South-Western College Publishing - Economics  

All Work and No Play
Subject Labor Supply
Topic Labor Markets
Key Words Hours of work, Productivity, Retirees, Discouraged workers, Real wages
News Story

Americans are working longer hours?at their primary job or by taking a second job. This has enabled the economy to keep on growing for eight years without upward pressure on wages. One study shows that in the first quarter of 1998, when there was 5.4 percent growth, productivity rose by 1.4 percent and hours of work increased by 4 percent.

Although the entry of retirees and discouraged workers into the work force may have accounted for some of the increased hours, the study’s author believes that longer workweeks are more significant. Since the 1960s, the work-week of the average couple has expanded by a day and a half.

The reason for this trend is not "to indulge in a cornucopia of consumption," but rather that families are having to work longer hours simply to maintain their standard of living. In spite of working 17.4 percent longer, families headed by persons with only a high-school diploma or some college have seen their real pay rise just 4 percent. College graduates have seen rising real wages, but are increasing their hours the most.
(Updated August 18, 1998)

Questions
  1. The author of the study argues that people with less than a college education are working longer hours in order to maintain their incomes. This implies that their real hourly wage rate is decreasing.
    1. Draw a diagram of the labor supply curve for this group of people with the real wage rate on the vertical axis and the number of work hours on the horizontal axis. Mark an initial real wage and the corresponding number of hours worked. Also shade in the area representing the total real income received.
    2. Show what happens to work hours and total income received when the wage rate decreases, assuming for the moment that nothing else changes.
    3. In fact, workers’ tastes for work over leisure have increased due to a desire to maintain their total income levels. Show what must have happened to the supply curve for this to occur.

  2. Some of the increase in labor supply is due to retirees and discouraged workers entering the work force.
    1. What must have happened to the real wage rate relative to the reservation wage rate of these people? Explain your answer.
    2. What might have caused their reservation wage rate to fall?

  3. Although not mentioned in the news story, labor supply decisions are affected by the amount of other income received.
    1. If the spouses of workers work longer hours and earn more money, what is going to happen to the labor supply curve of the workers whose spouses are working more? Illustrate on a new diagram of a labor supply curve and assume a constant real wage.
    2. What would this mean for the ability of the economy to keep on growing?
Source Beth Belton, “Tight job market helps women close pay gap,” USA Today, June 5, 1998.

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