Chapter 9: Wealth, Labour Force Participation and Trade
INTRODUCTION Although the unemployment rate is often used as an indicator of labourmarket conditions, it is sometimes argued that the amount of nonemployment may actually provide more information about the state of the labour market. Non-employment or non-participation would include potential workers who choose not to seek employment and would, in oﬃcial labour statistics, be counted as ‘out of the labour force’. Declining labour-market opportunities that are reﬂected in declining take-home wages relative to workers’ non-wage incomes would lead workers to choose not to work, or at least not to work all the time. Conversely, improving labour market conditions reﬂected in rising wages relative to workers’ nonwage incomes would lead individuals who were formerly out of the labour force to rejoin the labour market. In this chapter, we use a neoclassical growth model to study how changes in workers’ current and future wage earnings relative to their non-wage incomes aﬀect their labour supply decisions. Here, all variation in employment takes the form of adjustment in equilibrium man-hours supplied. However, following Woodford (1994), the adjustment of equilibrium man-hours supplied could be interpreted as occurring at the extensive margin if we think of the representative agent as belonging to a large group, which pools together its resources and decides jointly on consumption and employment supply. Under the latter interpretation, the variation in total employment reﬂects individuals’ decisions to participate in or withdraw from the labour force. The model we develop in this chapter incorporates individual labour supply...
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