Module 39 krugman 1
Module 39
The Market for Labor
What’s New in the Fourth Edition?
• Updated business cases
Module Objectives
• How do decisions about time allocation determine labor supply?
• How do you find equilibrium in the labor market?
The Supply of Labor
Creating Student Interest
• Ask students how much income per week (before taxes) they would find satisfactory. (You may
want to have them write it on a piece of paper and then collect them.) Determine an average amount
that the class seems to find satisfactory. Have students calculate the number of hours per week they
would have to work at minimum wage to earn that amount. (Note: As of 2017, the federal minimum
wage is $7.25 per hour.) Depending on the satisfactory income level your class has named, there
may not be enough hours in the week to earn that amount! Have students calculate how many hours
per week they would have to work at $20 per hour or $50 per hour to reach the satisfactory level of
income. Based on the calculations, ask students what they would do if they truly felt that level of
income was satisfactory and they received a wage increase to much more—say, $100 per hour.
(Work fewer hours?) Then ask them if that is what they would choose to do if they actually got a
raise to $100 per hour (and why). This discussion will help students understand the income and
substitution effects covered in the Module.
Presenting the Material
• Discuss labor supply as being derived from an individual’s time allocation problem, where each
person has to decide how to allocate the 24 hours available in a day. For simplicity, hours either are
spent working or are used for leisure activities. Make sure students understand that leisure includes
any activity (even sleep) that is not work. For most people leisure is a normal good. Have students
think about the work-leisure trade-off in terms of marginal utility—each individual attempts to
balance the marginal utility received from another hour of leisure against the marginal utility
received from spending the hourly income on goods and services.
• Consider an individual who works 40 hours a week at one job and earns $8 per hour. Suppose that
this same individual has a side job on the weekend working 10 hours and earning $8 per hour. What
if the individual receives a raise at the 40-hour-a-week job and now makes $10 per hour? Might they
quit their extra job? What if the person now makes $12 at the 40-hour-a-week job? Point out to
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Module Outline
I. The Supply of Labor
A. Work versus leisure
1. In the labor market, labor is demanded by firms and supplied by households.
2. Decisions about labor supply result from decisions about time allocation, how many
hours to spend on different activities. Individuals choose between work and leisure
activities.
3. Leisure is time available for purposes other than earning money to buy goods. This
includes spending time with family or pursuing hobbies.
4. The opportunity cost of leisure is the forgone income that could have been earned.
5. The opportunity cost of work is the forgone leisure activities that could have been
engaged in.
6. Individuals decide on how much leisure to consume by making a marginal comparison:
They compare the marginal utility of an additional hour of leisure with the marginal
utility they get from the income earned from an additional hour of work.
7. The optimal labor supply choice occurs when the marginal utility of one hour of leisure
is equal to the marginal utility one gets from the goods that one’s hourly wage can
purchase.
B. Wages and labor supply
1. If an individual chooses to work more hours as a result of a wage increase, the
substitution effect dominates. This is shown graphically as an upward-sloping labor
supply curve.
2. If an individual chooses to work fewer hours as a result of a wage increase, the income
effect dominates. This is shown graphically as a downward-sloping labor supply curve.
3. Americans’ increasing consumption of leisure over the past century indicates the income
effect is stronger than the substitution effect.
C. Shifts in the labor supply curve
1. The labor supply curve can shift due to:
a. changes in preferences and social norms.
b. changes in population.
c. changes in opportunities for workers.
d. changes in wealth; an increase in wealth can increase the ability to consume more
leisure and shift the labor supply curve to the left.
Case Studies in the Text
Economics in Action
The Decline of the Summer Job—This EIA presents data showing the number of young Americans taking
summer jobs is declining. Reasons cited include: increased emphasis on summer study, increased
affluence of American households, and competition for jobs from immigrants.
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Ask students the following questions:
1. In what way did the income effect cause a decline in the number of teenagers willing to
families can afford to have their teenagers not working in the summer.)
2. How did the 2007–2009 recession contribute to the decline in teenage employment in
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