If people's labor-supply decisions are taken at the level of the household, it is natural to expect aggregate demand and unemployment to influence the supply curve of labor. An increase in unemployment could prompt households to send more workers out in search of work to insure against the risk of the primary worker getting unemployed (the 'added worker effect'). But it could also discourage people from wasting energy searching for work (the 'discouragement effect'). While these effects have been studied empirically, their theoretical bases remain largely unexplored. The present paper formally models household labor supply decisions and establishes sufficient conditions for the domination of one effect over the other. A number of surprising results are established, such as the possibility of multiple equilibria in the labor market and how the announcement of a minimum wage policy can result in an overall lowering of wages and also give rise to an equilibrium which displays, simultaneously, excess demand and excess supply of labor. The model shows how the empirical literature may have a bias in overestimating the strength of the discouragement effect. It also provides a framework for analyzing the effects of minimum wage policy and the provision of unemployment benefits. It is argued that certain kinds of unemployment benefits can be justified on grounds of efficiency.
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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number
00-10.
Find related papers by JEL classification: D10 - Microeconomics - - Household Behavior - - - General J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Layard, R & Barton, M & Zabalza, A, 1980.
"Married Women's Participation and Hours,"
Economica,
London School of Economics and Political Science, vol. 47(185), pages 51-72, February.
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