreement about the validity and accuracy of using reduced-form models to predict the effects of policy changes; even among structural models, static and dynamic approaches can result in very different predictions. What can be done to alleviate the projected shortfall in Social Security? One solution is to rely on pensions for supplemental income.

The proportion of elderly households receiving income from all types of pensions in was 44 percent Congressional Budget Office, This proportion and its relative importance vary considerably along demographic lines. For example, while 57 percent of elderly couples age 65 and older report receiving a pension, only 32 percent of unmarried women do Reno, It is projected that for those in the upper half of the retirement income distribution in , 30 percent to 40 percent of cash income will come from private pension benefits Kingson, , citing a Congressional Budget Office projection.

Of these, 42 percent have only defined benefit plans, while 16 percent have only defined contribution plans. It is becoming increasingly common for employees to face a number of choices regarding pension plan and saving for retirement. Reimers and Honig cite difficulties in inference on labor supply behavior with nationally representative data owing to a lack of detailed pension plan information. This is particularly important when analyzing the behavior of men, for whom pension benefits are a greater proportion of retirement income.

It has also been shown that for firms, pension plans can be a useful tool for affecting workers' behavior. Clark, Gohmann, and McDermed note that defined benefit plans in particular provide incentives for employees to remain at a specific firm and to refrain from behavior that might lead to their dismissal.

They note that "firms with high costs of hiring and high monitoring costs also will tend to use defined benefit plans" p. In addition, firms can use defined benefit plans to alter retirement behavior. Ruhm provides evidence that. Lumsdaine, Stock, and Wise use data from a single Fortune firm to illustrate the dangers of drawing inferences without pension information for individuals that, in fact, have access to a pension plan.

In simulating the effects of eliminating Social Security early retirement using information on both types of retirement income, they estimate between a 9 percent and a 15 percent reduction in retirement rates of individuals ages 62 to 65; if pension information is not incorporated, the reduction is estimated to be between 43 percent and 72 percent.

In addition, the interaction between Social Security and pension plan provisions is well documented—the General Accounting Office estimates that 42 percent of pension plans used some method of integration in computing benefits.

While pension coverage rates have remained reasonably stable over the last 20 years Table ; see U. Department of Labor, , the percentage of pension-covered workers enrolled in primary defined benefit plans has declined dramatically, from 87 percent in to 68 percent in Ruhm, , citing Beller and Lawrence, Clark, Gohmann, and McDermed argue that in response to increased pension regulation and to legislation, the s have seen a shift from defined benefit to defined contribution pension plans.

Reno notes that this shift accounts for only 10 percent of the growth in primary defined contribution coverage; the majority of the growth is due to new plans, both primary and supplemental. Defined benefit plans are often based on final salary or an average of the final few years and take the responsibility of saving for retirement away from the individual. To the extent that individuals fail to save adequately for their retirement, this may not be a negative characteristic.

In a survey of major U. Even firms that have a defined benefit plan as their primary plan often offer a defined contribution plan to supplement the primary plan.

Defined contribution plans often allow for more mobility than defined benefit plans. By , they were primary plans for 8 percent of private plan participants—supplemental for an additional 23 percent Reno, , citing Beller and Lawrence, An additional attractive feature is that the employee can make supplemental voluntary tax-deferred contributions Reno, The observed increase in defined contribution plans means increased portability.

However, there is also evidence that portable benefits are often received as a lump sum; this option undermines the security such plans are intended to provide. Prior to receipt of the pension distribution, the risk of investment performance of the pension funds in defined contribution plans is. In addition, recipients are able to use distributions for other purposes Woods, Reno notes that in , only 11 percent of workers with previous lump-sum distributions reported rolling it all into a tax-deferred retirement account.

Policy changes in private pension plan provisions have occurred in a variety of ways, from the extreme form of liquidation of the existing company plan 2 to special "window" incentive plans targeted at a particular group of workers. Such plans have sometimes accompanied a restructuring or downsizing of the firm and have tended to be fairly generous.

As a result, these plans, which often target a specific group of workers and provide special incentives to retire leave the firm , have a profound effect on the labor force participation rates of the target group. Much of the literature on pension plans and retirement is based on results using static models.

These include least squares models as well as limited dependent variable specifications e. These different types of models have systematically documented the effects of pension plan provisions on the retirement decision and retirement. They have been less successful in predicting the effects of a change in policy. Gustman and Steinmeier b address the notion that pension plans reduce labor mobility create "job lock". Using separation as the dependent variable in a reduced-form probit model, they find that pension plans are not a substitute for wage compensation; instead compensation in pension-covered jobs is higher.

The "compensation premium"—rather than the nonportability of pension plans—accounts for increased attachment to the firm. Defined contribution plans, which are more portable, exhibit similar effects on mobility. Allen, Clark, and McDermed note that the observed lower mobility among pension-covered workers may be due to both a bonding effect as noted by Gustman and Steinmeier, b and a sorting effect, that is, that workers with certain observable characteristics prefer pension jobs.

Understanding and modeling such selection issues is critical to interpreting and predicting the impact of changes to pension plans. A careful review of pension legislation over the last decade is in Clark, Gohmann, and McDermed , who use a probit model with plan choice as the dependent variable to consider the impact of regulation on a firm's choice of pension plan type.

They find that the probability of a firm's offering at least one defined benefit plan has declined throughout the last decade. The shift towards defined contribution plans as a result of favorable tax treatments and anti-age-discrimination regulation is indicative of the way that firms can respond to government legislation. This casts doubt on the efficacy of government plans to alter the labor force composition via Social Security changes; Lumsdaine, Stock, and Wise and others have argued that firms may well offset potential effects via their pension plans.

Luzadis and Mitchell also find that the regulatory environment has significant impact on employer-sponsored pension incentives, most noticeably with regard to Social Security policy changes. There is also evidence that the observed dynamics pertain to the "buyout" hypothesis, that is, that firms encourage certain individuals to leave.

Both of these findings emphasize that response to pension plan provisions should be modeled in a dynamic context, which acknowledges the flexibility employers have to manipulate plan characteristics and incentives. A number of models have been used to capture more of the dynamic decision process of individuals.

Such dynamic models are critical to understanding actual behavior. The benefit of dynamic behavioral models is the potential for policy analysis. The model's parameters can be estimated under a base-case scenario, and a variety of dynamic policies can be assessed.

Unfortunately, exactly modeling such dynamics in a way that mirrors reality is difficult, if not impossible. It is therefore necessary to make simplifying assumptions in order to achieve tractability. In addition, there is debate as to what the goal of mirroring reality seeks to.

Gustman and Steinmeier ignore uncertainty and assume perfect markets in constructing a life-cycle model of retirement. Their model specifies reduced wages for diminished work effort. They use the RHS data set and maximum likelihood estimation. They note that the peaks in retirement rates at ages 62 and 65 are completely attributable to Social Security, pension provisions, and mandatory retirement.

Simulations implementing the shift of the Social Security normal retirement age to 67 produce a corresponding shift in the latter peak in retirement rates. Stock and Wise a, b proposed the "option value" model, where individuals retire at the age that achieves the maximum gain from the choice of postponing retirement versus retiring in the current period. The motivation for their model is from Lazear , which suggests that by delaying retirement, individuals retain the option to retire at a later date, under potentially more advantageous terms.

In the Stock-Wise model, individuals reassess their options at each new time period. The model is fairly flexible in that it allows for correlated individual-specific errors and features a parsimonious specification. Correlated errors in a dynamic setting are difficult to model analytically, as the model would involve high orders of integration.

The tractable simplification, in this case, is that individuals maximize the present discounted value of expected wealth. Stock and Wise use data from a single Fortune firm. These data consist of a panel of individual earnings histories over a number of years.

In addition, the data are well suited for analyzing the validity of the model; parameter estimates can be obtained from data from one year and used to predict behavior in subsequent years. The results of such an analysis, as well as the incorporation of individual-specific errors that follow an AR 1 process, are in Stock and Wise b. Stock and Wise a also consider a number of simulations to assess the effects of potential policy changes. Using the parameters obtained under the base specification, they simulate the effects of increasing the firm's early retirement age, increasing the Social Security early retirement reduction factor, and increasing the Social Security early retirement age.

Subsequent papers by Lumsdaine, Stock, and Wise , have considered modifications to the base model. Lumsdaine, Stock, and Wise compare a simpler, static model probit , two dynamic programming models with uncorrelated individual-specific errors, and the option value model. They find that the three dynamic models perform significantly better in terms of fit and prediction than do static probit models.

A separate issue, raised by Lumsdaine, Stock, and Wise , is what the goal should be with these increasingly complex models see also Burtless, There are clear gains in inference from using dynamic models over the static ones. If the goal is to mirror the observed pattern of behavior, these models do quite well. However, it may also be desirable to mimic the actual decision-making process that an individual undergoes.

In this case, it is hardly plausible that the average individual will utilize the level of complexity specified in these dynamic models. In addition, usually the more complicated the model, the more simplifying assumptions necessary to retain tractability. It is therefore necessary to ensure that models are robust to misspecification and to determine the impact of these assumptions and their relation to actual behavior.

Lumsdaine, Stock, and Wise compare the behavior of men and women. Contrary to common belief, for individuals in the specific firm they consider, the actual behavior is quite similar; this is also reflected in the parameter estimates and the predicted behavior. Because there are only two transition states, maximum likelihood is feasible; a modified simulated annealing random search method, not requiring second or even first derivatives of the relevant function is at times employed in estimation.

Dynamic models that allow for multiple choices transition states usually need to employ integral approximation techniques to retain tractability. Window plans, when analyzed with the corresponding individual firm's pension details, provide a convenient way to test a model out of sample; the model is estimated under the normal pension provisions, and the estimates are then used to predict the effects of the window plan.

Lumsdaine, Stock, and Wise , evaluate the effect of a window plan in the same Fortune firm that Stock and Wise a, b considered. Lumsdaine, Stock, and Wise find that the predicted effects typically match the actual effects well, the notable exception being at age 65, when the models always underpredict the retirement effect.

Lumsdaine, Stock, and Wise use a beta distribution to approximate the firm's pension plan in order to investigate whether the firm could have achieved its potential goals more efficiently.

A beta distribution provides a parsimonious flexible functional form that allows the pension schedule to vary continuously thus providing determination of exact schedules without being bound by discretization. Lumsdaine, Stock, and Wise then consider potential motivations that the firm may have had for offering a window plan, based on economic theory, and investigate whether the firm could have structured its plan more efficiently, subject to the budgetary restrictions that it faced.

If the main motivation was to reduce the current size of its labor force immediately, the firm acted close to optimally. In a more recent paper, Lumsdaine, Stock, and Wise a simulate the effects of a number of different policy changes, using data from another Fortune firm. Besides confirming their earlier results using this alternative data set, they investigate the effects on labor force participation of changes in the Social Security early and normal retirement ages, the private pension plan provisions,.

The evidence associated with this body of literature is relatively clear. For those people who will receive pension benefits, the magnitude of the expected benefit is such that pension plan provisions can strongly influence their retirement decision.

An important aspect of modeling the determinants of retirement behavior and retirement income is understanding how Social Security and pensions interact with other forms of retirement savings. In particular, do they provide additional savings or are they substitutes for alternative forms?

Much of the research has focused on shortfalls in retirement income or benefit levels for individual retirees. Day cites overwhelming support across all ages for maintaining or increasing Social Security benefit levels, but suggests that younger workers may not completely understand how these levels would be raised.

Attitudes towards taxes and attitudes towards benefits are only weakly correlated. Day claims this is because attitudes towards taxes are more likely to be driven by self-interest whereas attitudes towards benefits are more ideological in nature.

Another significant source of uncertainty is how firms will react to changing labor force participation and needs. Will they support government policy to encourage older workers to continue working, or will they try to counterbalance the Social Security effects via manipulation of their pension plan provisions? The upward-sloping wage curve makes it difficult for firms to retain older workers in a cost-effective way.

In addition, anecdotal evidence of firms' rehiring retirees who have opted for a window plan, often at higher consulting wages, suggests that firms have difficulty convincing the "right" less productive people to retire; a more systematic assessment of firm behavior would provide insight as to the frequency with which this occurs.

Note that economic theory would predict that workers with a high opportunity cost of leaving those that would have difficulty finding an equivalent job would be less likely to accept a window plan. The results of Lumsdaine, Stock, and Wise are not inconsistent with this theory and anecdotal evidence; they do, however, suggest that firms may be operating under rather myopic, short-term objectives such as paring down the size of their labor force, without regard to overall productivity or future productivity when offering window plans.

It is also clear that individuals do not always have an accurate perception of the components of their expected retirement income. A study by Merrill Lynch as reported in Employee Benefit Plan Review, b found that of individuals ages 45 to 64, 36 percent cited pensions as their expected most important source. In reality, only 10 percent of income comes from pensions, according to a U. Department of Health and Human Services report Radner, a. In addition, only one-third of individuals correctly chose the range of dollar amounts that included the maximum Social Security benefit when given four choices.

Additional evidence of inaccurate understanding of the Social Security earnings test rules by the elderly is found in Leonesio b.

While much of the literature on pensions has focused on coverage, in considering individuals most at risk in terms of potential future income inadequacy, it is important to consider pension receipt, not pension coverage. Gender differences in pension coverage become even more pronounced when measuring receipt; women are much more likely to experience interruptions in labor force attachment and are thus less likely to meet vesting requirements in a pension plan than men.

When tenure is controlled for, coverage rates are fairly similar, as shown in Table Another reason that women are particularly at risk is the earnings gap. The coverage rates for men and women. Multiple vesting further increases the gender gap. There is some evidence that for women, pension coverage is associated with increased attachment to the labor force in later life Pienta, Burr, and Mutchler, Possible explanations for this counterintuitive observation include a selection effect and the need to make up for an earlier discontinuous work history in terms of vesting and the earnings gap.

This explanation is supported by evidence in Ruhm , who finds that for men in the RHS, late entry into a pension-covered job is associated with increased attachment to the labor force, even more than for non-pension-covered individuals. In addition, pension coverage may be leveling off recall Table Quinn, Burkhauser, and Myers suggest that if increasing pension coverage is responsible for the observed trend towards early retirement, a leveling off of coverage may signal a corresponding increase in average retirement ages relative to current projections.

Defined contribution participants seem to compose one-third of all pension participants, as compared with one-sixth 15 years earlier. In addition, more employers are offering supplementary coverage; this is most often in the form of a defined contribution plan.

The proliferation of these plans also. However, defined benefit plans are relaxing their requirements for receipt of benefits; see the sources cited in Quinn and Burkhauser for evidence that this promotes early retirement.

Much of the literature has used large aggregate data sets to investigate the influence of pension plans on the retirement decision. The advantage of using large data sets is that they may be more representative of the population and therefore more useful for policy evaluation.

The disadvantage is the loss of heterogeneity, which typically arises from the absence of details for each individual pension plan. In order to control for some of this loss of heterogeneity, Stock and Wise a, b use data from one particular Fortune firm. The size of the firm allows for an adequate sample while providing a level of detail regarding the pension plan provisions that is not found in more aggregate data sets. The obvious benefit of using data from a single firm is the use of detailed pension plan information and earnings records.

However, such an approach is not necessarily representative of the aggregate population. An important research priority should be obtaining better earnings records, in a more timely manner, while still maintaining confidentiality. Data on Social Security earnings records would provide an entire wage history for each individual; tax data from the Internal Revenue Service would supplement this with information on additional assets, which are critical for evaluating the adequacy of retirement income and savings.

While some information would still have to be imputed e. More recent data sets, such as the HRS, link extensive survey responses on work history, health status, and assets to pension plan detail from the individual's specific firm. This provides hope of estimating more dynamic models using broader based studies that are more representative of the population.

In addition, evidence in Hurd and McGarry a suggests that workers' subjective probabilities of working past ages 62 and 65 reflect details of their pension plan provisions. In particular, the probability of working past age 65 for individuals with no pension plan is more than double the corresponding probability among workers with pension plans that allow for full benefits by age Additional subjective questions, such as how large benefits are expected to be, will, in future years, be matched with actual receipt in order to draw inferences about expectations.

The HRS also asks what form the benefit is expected to be received in e. Many other subjective questions about work and perceptions of and interactions with areas related to work are also asked, and additional information regarding early retirement window plans is also requested.

While many researchers have noted the significant effect of pension plan provisions and have estimated it to be much larger than the effect of changes in. Social Security provisions, it is important to emphasize that for the fraction of the population that relies solely on Social Security benefits, changes to Social Security will have a profound effect. This is discussed in Hurd b and Lumsdaine, Stock, and Wise a.

Pension benefits are thought to be of more importance when the relative magnitudes of actual benefits for individuals that have them are considered; Social Security benefits may be more important when the aggregate or even the median impact of policy changes is assessed.

Quantity increases from Q1 to Q2. If immigration led to an increase in the supply of labour more workers then wages would initially fall. However, net migration would also lead to increase in demand for labour because the new workers create additional demand in the economy. In a perfectly competitive labour market, wages are determined by supply and demand We. For an individual firm, the supply of labour is perfectly elastic. They are wage takers and employ workers at the market wage of We.

The lump of labour fallacy is the contention that the amount of work available in an economy is fixed. But, most economists argue this belief there is a fixed number of jobs or a fixed number of hours is usually incorrect.

However, this is only half the story. Net migration increases demand in the economy, causing an equivalent rise in demand for labour. Though we can see differing impacts in certain labour markets — depending on skill levels of migrants. Higher wages usually will encourage a worker to supply more labour because work is more attractive compared to leisure.

Therefore the supply curve for labour tends to be upwardly sloping. Therefore, there is a choice between working more higher wage and working less more leisure. Two factors that influence a workers supply of labour 1. Substitution effect of a rise in wages With higher wages, workers will give greater value to working than leisure.

Income effect of a rise in wages This occurs when an increase in wages causes workers to work fewer hours. Backward sloping supply of labour Up to W1, the substitution effect is greater than the income effect, and higher wages causes more hours worked.


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A comfortable working place, and satisfactory conditions will improve labor supply. Attitude of workers: If people are ambitious and hard working, labor supply will be more. Cost of education and training: If education and technical training are very expensive, the supply of unskilled labor will be more.

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The extent to which a rise in the prevailing wage or salary in an occupation leads to an expansion in the supply of labour depends on the elasticity of labour supply. Key factors affecting labour supply. 1.

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This resource features two activities that enable students to consider the factors that might influence the quantity of labour supplied to particular This resource features two activities that enable students to consider the factors that might influence the quantity of labour supplied to . determinants of demand: income and wealth -prices of other goods and services -tastes and preferences -expectations determinants of supply: the cost of production .

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What Are the Determinants of Supply? For example, a wage is a price of labor and an interest rate is a price of capital. When the prices of the inputs to production increase, it becomes less attractive to produce, and the quantity that firms are willing to supply decreases. In contrast, firms are willing to supply more output when the. Determinants of Labour supply Labour supply refers to the number of workers that are “willing” and able to work in a particular job or industry at a.