• <b>Federal Trade Commission</b>

Labor Economics


1. Labor Supply


The neclassical model of labor supply examines numerous aspects of labor-supply decisions, including the decision to work, how many hours to work conditional on working, how changes in nonlaobr income affect work decisions, how changes in wage rates affect labor-supply decisions, how the implementation of government programs (e.g., welfare/workfare) affect labor-supply decisions and how labor-supply behavior changes over the life cycle. While there are other models of labor supply that offer different conclusions and predictions, the neoclassical model is typically a good starting point to consider how changes in economic conditions or government interventions might alter work incentives and, hence, decisions. In the Pencasts for this topic, we examine worker preferences, budget constraints, the hours worked and participation decisions, how a change in the wage rate affects labor supply, and how a variety of different government policies affect work incentives.


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Worker Preferences

This Pencast discusses the basics of the neoclassical model of labor supply, which models the decision to work, how much to work, and the impact of policies, and worker preferences, which are assumed to be a function of consumption and leisure. The information summarized by indifference curves is also described. [Play Pencast]


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Marginal Rate of Substitution

This Pencast illustrates how to derive a worker's marginal rate of substitution between consumption and leisure, which is the slope of the worker's indifference curve. [Play Pencast]


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Differences in Preferences Across Workers

This Pencast presents the indifference curves for two different types of workers. One of the workers requires a small amount of leisure to give up consumption, while the other worker requires a relatively larger amount of leisure to give up consumption. [Play Pencast]


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Budget Constraint

This Pencast shows how to derive a worker's budget constraint. A plot of the worker's budget line is also provided. [Play Pencast]


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Hours of Work Decision

This Pencast illustrates graphically how a worker choose their optimal combation of consumption and leisure (and hence work hours). Examples of an interior and a corner solutions are provided. [Play Pencast]


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Nonlabor Income and Hours of Work

This Pencast shows how a change in nonlabor income affects leisure and, hence, hours of work. Two examples are provided. In one example, leisure is assumed to be a normal good and leisure is assumed to be an inferior good in the other example. [Play Pencast]


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Substitution and Income Effects

This Pencast describes how the demand for leisure and, hence, labor supply responds to a change in the wage rate. The concepts of substitution and income effects are discussed. [Play Pencast]


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Wage Increase and Hours of Work

This Pencast shows how an increase in the wage rate affects hours of work. It is demonstrated how to separate substitution and income effects. [Play Pencast]


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Wage Decrease and Hours of Work

This Pencast shows how an decrease in the wage rate affects hours of work. It is demonstrated how to separate substitution and income effects. [Play Pencast]


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Decision to Work

This Pencast illustrates a worker's reservation wage affects their decision to enter or to stay out of the labor force. [Play Pencast]


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Cash Grant and Hours of Work

This Pencast demonstrates how a cash grant affects work incentives. [Play Pencast]


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Welfare Program and Hours of Work

This Pencast shows how a welfare program, which taxes labor income at a particular rate, affecs work incentives. [Play Pencast]


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Earned Income Tax Credit: Part I

This Screencast describes the earned income tax credit (EITC) program. [Play ScreenCast]


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Earned Income Tax Credit: Part II

This Pencast illustrates how the earned income tax credit affects an eligible worker's budget set. [Play Pencast]


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Earned Income Tax Credit: Part II

This Pencast illustrates how the earned income tax credit affects the work incentives of a person who is not working. [Play Pencast]


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Earned Income Tax Credit: Part III

This Pencast illustrates how the earned income tax credit affects the work incentives of a worker who makes below $11,000. [Play Pencast]


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Earned Income Tax Credit: Part IV

This Pencast illustrates how the earned income tax credit affects the work incentives of a worker who makes between $11,000 and $14,370. [Play Pencast]


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Earned Income Tax Credit: Part V

This Pencast illustrates how the earned income tax credit affects the work incentives of a worker who makes between $14,370 and $35,263. [Play Pencast]


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Social Security Earnings Test: Part I

This Pencast describes the Social Security earnings test, which discouraged Social Security recipients from working. [Play Pencast]


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Social Security Earnings Test: Part II

This Pencast illustrates how the repeal of the Social Security earnings tests affects the work incentives of a worker who earns less than $17,000 in labor income. [Play Pencast]


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Social Security Earnings Test: Part III

This Pencast illustrates how the repeal of the Social Security earnings tests affects the work incentives of a worker who earns between $17,000 and $37,000 in labor income. [Play Pencast]


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Social Security Earnings Test: Part IV

This Pencast illustrates how the repeal of the Social Security earnings tests affects the work incentives of a worker who earns more than $37,000 in labor income. [Play Pencast]


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