3. LINEAS DE ACCIÓN DEL PLAN OPERATIVO ANUAL DE INVERSIONES –
3.2 Programa de gestión empresarial
EXHIBIT 4.10
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CHAPTER 4: Labour Supply over the Life Cycle
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SUMMARY
•
As individuals age, there are several systematic pat- terns in their labour supply—withdrawing to have children, and eventually retiring from the labour force— that require modifications of the static labour supply model developed in Chapter 2.•
Interpretation of the cross-section correlation between age and labour force status as represent- ing the pure effect of age is problematic, especially for women. This arises because of cohort effects, or the difficulty of separating out age from vintage (or year of birth) at a single point in time. Specifically for women, the age-participation profiles have been shifting upward over time, as each subsequent cohort of women is more attached to the labour market than previous ones.•
Incorporating individual decisions to work in one time period versus another involves a straightfor- ward extension of the static labour supply model. Principally, this entails allowing for preferences to work at various points in one’s life, and more impor- tantly, the specification of the lifetime budget con- straint: the present value of lifetime consumption equals the present value of lifetime income.•
The intertemporal labour supply model can be used to conduct a variety of thought experiments concern- ing the impact of wage changes at different points in the life cycle on the evolution of work patterns.•
The household production model helps explain how preferences evolve, specifically why household valu- ation of nonmarket time may change with the intro- duction of technologies that improve the production of goods and services within the household. This model emphasizes that many goods entail signifi- cant time input in order to be consumed. Especially to the extent that household production was per- formed by women, the model can be used to better understand the factors that contribute to the chang- ing economic role of women, inside the family, and in the labour market.•
Children can have an important impact on the labour supply of parents, especially mothers; how- ever, children are themselves the outcome of par- ents’ choices. Economic models of fertility explore the connections between economic variables like income and wife’s wages on the decision regard- ing whether and how many children to have, as well as interactions between fertility and labour supply.•
Retirement is another important life-cycle labour supply decision that is affected by a myriad of pub- lic and private pension plans. The static labour sup- ply model can easily be augmented along the lines shown in Chapter 3, in order to incorporate some of the main features of public pension plans.Canada/Quebec Pension Plan 131 cohort effect 109
defined benefit plans 134 defined contribution plans 134 dynamic labour supply 113 employer-sponsored/occupational
pension plans 134
evolutionary wage change 114 fertility 120
goods-intensive commodities 117
Guaranteed Income Supplement (GIS) 130 household production model 117
intertemporal substitution 114 life-cycle labour supply 107
mandatory retirement provisions 128 Old Age Security (OAS) 130
present value 113 retirement decision 127 retirement test 131 time-intensive commodities 117 transitory wage 115 tripartite choice 118
unanticipated wage increase 114
KEYWORDS
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138 PART 1: Labour Supply
1. Why has there been a long-run decline in fertility over time, even though income has risen?
2. Briefly outline the Becker-Lancaster approach to consumer demand theory (“household production”) and its applicability to labour market economics. Specifically, indicate some of the labour market implications of this theory that we would not have been able to derive from conventional consumer demand theory.
3. What does the economics of fertility suggest to us about differences in family size between urban and rural areas of less-developed countries?
4. Discuss the extent to which the mandatory retire- ment age is both an exogenous determinant of the retirement decision and an endogenous result of the retirement decision.
5. On the basis of Figure 4.3(a) draw the indifference curves, before and after the pension, for persons who a. retire completely,
b. retire partially, or
c. work the same as before. Compare their income in each case.
6. On the basis of Figure 4.3(b), draw the indifference curve for a person who is indifferent between retir- ing completely and continuing to work. Why would a person ever be indifferent between these two alternatives assuming that retirement is regarded positively? On the basis of the various factors given in the diagram, indicate how people may be induced to stay in the labour force rather than retire.
7. On the basis of Figure 4.3(c), draw the indifference curve for a person who
a. retires completely,
b. works part-time and earns income only up to the maximum amount before it becomes “retirement- tested,” that is, benefits are reduced if the indi- vidual works “too much,”
c. works and earns income up to the maximum amount before it becomes retirement-tested at a 100 percent implicit tax, or
d. works and earns so much income that no pen- sion is forthcoming.
Compare the pension cost under each alternative.
REVIEW QUESTIONS
1. The evaluation of the labour supply response to a tax cut can be quite different in a dynamic setting from what it is in a static setting. Discuss the relative impact of a permanent versus a transitory tax cut on labour supply, and compare the analysis to the static model.
2. Consider the two-period dynamic labour supply model discussed in this chapter. What, if any thing, happens to current labour supply if the interest rate rises from 2% to 10%?
3. Use a simple supply and demand diagram to illus- trate how either supply- or demand-side factors may underlie the cohort effects implicit in Figure 4.1. What factors could be assigned to the supply or the demand side in explaining how the curves would shift? How could an empirical researcher disentangle the relative magnitudes of the supply and demand factors in explaining the increase in the number of women working now, as against 1950?
4. Utilize your knowledge of household production theory to indicate the following:
a. The expected effect of a wage increase on the wife’s labour supply.
b. The expected effect, on the demand for children, of an increase in the wage of a wife.
c. Why the substitution effect for labour supply may be larger for women than men.
d. The effect on one spouse’s labour supply, of his or her spouse’s disability, where the spouse requires home (not institutional) care.
e. The effect on this same spouse’s labour sup- ply, as in (d), if the government (or private insur- ance) provided financial compensation to the family.
5. The importance of cohort effects in female labour supply seems to have diminished over time, as seen in Figure 4.1. What factors may account for this? Does this mean cohort effects are probably unim- portant to predicting future female labour supply?
PROBLEMS
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CHAPTER 4: Labour Supply over the Life Cycle
Discuss possible factors that may arise in the future to shift women’s age-participation profiles, in any direction.
6. Using the economic theory of fertility, analyze the expected impact on the TFR (total fertility rate) and women’s labour supply of the following:
a. An increase in women’s wages.
b. Elimination of the family allowance for high- income women.
c. An increase in the deduction for child care expenses.
d. Increasing educational levels for women.
7. Financial advisers say it’s never too early to think about retirement. Analyze the impact on the cur- rent labour supply of a 25-year-old of the following news: “The Canada Pension Plan will be insolvent in 40 years, and in addition to a reduction of pen- sion and old age security benefits, the government will have to increase the CPP payroll tax for all workers.”
8. Consider an individual aged 64 who is eligible to collect full social security (public pension) benefits of $6000 for a year. She has no other income, but can work at a weekly wage rate of $600 for a maximum of 52 weeks. Receipt of benefits from the social security program is retirement-tested. Specif- ically, the individual can earn up to $9000 in annual wage income without a reduction in benefits; how- ever, after $9000 of earnings, benefits are reduced by 50 percent for every dollar earned, until the ben- efits are exhausted.
a. Carefully draw and label the budget constraint for this individual.
b. Consider an individual whose labour supply decision is such that she receives YA in social security benefits, so that 0 , YA , $6000 (i.e., she receives positive but reduced benefits). On the carefully labelled diagram from part (a), show her labour supply decision.
c. “Elimination of the retirement test (i.e., allowing the individual to keep all benefits, irrespective of his or her labour earnings) will unambigu- ously increase the labour supply of the individ- ual described in part (b).” True or false? Explain, using a carefully labelled diagram.
9. You have been asked to estimate the impact on retirement of a policy raising the replacement rate from 40 to 60 percent of final earnings, and of lowering the implicit tax of the retirement test from 50 to 30 percent. You have access to comprehensive microeconomic data where the individual is the unit of observation. Specify an appropriate regression equation for estimating the retirement response, and indicate how you would simulate the impact of the change in the two policy parameters.
10. On the basis of a social insurance pension scheme where income, YP, is
YP 5 B 1 (1 2 t)E
and B is the pension, t is the tax-back rate of the retirement test, and E is earnings, solve for the following:
a. The breakeven level of earnings, Eb, where the recipient no longer receives any pension income (Hint: Income without the pension scheme is Y0 5 E, and therefore the breakeven level of earnings, Eb, occurs when Y0 5 YP or the pension benefit, B 2 tE, equals zero) b. The breakeven level when there is also a thresh-
old level of income, Yt, before the taxback rate of the retirement test is applied, so that:
YP 5 B 1 Yt 1 (1 2 t)E
c. The dollar value of the breakeven level of earnings in parts (a) and (b) when B 5 $6000, Yt 5$10,000, and t 5 0.5. 11. In an income-retirement choice diagram, indicate
the effect on an individual’s indifference curves and/or budget constraint, and subsequent retire- ment decision, of each of the following:
a. Retirement of one’s spouse. b. Illness of one’s spouse.
c. Improvements in health of the elderly.
d. Permanent displacement from a high-wage job in the steel industry to a low-wage job in the restaurant sector.
e. Improvements in the retirement leisure industry (e.g., condominiums, recreation, travel) such that retirement is now relatively more attractive.
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