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[SQUEAKING]
[RUSTLING] [CLICKING]

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JONATHAN GRUBER:
All right, let's

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get started today with our
lecture on factor markets.

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So when we talked
about producer theory,

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we talked about input
prices, that firms

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had prices for their
wages and their capital.

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And we just sort of
posed those as given.

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I just sort of gave
you values for the wage

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and the renter rate of capital.

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But we never really talked about
where those prices come from.

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Given that they may be
the most important prices

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in our whole economy,
it's probably worth

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spending a little time
on talking about where

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do w and r actually come from.

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And that's we'll do for
the next three lectures,

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is talk about factor markets,
talk about the markets

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that give us the price
of labor and capital.

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We're going to start
by talking about factor

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demand, the general demand
for labor and capital.

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And then we'll move on to
talk about factor supply,

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where does supply come from.

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We'll then develop
the equilibrium,

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and that will tell us where
wages and the interest rate

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come from.

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So that's sort of the
map of where we're going,

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is we're basically
going to develop

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the markets that give us the
wage rate and the interest

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rate.

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So let's start with factor
demand, factor demand.

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And let's start, and
we're going to start

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with the cleanest case.

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We're going to assume that
factor markets are perfectly

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competitive.

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So unless I say
otherwise, we're assuming

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the market for
workers, or the market

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for machines, or capital,
is perfectly competitive.

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OK, we'll come back and bend
that a little bit later.

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So what that means is that
there's basically many sellers

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and buyers, OK?

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So any worker is
basically competing

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with lots of workers for jobs.

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Any firm is competing
with lots of firms

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to hire the workers, OK?

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And we're also going--

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we're going to assume a
perfectly competitive input

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market, that is lots
of firms and workers

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competing to match
with each other.

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We're also going to assume a
perfectly competitive output

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market, that is, we're going
to examine this for the case

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not of a monopoly firm but of
a perfectly competitive firm.

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So just think of this, you have
a perfectly competitive firm

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competing with lots of other
firms to hire workers, OK?

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So let's start by talking
about short run labor

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demand in this context.

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Let's talk about short
run labor demand.

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Now, in the short
run, capital is fixed.

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So our decision is just, do
we add another worker or not,

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or another hour of labor or not.

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Like I said, the units
don't really matter here,

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but let's take in
terms of workers.

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Do we add another worker or not?

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Well, as with everything
else in this course,

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we want to consider the marginal
benefits and the marginal costs

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of that decision.

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The marginal benefit
of an extra worker

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is that one extra unit of
labor raises productivity

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by the marginal
product of labor, OK?

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One more unit of labor
raises our output

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by the marginal
product of labor, OK?

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But that's not the only
part of the benefit,

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because we don't actually
care as a firm about units

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of output.

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We care about revenues.

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So the benefit of a worker is
not just the how many units

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it produces, but the
value of those units.

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And what is the value of
the next unit produced?

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It's the marginal revenue.

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So the value of the
next unit of labor

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is what we call the marginal
revenue product, MRP sub

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L. The marginal
revenue product is

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the marginal product of
labor times marginal revenue.

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That's the benefit of
another unit of labor.

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It's not just what they
make, but what it's worth.

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It's not just what they make,
but what it's worth, OK?

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So that's the marginal benefit.

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The value of another
unit of labor

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is it makes marginal revenue
product amount more stuff,

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and you sell that at
the marginal revenue.

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That's the marginal benefit.

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What's the marginal cost
of another unit of labor?

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So this is the marginal benefit
of another unit of labor.

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What's the marginal cost?

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Well, the marginal cost
of labor is just the wage.

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So we simply set this
equal to the wage.

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We set the marginal
revenue product of labor

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equal to the wage, and that
gives us our optimization

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condition for the
optimal amount of labor

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the firms want to demand--

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is to set the marginal
revenue product of labor

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equal to the wage.

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Marginal benefits of hiring
another unit of labor

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equals the marginal cost of
hiring of the unit of labor.

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Now to go further,
remember, I said

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this is a perfectly
competitive output market.

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So what is the marginal revenue
in a perfectly competitive

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output market?

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What's the marginal revenue
of a firm producing-- yeah.

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Price.

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So I can write this
more to say that I

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want to set the marginal product
of labor times the price equal

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to the wage, OK?

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So basically, what
we're saying here--

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think about it-- is hire workers
until the cost of the next unit

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of labor is the same as
what that unit will actually

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produce for you, OK?

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The next unit of
labor costs you w.

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It produces for you MPL times p.

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So you want to hire workers
until that condition is

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met, OK?

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So think about that, and figure
15-1 sort of shows this, OK?

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We have a supply of labor.

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In 15-1, that's
horizontal, because we're

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assuming competitive
market for workers, OK?

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We're assuming a
competitive market

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for workers, that is a
perfectly competitive market.

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So if I try to pay workers one
penny more than other firms,

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every worker in the world
will want to work for me.

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If I pay workers one penny
less than other firms,

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no workers will
want to work for me.

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That's what a perfectly
competitive labor market

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means, that literally, I am
a price taker in the input

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market.

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I don't get to set the wage, OK?

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I don't get to set the wage.

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The wage is given to
me by the labor market.

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So just like a perfectly
competitive firm

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doesn't get to set the
price of their product--

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it's given to them by
the competitive market.

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A perfectly competitive
firm in the input market

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doesn't get to set
the wage they pay.

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It's given them through
the kind of process

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that delivered us our prices
on the output side, OK?

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So we get a horizontal
labor supply curve.

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And then we have this downward
sloping labor demand curve.

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Why is it downward sloping?

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Someone raise their
hand and tell me.

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Why is the labor demand
curve downward sloping?

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Yeah.

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AUDIENCE: Marginal product
of labor is diminishing.

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JONATHAN GRUBER: Exactly.

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The diminishing marginal
product of labor

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means you have a
downward sloping

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marginal benefit of labor.

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Each additional-- remember,
holding capital fixed

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is only one shovel.

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So each additional
worker add less and less

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to digging that hole, OK?

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So marginal product
is diminishing.

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Since p is a constant,
that doesn't really

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affect the slope.

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I mean, it affects the slope.

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It doesn't really
affect the sign.

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Doesn't affect the sign.

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It's diminishing because the
marginal product of labor

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is diminishing.

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So the equilibrium is
where they intersect.

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So the bottom line-- this
is complicated and new--

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the bottom line intuition
is to think about,

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as I decide whether to hire
one more hour of work--

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you've got a firm.

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You've got to decide,
do I want the worker

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to work one more hour?

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You do the tradeoff
of, what am I

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going to pay them for an
hour versus what are they

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going to get me for an hour.

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What they're going to get
me is their marginal product

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times the price, OK?

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Now, that--

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So in other words, the wage is
not just the marginal product.

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It's imagining if two workers
were equally productive.

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With one more hour of work,
they each make three more units.

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But let's say, in one case, a
unit is a computer chip, OK?

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In another case, a
unit is a potato chip.

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We clearly would not want to
pay the same wage to someone

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who produces three more computer
chips to someone who produces

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three more potato chips.

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We'd want to pay a
lot more to the person

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to do more computer chips.

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Why?

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Not because computers
are inherently valuable.

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In fact, potato chips
are much more delicious

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than computer chips.

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Because they sell
for a higher price.

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So therefore, you'd
want to pay more

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to the worker who produces more
units of a more valuable good.

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So let's think about
a sports example, OK?

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And I realize we're all
about baseball today,

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as we should be.

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Go, Red Sox.

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But let's focus on
basketball for a minute, OK?

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Now, imagine you're a owner of
a team in the NBA, the National

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Basketball
Association, and you're

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trying to decide how much
you pay one of your players.

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So basically, in that
case, your goal is to--

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your goal is wins.

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That's the goal.

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That's the profit you're trying
to maximize, is your wins.

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Let's say you're probably
trying to maximize

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your revenues from
ads and stuff,

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but assume that's
proportional to wins.

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OK, assume that
basically, the more you

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win, the more money you make.

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So let's say the thing you're
trying to maximize is wins, OK?

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So your labor demand,
the marginal product

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you care about, is the
contribution of the next player

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to your win total.

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That's what you care about.

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The marginal product of labor is
how much does that next player

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add to my win total, OK?

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So for example, LeBron James,
the best player in basketball,

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arguably the best
player in history--

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we could have that-- we could
have the LeBron versus Michael

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debate some other time, OK?

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LeBron James makes $31
million, and that's

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because his marginal
product is enormous.

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He adds a huge amount
of wins to any team, OK?

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We'll see with the--

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we'll run the
experiment to watch

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how the Cleveland Cavaliers
tank this year once LeBron

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has left, OK?

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Now, other players
don't make as much.

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Let's compare LeBron
James to Nate Robinson.

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You guys might not
know Nate Robinson is.

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He's one of the shortest players
in the history of the NBA

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at a paltry 5'9", which sounds
pretty tall to you and I,

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but it's tiny for the NBA.

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He was a very exciting player.

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It's kind of fun to
watch this little guy

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run among these giants.

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But he was just OK.

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He wasn't a great player.

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He was a fine player.

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He made about $2 million a
year by the end of his career.

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So basically, you have
LeBron making 31 million

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00:10:52,848 --> 00:10:54,390
and Nate Robinson
making two million,

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and that's sort of related
to their marginal product.

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So LeBron adds a lot
more to your wins.

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Now, what happened
is Nate Robinson

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quit basketball in
the US, and went

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00:11:01,820 --> 00:11:03,697
to play basketball in Israel.

251
00:11:03,697 --> 00:11:05,030
In Israel, they love basketball.

252
00:11:05,030 --> 00:11:05,540
They have a league.

253
00:11:05,540 --> 00:11:07,280
And he went to Israel,
and he was dominant.

254
00:11:07,280 --> 00:11:09,530
He was the best player in
Israel, because they don't--

255
00:11:09,530 --> 00:11:11,780
it's not as good as the US, OK?

256
00:11:11,780 --> 00:11:14,348
So his marginal
product went way up.

257
00:11:14,348 --> 00:11:15,890
Nate Robinson went
from being someone

258
00:11:15,890 --> 00:11:18,140
that had a small marginal
product to maybe the highest

259
00:11:18,140 --> 00:11:22,020
marginal product in the
league, and his wage went down

260
00:11:22,020 --> 00:11:24,390
from two million to 500,000.

261
00:11:24,390 --> 00:11:26,890
So this is a situation where
someone's marginal product went

262
00:11:26,890 --> 00:11:29,680
way up and their wage went down.

263
00:11:29,680 --> 00:11:31,460
Why?

264
00:11:31,460 --> 00:11:32,183
Yeah.

265
00:11:32,183 --> 00:11:34,100
AUDIENCE: Because people
aren't paying as much

266
00:11:34,100 --> 00:11:34,920
to watch basketball.

267
00:11:34,920 --> 00:11:37,462
JONATHAN GRUBER: Right, because
the marginal product went up,

268
00:11:37,462 --> 00:11:39,880
but the price went way down, OK?

269
00:11:39,880 --> 00:11:41,510
And what we care
about is the wage

270
00:11:41,510 --> 00:11:43,750
equals to marginal
product times the price.

271
00:11:43,750 --> 00:11:47,260
So you have a situation where a
player got better but got paid

272
00:11:47,260 --> 00:11:48,782
less because they got better.

273
00:11:48,782 --> 00:11:51,240
He moved from making computer
chips to making potato chips,

274
00:11:51,240 --> 00:11:51,982
OK?

275
00:11:51,982 --> 00:11:53,440
He moved from a
market where he was

276
00:11:53,440 --> 00:11:55,440
earning a valuable commodity
to one where he was

277
00:11:55,440 --> 00:11:58,130
earning one that was much less.

278
00:11:58,130 --> 00:12:01,228
So basically, it's a
situation-- that example

279
00:12:01,228 --> 00:12:02,770
shows why you have
to care about both

280
00:12:02,770 --> 00:12:06,250
the quantity of the additional
worker and the value of what

281
00:12:06,250 --> 00:12:08,530
they're producing, OK?

282
00:12:08,530 --> 00:12:11,070
Any questions about that?

283
00:12:11,070 --> 00:12:11,715
Yeah.

284
00:12:11,715 --> 00:12:14,417
AUDIENCE: When we talk about
perfectly competitive input

285
00:12:14,417 --> 00:12:18,228
market, are we saying that
like all of the workers--

286
00:12:18,228 --> 00:12:20,520
like a single hour of work
regardless of who you get it

287
00:12:20,520 --> 00:12:22,100
from is equal, right?

288
00:12:22,100 --> 00:12:23,100
JONATHAN GRUBER: No, no.

289
00:12:23,100 --> 00:12:24,660
A single hour of
work is paid equally.

290
00:12:24,660 --> 00:12:25,290
It's not equal.

291
00:12:25,290 --> 00:12:26,110
Marginal product varies.

292
00:12:26,110 --> 00:12:27,400
We're talking about the market.

293
00:12:27,400 --> 00:12:28,650
Let's think about a
perfectly competitive--

294
00:12:28,650 --> 00:12:29,820
I probably went
too fast with this.

295
00:12:29,820 --> 00:12:31,950
Let's say a perfectly
competitive output market

296
00:12:31,950 --> 00:12:36,028
is where the firms sell
the goods into a market

297
00:12:36,028 --> 00:12:37,570
where people have
perfect information

298
00:12:37,570 --> 00:12:39,510
and can shop across
all firms easily.

299
00:12:39,510 --> 00:12:41,010
A perfectly competitive
input market

300
00:12:41,010 --> 00:12:44,040
is where firms hire workers
in a situation workers

301
00:12:44,040 --> 00:12:46,470
have perfect information
and compare across all firms

302
00:12:46,470 --> 00:12:47,610
equally.

303
00:12:47,610 --> 00:12:50,387
So basically, the point
is, think about a perfectly

304
00:12:50,387 --> 00:12:51,470
competitive output market.

305
00:12:51,470 --> 00:12:53,860
People are in a market where
lots of people are shopping,

306
00:12:53,860 --> 00:12:55,330
and all the options
are in front of them.

307
00:12:55,330 --> 00:12:57,747
A perfectly competitive labor
market where you as a worker

308
00:12:57,747 --> 00:12:59,490
have lots of firms
you can work for,

309
00:12:59,490 --> 00:13:01,443
and they're all clearly
in front of you,

310
00:13:01,443 --> 00:13:03,360
and they all offer a
wage, and you can see it.

311
00:13:03,360 --> 00:13:04,492
AUDIENCE: OK, but
we're not saying

312
00:13:04,492 --> 00:13:06,725
that the firms have perfect
information across all

313
00:13:06,725 --> 00:13:08,965
the laborers, and [INAUDIBLE].

314
00:13:08,965 --> 00:13:10,433
Are we saying if we have the--

315
00:13:10,433 --> 00:13:11,850
JONATHAN GRUBER:
What we're saying

316
00:13:11,850 --> 00:13:13,680
is-- we're not saying the
firms have perfect information

317
00:13:13,680 --> 00:13:14,970
about the laborers.

318
00:13:14,970 --> 00:13:19,580
The firms essentially-- let
me think of the best way

319
00:13:19,580 --> 00:13:20,580
describe this.

320
00:13:20,580 --> 00:13:24,625
So once again, the firms are--
from the firm's perspective,

321
00:13:24,625 --> 00:13:26,000
they do have
perfect information.

322
00:13:26,000 --> 00:13:27,230
No, the wages
aren't-- yes, right,

323
00:13:27,230 --> 00:13:28,070
the workers aren't the same.

324
00:13:28,070 --> 00:13:29,653
They have different
marginal products.

325
00:13:29,653 --> 00:13:32,880
The firms know you're better
than you or vice versa.

326
00:13:32,880 --> 00:13:34,500
But from the firm's
perspective--

327
00:13:34,500 --> 00:13:36,410
from the workers'
perspective, is

328
00:13:36,410 --> 00:13:38,410
just like, think of the
workers as the consumers

329
00:13:38,410 --> 00:13:40,035
in a perfect competitive
output market.

330
00:13:40,035 --> 00:13:41,800
For a perfectly
competitive output market,

331
00:13:41,800 --> 00:13:44,690
the consumers can easily
shop across all the firms

332
00:13:44,690 --> 00:13:45,750
they might buy from.

333
00:13:45,750 --> 00:13:47,900
In a perfectly
competitive input market,

334
00:13:47,900 --> 00:13:50,240
workers can easily
shop among all firms

335
00:13:50,240 --> 00:13:52,580
they might work for, OK?

336
00:13:52,580 --> 00:13:53,980
That's a good question.

337
00:13:53,980 --> 00:13:55,570
Other questions?

338
00:13:55,570 --> 00:13:57,910
OK, now let's think
about the long run.

339
00:13:57,910 --> 00:13:59,122
This is the short run.

340
00:13:59,122 --> 00:14:01,330
Let's think for a minute
about long run labor demand.

341
00:14:03,860 --> 00:14:06,220
Think for a second about
long run labor demand.

342
00:14:06,220 --> 00:14:08,095
Well, what's different?

343
00:14:08,095 --> 00:14:10,220
The only thing that's
different is in the long run,

344
00:14:10,220 --> 00:14:12,365
capital can adjust as well.

345
00:14:12,365 --> 00:14:13,990
The only thing
different about the long

346
00:14:13,990 --> 00:14:16,100
run-- all the intuition,
everything's the same.

347
00:14:16,100 --> 00:14:19,400
It's just that capital
can adjust as well.

348
00:14:19,400 --> 00:14:21,640
And what this means
is that long run labor

349
00:14:21,640 --> 00:14:27,570
demand is more elastic than
short run labor demand, OK?

350
00:14:27,570 --> 00:14:32,740
So we could see this
in figure 15-2, OK?

351
00:14:32,740 --> 00:14:35,470
So the figure shows two
different short run labor

352
00:14:35,470 --> 00:14:38,320
demand curves at two
different levels of capital.

353
00:14:41,280 --> 00:14:46,070
So the short run labor
demand when k bar equals 32

354
00:14:46,070 --> 00:14:47,790
is that lower one.

355
00:14:47,790 --> 00:14:49,840
The short run labor demand
when k bar equals 108

356
00:14:49,840 --> 00:14:51,800
is the higher one.

357
00:14:51,800 --> 00:14:55,210
And what this says
is, in the short run,

358
00:14:55,210 --> 00:14:57,730
you've got these two
labor demand curves.

359
00:14:57,730 --> 00:14:59,830
In the long run, you
could optimize capital.

360
00:14:59,830 --> 00:15:02,110
You can pick a point
on either curve,

361
00:15:02,110 --> 00:15:04,870
depending on which level
of capital you choose.

362
00:15:04,870 --> 00:15:07,390
And by definition,
that allows you be more

363
00:15:07,390 --> 00:15:09,270
elastic at choosing your labor.

364
00:15:09,270 --> 00:15:10,810
You're more flexible
because you can

365
00:15:10,810 --> 00:15:13,870
optimize not just over workers,
but over machines as well.

366
00:15:13,870 --> 00:15:15,370
It's the same
intuition we developed

367
00:15:15,370 --> 00:15:17,453
before talking about short
run and long run costs,

368
00:15:17,453 --> 00:15:19,880
that the long run cost
curve was a lower envelope

369
00:15:19,880 --> 00:15:21,250
than the short run cost curve.

370
00:15:21,250 --> 00:15:21,940
Same thing here.

371
00:15:21,940 --> 00:15:23,440
This applies that
the long run labor

372
00:15:23,440 --> 00:15:27,568
demand is more elastic, because
I basically am more flexible.

373
00:15:27,568 --> 00:15:29,110
I not only can choose
a longer curve,

374
00:15:29,110 --> 00:15:30,812
I can choose which curve I use.

375
00:15:30,812 --> 00:15:32,770
And by definition, that
means that the long run

376
00:15:32,770 --> 00:15:34,700
is more elastic, OK?

377
00:15:34,700 --> 00:15:37,330
Just a small sort
of side point there.

378
00:15:37,330 --> 00:15:39,970
Now, the last thing I
want to talk about here

379
00:15:39,970 --> 00:15:41,020
is capital demand.

380
00:15:43,493 --> 00:15:45,660
We talked about short run
and long run labor demand.

381
00:15:45,660 --> 00:15:47,570
Let's talk about capital demand.

382
00:15:47,570 --> 00:15:50,030
It basically is the same thing.

383
00:15:50,030 --> 00:15:52,940
Capital demand is the
exact same intuition.

384
00:15:52,940 --> 00:15:56,180
You want to get machines
until the marginal product

385
00:15:56,180 --> 00:15:59,720
of capital, marginal
product of the next machine,

386
00:15:59,720 --> 00:16:05,950
times the price you get for your
good equals the interest rate.

387
00:16:05,950 --> 00:16:07,277
It's the same condition.

388
00:16:07,277 --> 00:16:09,360
So we want to hire workers
so the marginal product

389
00:16:09,360 --> 00:16:12,150
of the labor times the price of
our good equals the wage rate.

390
00:16:12,150 --> 00:16:15,422
We want to invest
in more machines

391
00:16:15,422 --> 00:16:16,880
until the margin
product of capital

392
00:16:16,880 --> 00:16:19,290
of the next machine times
the price for our goods

393
00:16:19,290 --> 00:16:21,500
is equal to the interest rate.

394
00:16:21,500 --> 00:16:22,690
So it's exact same logic.

395
00:16:22,690 --> 00:16:23,490
Here's the marginal cost.

396
00:16:23,490 --> 00:16:24,870
The next unit of
capital-- remember,

397
00:16:24,870 --> 00:16:26,120
we talked about the intuition.

398
00:16:26,120 --> 00:16:27,360
You're always renting things.

399
00:16:27,360 --> 00:16:28,980
So thinking about
renting a machine,

400
00:16:28,980 --> 00:16:31,620
the next machine
costs are to rent.

401
00:16:31,620 --> 00:16:32,640
Do you want to rent it?

402
00:16:32,640 --> 00:16:33,690
Well, it depends.

403
00:16:33,690 --> 00:16:37,320
What will it produce, and what
can you sell that stuff for?

404
00:16:37,320 --> 00:16:39,990
So you rent the next machine
if the marginal product

405
00:16:39,990 --> 00:16:41,790
of capital, if the
goods it produces,

406
00:16:41,790 --> 00:16:43,680
times what you sell
those goods for, you

407
00:16:43,680 --> 00:16:48,880
want to do that until that
equals the interest rate, OK?

408
00:16:48,880 --> 00:16:49,970
Questions about that?

409
00:16:49,970 --> 00:16:50,568
Yeah.

410
00:16:50,568 --> 00:16:53,315
AUDIENCE: [INAUDIBLE]
machine that you buy and own?

411
00:16:53,315 --> 00:16:54,190
JONATHAN GRUBER: Yes.

412
00:16:54,190 --> 00:16:56,840
We're going to talk about that
a lot starting next lecture.

413
00:16:56,840 --> 00:16:58,480
Right now, I think I'll
just put this down here.

414
00:16:58,480 --> 00:16:59,980
We'll come back to
it, but I'm going

415
00:16:59,980 --> 00:17:02,270
to focus on labor
for this lecture, OK?

416
00:17:02,270 --> 00:17:05,964
So let's focus on labor, and
let's-- so I just put that

417
00:17:05,964 --> 00:17:08,089
down, and we'll back to
capital, but focus on labor

418
00:17:08,089 --> 00:17:10,589
for a minute, and make sure to
understand where labor demand

419
00:17:10,589 --> 00:17:11,359
comes from.

420
00:17:11,359 --> 00:17:15,290
Now let's talk about where
does labor supply come from.

421
00:17:15,290 --> 00:17:17,450
We talked about,
at the firm level,

422
00:17:17,450 --> 00:17:18,970
labor supply is
perfectly elastic.

423
00:17:18,970 --> 00:17:20,599
So go back to figure 15-1.

424
00:17:20,599 --> 00:17:23,810
That was a firm level curve, OK?

425
00:17:23,810 --> 00:17:25,400
That was a firm level curve.

426
00:17:25,400 --> 00:17:28,273
That's a perfectly elastic
labor supply to a firm,

427
00:17:28,273 --> 00:17:29,690
but that doesn't
mean labor supply

428
00:17:29,690 --> 00:17:31,580
to the market's
perfectly elastic.

429
00:17:31,580 --> 00:17:34,850
So now we want to derive
market labor supply.

430
00:17:34,850 --> 00:17:37,550
So I'll call this
deriving market labor

431
00:17:37,550 --> 00:17:46,610
supply, deriving market
labor supply, OK?

432
00:17:46,610 --> 00:17:51,020
Now, this is basically
the question of,

433
00:17:51,020 --> 00:17:53,463
how do we model how hard
people want to work?

434
00:17:53,463 --> 00:17:54,880
This is, once
again, getting where

435
00:17:54,880 --> 00:17:58,190
the economics is exciting, OK?

436
00:17:58,190 --> 00:18:01,720
You sort of knew that economics
was involved in how much Ford

437
00:18:01,720 --> 00:18:04,342
charged for a car,
but you might not

438
00:18:04,342 --> 00:18:06,050
have thought so much
about that economics

439
00:18:06,050 --> 00:18:10,020
was involved in deciding how
hard you work, but it is.

440
00:18:10,020 --> 00:18:13,490
And we're going to use the
same tools of consumer choice.

441
00:18:13,490 --> 00:18:15,920
Indeed, I used to teach this
as an application of consumer

442
00:18:15,920 --> 00:18:19,280
choice, and now I teach it here,
because it's the same tools

443
00:18:19,280 --> 00:18:20,360
of consumer choice.

444
00:18:20,360 --> 00:18:24,410
But now, consumers, instead of
choosing good A versus good B,

445
00:18:24,410 --> 00:18:28,540
are going to choose how hard
they're going to work, OK?

446
00:18:28,540 --> 00:18:33,690
So basically, like any
choice, there's a tradeoff.

447
00:18:33,690 --> 00:18:34,710
There's a tradeoff.

448
00:18:34,710 --> 00:18:40,110
On the one hand, if you work
harder, you get more stuff.

449
00:18:40,110 --> 00:18:41,460
So you bring home more income.

450
00:18:41,460 --> 00:18:44,280
You can buy more
pizzas and cookies, OK?

451
00:18:44,280 --> 00:18:46,380
Remember, we talked about
income as a fixed thing

452
00:18:46,380 --> 00:18:48,590
your parents gave you, but
in reality, sorry, kids,

453
00:18:48,590 --> 00:18:51,120
you're going to have to
make your own money someday.

454
00:18:51,120 --> 00:18:53,130
In reality, you're going
to make a Y. It's not

455
00:18:53,130 --> 00:18:54,180
going to be given to you.

456
00:18:54,180 --> 00:18:55,860
And so if you want to buy
more pizza and cookies,

457
00:18:55,860 --> 00:18:57,777
you're going to have to
raise your Y. It's not

458
00:18:57,777 --> 00:18:59,430
going to be given, OK?

459
00:18:59,430 --> 00:19:01,240
So the reason you
want to work harder

460
00:19:01,240 --> 00:19:03,300
is to buy more
pizza and cookies.

461
00:19:03,300 --> 00:19:05,400
The reason you don't
want to work harder

462
00:19:05,400 --> 00:19:08,100
is because you're not
an MIT student, OK?

463
00:19:08,100 --> 00:19:12,760
That is, normal people actually
don't like work, newsflash.

464
00:19:12,760 --> 00:19:14,080
OK?

465
00:19:14,080 --> 00:19:16,780
Normal people
actually like leisure.

466
00:19:16,780 --> 00:19:18,980
There's a thing called
leisure, it turns out,

467
00:19:18,980 --> 00:19:21,790
and normal people like it, OK?

468
00:19:21,790 --> 00:19:23,440
So the tradeoff for
regular people--

469
00:19:23,440 --> 00:19:26,530
so it's a hard
thing teach at MIT--

470
00:19:26,530 --> 00:19:29,778
is that basically, the
tradeoff is if you work harder,

471
00:19:29,778 --> 00:19:31,570
you get more stuff,
but you spend more time

472
00:19:31,570 --> 00:19:33,860
doing something you
don't want to do.

473
00:19:33,860 --> 00:19:35,505
Now, this is weird.

474
00:19:35,505 --> 00:19:37,150
When we talked about
tradeoffs before,

475
00:19:37,150 --> 00:19:39,580
we talked about the tradeoff
between goods, pizza

476
00:19:39,580 --> 00:19:40,210
and cookies.

477
00:19:40,210 --> 00:19:41,710
Now we're talking
about the tradeoff

478
00:19:41,710 --> 00:19:43,660
between a good and a bad.

479
00:19:43,660 --> 00:19:45,460
The good is more stuff to eat.

480
00:19:45,460 --> 00:19:47,590
The bad is working harder,
and we don't really

481
00:19:47,590 --> 00:19:49,330
know how to model that.

482
00:19:49,330 --> 00:19:51,640
So the trick we're
going to use here

483
00:19:51,640 --> 00:19:55,030
is we're going to flip
the bad into a good.

484
00:19:55,030 --> 00:19:59,940
Instead of modeling labor,
we're going to model leisure.

485
00:19:59,940 --> 00:20:03,650
So to get labor supply, we're
going to model leisure supply,

486
00:20:03,650 --> 00:20:07,400
and then just flip it around
to get labor supply, OK?

487
00:20:07,400 --> 00:20:13,400
So that is, we're going to say,
your ultimate labor supply,

488
00:20:13,400 --> 00:20:16,760
the amount of hours you
work, the amount you work,

489
00:20:16,760 --> 00:20:19,280
the amount of hours
you work, call them H,

490
00:20:19,280 --> 00:20:28,760
is equal to 24 minus leisure.

491
00:20:28,760 --> 00:20:32,240
Let's call it leisure, because
leisure's called little l.

492
00:20:32,240 --> 00:20:33,470
Leisure's little l.

493
00:20:33,470 --> 00:20:36,260
The amount of hours you work is
24 minus the hours of leisure

494
00:20:36,260 --> 00:20:37,490
you take.

495
00:20:37,490 --> 00:20:41,450
What that means is I don't
have to model the bad.

496
00:20:41,450 --> 00:20:45,200
I can model the good and just
use this simple reflection

497
00:20:45,200 --> 00:20:47,708
equation to get the bad, OK?

498
00:20:47,708 --> 00:20:49,125
So this is the
trick in economics.

499
00:20:49,125 --> 00:20:50,390
It's a good modeling trick.

500
00:20:50,390 --> 00:20:51,545
We don't model bad
so we don't have

501
00:20:51,545 --> 00:20:53,100
to do the tradeoff between
the bad and the good.

502
00:20:53,100 --> 00:20:55,225
We don't have to do the
tradeoff between two goods.

503
00:20:55,225 --> 00:20:56,480
So turn the bad into a good.

504
00:20:56,480 --> 00:20:59,200
Don't model work, model leisure.

505
00:20:59,200 --> 00:21:01,700
Don't model your hours
you work, model how many

506
00:21:01,700 --> 00:21:03,710
hours of leisure, OK?

507
00:21:03,710 --> 00:21:05,160
This is a general
modeling trick.

508
00:21:05,160 --> 00:21:07,860
So what we want to
ask is, now, not how

509
00:21:07,860 --> 00:21:09,780
do you derive the
supply of labor,

510
00:21:09,780 --> 00:21:13,190
how do you derive the
demand for leisure?

511
00:21:13,190 --> 00:21:16,230
How do we derive how
much leisure people want?

512
00:21:16,230 --> 00:21:18,927
Well, once I say it that
way, you know what to do,

513
00:21:18,927 --> 00:21:20,010
which is what I just said.

514
00:21:20,010 --> 00:21:23,490
There are two goods,
consumption and leisure.

515
00:21:23,490 --> 00:21:25,440
I wonder how much of
one good you choose--

516
00:21:25,440 --> 00:21:26,490
of each good you choose.

517
00:21:26,490 --> 00:21:28,830
Well, that's a consumer
choice problem.

518
00:21:28,830 --> 00:21:31,110
You know how to do that, OK?

519
00:21:31,110 --> 00:21:36,430
So basically, take
figure 15-3, OK?

520
00:21:36,430 --> 00:21:40,570
In figure 15-3, now, instead
of doing pizza versus cookies,

521
00:21:40,570 --> 00:21:42,360
now our decision
is all consumption.

522
00:21:42,360 --> 00:21:44,360
So we're thinking about
consumption as a bundle,

523
00:21:44,360 --> 00:21:47,240
OK, versus leisure.

524
00:21:47,240 --> 00:21:51,490
So on the y-axis is
the goods you choose.

525
00:21:51,490 --> 00:21:55,560
On the x-axis is how much
leisure you take, OK?

526
00:21:55,560 --> 00:21:59,070
It says N but actually it
should be little l, OK?

527
00:21:59,070 --> 00:22:00,900
Should be little l.

528
00:22:00,900 --> 00:22:03,230
So let's call that little l, OK?

529
00:22:03,230 --> 00:22:08,560
So basically, as you go
more positive on the x-axis,

530
00:22:08,560 --> 00:22:09,610
that's more leisure.

531
00:22:09,610 --> 00:22:11,380
But because this
equation, that implies

532
00:22:11,380 --> 00:22:14,200
as you go to the left on the
axis, that's more work, OK?

533
00:22:14,200 --> 00:22:15,820
Yeah.

534
00:22:15,820 --> 00:22:17,360
H is hours of work.

535
00:22:17,360 --> 00:22:18,260
H is hours of work.

536
00:22:18,260 --> 00:22:20,353
So as you go to the
left, you work more.

537
00:22:20,353 --> 00:22:22,270
As you go to the right,
you take more leisure.

538
00:22:22,270 --> 00:22:24,500
But we're modeling the
good, which is leisure.

539
00:22:24,500 --> 00:22:28,600
And then we just go
to our standard--

540
00:22:28,600 --> 00:22:31,990
we go to our standard
consumer choice equation.

541
00:22:31,990 --> 00:22:34,180
We have a budget
constraint and preferences.

542
00:22:34,180 --> 00:22:38,730
The indifference curve comes
from your utility function.

543
00:22:38,730 --> 00:22:44,430
It comes from your indifference
between how much you consume

544
00:22:44,430 --> 00:22:45,897
and how much leisure you take.

545
00:22:45,897 --> 00:22:48,480
And the indifference curve comes
from like any consumer choice

546
00:22:48,480 --> 00:22:49,017
decision.

547
00:22:49,017 --> 00:22:51,100
But instead of choosing
between pizza and cookies,

548
00:22:51,100 --> 00:22:52,920
now it's how much stuff you
want versus how much leisure you

549
00:22:52,920 --> 00:22:54,070
want to take.

550
00:22:54,070 --> 00:22:56,220
So it's the same sort
of indifference curve.

551
00:22:56,220 --> 00:23:01,840
The budget constraint comes
from what the market tells

552
00:23:01,840 --> 00:23:04,420
you is the cost of leisure.

553
00:23:04,420 --> 00:23:07,790
What is the price of leisure?

554
00:23:07,790 --> 00:23:10,928
What is the price of leisure?

555
00:23:10,928 --> 00:23:11,470
Someone else?

556
00:23:11,470 --> 00:23:12,760
Someone else got it?

557
00:23:12,760 --> 00:23:13,330
Yeah,

558
00:23:13,330 --> 00:23:14,010
AUDIENCE: Your wage.

559
00:23:14,010 --> 00:23:14,380
JONATHAN GRUBER: Your wage.

560
00:23:14,380 --> 00:23:15,755
Why is that the
price of leisure?

561
00:23:15,755 --> 00:23:17,338
AUDIENCE: Because
every hour you don't

562
00:23:17,338 --> 00:23:19,340
work is another hour
of wage you don't get.

563
00:23:19,340 --> 00:23:21,340
JONATHAN GRUBER:
Which we call what?

564
00:23:21,340 --> 00:23:21,880
AUDIENCE: Opportunity cost.

565
00:23:21,880 --> 00:23:22,250
JONATHAN GRUBER:
Opportunity cost.

566
00:23:22,250 --> 00:23:24,190
Remember, prices
and opportunity cost

567
00:23:24,190 --> 00:23:25,780
are the same thing in economics.

568
00:23:25,780 --> 00:23:28,405
Here's once again where it gets
interesting to apply what we've

569
00:23:28,405 --> 00:23:30,130
learned, which is
that basically, this

570
00:23:30,130 --> 00:23:32,680
is why, once again, they call
economics the dismal science.

571
00:23:32,680 --> 00:23:34,470
Instead of having
fun sitting around,

572
00:23:34,470 --> 00:23:36,790
we're telling you,
you know, by the way,

573
00:23:36,790 --> 00:23:38,440
you could be working
and making a wage.

574
00:23:38,440 --> 00:23:41,940
So you're actually spending
money by taking leisure.

575
00:23:41,940 --> 00:23:43,710
By taking leisure, you
are spending money.

576
00:23:43,710 --> 00:23:44,910
What are you spending?

577
00:23:44,910 --> 00:23:47,950
You're spending the money
you could be earning.

578
00:23:47,950 --> 00:23:51,270
So the opportunity--
so leisure has a price,

579
00:23:51,270 --> 00:23:54,150
and the price of
leisure is the wage.

580
00:23:54,150 --> 00:23:56,340
It's what you could be
earning if you were working.

581
00:23:56,340 --> 00:24:00,210
So the budget constraint
has the slope of minus w.

582
00:24:00,210 --> 00:24:02,250
So if you look at the
budget constraint,

583
00:24:02,250 --> 00:24:05,250
you could take 24
hours of leisure

584
00:24:05,250 --> 00:24:07,920
and have zero consumption, OK?

585
00:24:07,920 --> 00:24:10,530
That's the x-axis intercept.

586
00:24:10,530 --> 00:24:17,460
Or you take no leisure and have
24w worth of consumption, OK?

587
00:24:17,460 --> 00:24:21,528
So basically, that is
the tradeoff you face.

588
00:24:21,528 --> 00:24:23,320
One other modeling
trick-- couple of them--

589
00:24:23,320 --> 00:24:24,820
so a couple of
modeling tricks here.

590
00:24:24,820 --> 00:24:28,840
Modeling trick one is modeling
the good, not the bad, OK?

591
00:24:28,840 --> 00:24:33,105
Modeling trick two is, I
wrote on the x-axis goods,

592
00:24:33,105 --> 00:24:34,480
but we don't think
in quantities,

593
00:24:34,480 --> 00:24:36,080
we think in dollars.

594
00:24:36,080 --> 00:24:37,580
So to make life
easier, I just said,

595
00:24:37,580 --> 00:24:41,190
let's assume the price of
the average good is $1.

596
00:24:41,190 --> 00:24:42,480
That way you can--

597
00:24:42,480 --> 00:24:45,810
that's called-- that's
just a normalization, OK,

598
00:24:45,810 --> 00:24:48,060
which allows you to think
in terms of dollars of goods

599
00:24:48,060 --> 00:24:49,310
rather than quantity of goods.

600
00:24:49,310 --> 00:24:51,060
That's another modeling
trick we'll do.

601
00:24:51,060 --> 00:24:53,788
We call it making a
numerator good, OK?

602
00:24:53,788 --> 00:24:55,330
You don't have to
remember that term,

603
00:24:55,330 --> 00:24:56,705
but the point is
a trick we'll do

604
00:24:56,705 --> 00:24:58,660
is we want to model
dollars, not quantities.

605
00:24:58,660 --> 00:25:00,580
We just make the
quantities cost $1,

606
00:25:00,580 --> 00:25:03,030
and then we can model
quantities basically as dollars.

607
00:25:03,030 --> 00:25:04,363
So that's the trick we're doing.

608
00:25:04,363 --> 00:25:07,150
So the y-axis is dollars,
but it's also quantities,

609
00:25:07,150 --> 00:25:10,052
because we made the price
of everything be $1, OK?

610
00:25:10,052 --> 00:25:12,010
It's just another trick
that makes life easier.

611
00:25:12,010 --> 00:25:15,140
OK, so two modeling tricks
here, the numerator trick,

612
00:25:15,140 --> 00:25:18,760
which is making the price $1
so quantities become dollars,

613
00:25:18,760 --> 00:25:21,460
and the bad is good trick,
which is model the good,

614
00:25:21,460 --> 00:25:23,410
and then reverse
that to get the bad.

615
00:25:23,410 --> 00:25:25,360
Having done that,
we know what to do.

616
00:25:25,360 --> 00:25:27,550
We get an optimum,
which is the tendency

617
00:25:27,550 --> 00:25:30,730
between the indifference curve
and the budget constraint,

618
00:25:30,730 --> 00:25:32,550
and we're done.

619
00:25:32,550 --> 00:25:33,630
And so what do you do?

620
00:25:33,630 --> 00:25:36,550
You choose-- we're going to call
this L. We'll call it little l.

621
00:25:36,550 --> 00:25:40,650
You choose little l
star hours of leisure,

622
00:25:40,650 --> 00:25:45,660
which means you choose 24 minus
little l star hours of work,

623
00:25:45,660 --> 00:25:46,190
OK?

624
00:25:46,190 --> 00:25:47,210
So basically, you sat down.

625
00:25:47,210 --> 00:25:48,627
You made the
decision, how much do

626
00:25:48,627 --> 00:25:51,520
I want to eat versus how
much do I want to watch TV.

627
00:25:51,520 --> 00:25:54,680
You make that tradeoff, and that
determines how hard you work,

628
00:25:54,680 --> 00:25:55,700
OK?

629
00:25:55,700 --> 00:25:56,680
Now-- yeah.

630
00:26:00,020 --> 00:26:03,230
AUDIENCE: Aren't there things
that are kind of necessary?

631
00:26:03,230 --> 00:26:06,220
Like for example, if
you wanted to-- like

632
00:26:06,220 --> 00:26:11,213
if your preference was
completely to work,

633
00:26:11,213 --> 00:26:13,130
then wouldn't we be like
an inefficient worker

634
00:26:13,130 --> 00:26:14,110
if we didn't sleep?

635
00:26:14,110 --> 00:26:14,862
Doesn't--

636
00:26:14,862 --> 00:26:16,570
JONATHAN GRUBER: Well,
and in some sense,

637
00:26:16,570 --> 00:26:19,610
that would be in your
utility function,

638
00:26:19,610 --> 00:26:21,240
or it would be in
your utility function

639
00:26:21,240 --> 00:26:22,490
and/or your budget constraint.

640
00:26:22,490 --> 00:26:23,900
That would be true, absolutely.

641
00:26:23,900 --> 00:26:25,492
But that would be a feature.

642
00:26:25,492 --> 00:26:27,450
That wouldn't change this
maximization problem.

643
00:26:27,450 --> 00:26:28,867
It'd just change
general structure

644
00:26:28,867 --> 00:26:32,830
of the equations that go into
the maximization problem, OK?

645
00:26:32,830 --> 00:26:37,197
So basically, now, what's really
interesting about this is now

646
00:26:37,197 --> 00:26:39,280
we finally understand why
we learned all that shit

647
00:26:39,280 --> 00:26:40,963
about income and
substitution effects.

648
00:26:40,963 --> 00:26:42,880
Remember, let's think
of substitution effects.

649
00:26:42,880 --> 00:26:44,880
And you're probably saying
like, "Why do I care?

650
00:26:44,880 --> 00:26:45,628
Price goes up.

651
00:26:45,628 --> 00:26:46,420
Quantity goes down.

652
00:26:46,420 --> 00:26:47,350
Why do I care?"

653
00:26:47,350 --> 00:26:53,350
Here's why you care, because now
it gets really interesting, OK?

654
00:26:53,350 --> 00:26:55,690
Because when we're doing
substitution effects

655
00:26:55,690 --> 00:26:57,670
for a good, they work together.

656
00:26:57,670 --> 00:27:00,623
As long as the good was
normal, they work together.

657
00:27:00,623 --> 00:27:03,040
When the price went up, you
substituted away from the good

658
00:27:03,040 --> 00:27:04,350
and you are poor.

659
00:27:04,350 --> 00:27:06,370
So it gets substituted
down for two reasons.

660
00:27:06,370 --> 00:27:13,970
Now, a normal leisure effect
is an inferior labor effect.

661
00:27:13,970 --> 00:27:19,040
What I mean by that is that
when your wage goes up,

662
00:27:19,040 --> 00:27:22,220
you work more through the
substitution effect, but now

663
00:27:22,220 --> 00:27:23,780
you're richer.

664
00:27:23,780 --> 00:27:26,820
And when you're richer,
you buy more of everything,

665
00:27:26,820 --> 00:27:28,530
including leisure.

666
00:27:28,530 --> 00:27:31,820
So if you take more
leisure, you do less labor.

667
00:27:31,820 --> 00:27:34,870
So the income effect naturally
goes against the substitution

668
00:27:34,870 --> 00:27:35,370
effect.

669
00:27:35,370 --> 00:27:36,240
I'll go through this
a couple of times.

670
00:27:36,240 --> 00:27:37,060
Don't worry.

671
00:27:37,060 --> 00:27:39,260
The income effect naturally goes
against the substitution effect

672
00:27:39,260 --> 00:27:39,860
here.

673
00:27:39,860 --> 00:27:42,200
For consumption goods,
the income effect

674
00:27:42,200 --> 00:27:44,910
naturally work together, OK?

675
00:27:44,910 --> 00:27:47,180
We almost never saw sort
of a Giffen good type

676
00:27:47,180 --> 00:27:49,610
phenomenon, where the
effect could sort of switch

677
00:27:49,610 --> 00:27:50,960
the overall effect.

678
00:27:50,960 --> 00:27:52,520
For labor, that's
much more likely,

679
00:27:52,520 --> 00:27:58,370
and it's much more likely not
because of any inferior good.

680
00:27:58,370 --> 00:28:00,470
It's because leisure
is a normal good,

681
00:28:00,470 --> 00:28:02,940
and labor is the
opposite of leisure.

682
00:28:02,940 --> 00:28:04,590
So once again, let
me say it again.

683
00:28:04,590 --> 00:28:06,820
The wage goes up.

684
00:28:06,820 --> 00:28:11,590
The substitution effect--
think of leisure as a good.

685
00:28:11,590 --> 00:28:15,350
When the wage goes up, that's
the price of leisure going up.

686
00:28:15,350 --> 00:28:17,660
When the price of
a good goes up,

687
00:28:17,660 --> 00:28:21,220
the substitution effects
says you want less of it, OK?

688
00:28:21,220 --> 00:28:26,980
So when the wage goes up,
the substitution effect

689
00:28:26,980 --> 00:28:31,530
says that leisure
goes down, right?

690
00:28:31,530 --> 00:28:33,300
Because you want to
substitute-- wait,

691
00:28:33,300 --> 00:28:35,160
leisure just got more expensive.

692
00:28:35,160 --> 00:28:37,260
You now feel worse sitting
around watching TV,

693
00:28:37,260 --> 00:28:39,570
because you could be out
there making more money.

694
00:28:39,570 --> 00:28:41,264
Yeah.

695
00:28:41,264 --> 00:28:43,256
AUDIENCE: Wouldn't
income-- [COUGHS]

696
00:28:43,256 --> 00:28:43,760
JONATHAN GRUBER: I haven't
got to income effect.

697
00:28:43,760 --> 00:28:45,395
Let me finish, then
you can ask it.

698
00:28:45,395 --> 00:28:46,640
AUDIENCE: Wouldn't
income effect be--

699
00:28:46,640 --> 00:28:47,640
JONATHAN GRUBER: I haven't
gotten to the income effects.

700
00:28:47,640 --> 00:28:50,460
Let me ask finish, then
you can ask it, OK?

701
00:28:50,460 --> 00:28:54,990
So the substitution effect says
that leisure goes down, OK?

702
00:28:54,990 --> 00:29:01,250
The income effect says
that you are richer, right?

703
00:29:01,250 --> 00:29:02,710
Your wage went up.

704
00:29:02,710 --> 00:29:03,950
You're richer.

705
00:29:03,950 --> 00:29:07,630
When you're richer, you want
more of all normal goods.

706
00:29:07,630 --> 00:29:12,160
Leisure for non-MIT
students is a normal good.

707
00:29:12,160 --> 00:29:13,380
So you want more of it.

708
00:29:16,790 --> 00:29:20,920
So here, with consumption
goods, when they were normal,

709
00:29:20,920 --> 00:29:23,770
the income and substitution
effects work together.

710
00:29:23,770 --> 00:29:27,163
With labor and leisure,
they work opposite.

711
00:29:27,163 --> 00:29:28,830
So what this is, the
substitution effect

712
00:29:28,830 --> 00:29:32,320
says take more leisure,
which means work--

713
00:29:32,320 --> 00:29:35,170
take less leisure means work
harder, work more hours.

714
00:29:35,170 --> 00:29:37,120
But the income effect
says take more leisure,

715
00:29:37,120 --> 00:29:40,420
which means work less hours.

716
00:29:40,420 --> 00:29:44,083
So you don't know what
the net effect is.

717
00:29:44,083 --> 00:29:46,250
So that's why we do income
and substitution effects,

718
00:29:46,250 --> 00:29:48,070
because in a case like this,
they get much more interesting.

719
00:29:48,070 --> 00:29:49,028
Yes, now your question.

720
00:29:49,028 --> 00:29:52,310
AUDIENCE: Is this income effect
in terms of income over time?

721
00:29:52,310 --> 00:29:53,870
JONATHAN GRUBER: No, this is
your income, your actual cash

722
00:29:53,870 --> 00:29:54,380
income.

723
00:29:54,380 --> 00:29:57,140
You are now richer,
and when you're richer,

724
00:29:57,140 --> 00:29:58,520
you spend more on everything.

725
00:29:58,520 --> 00:29:59,280
So think of it this way.

726
00:29:59,280 --> 00:30:00,910
Once again, imagine
you're not an MIT student.

727
00:30:00,910 --> 00:30:01,960
You're a normal guy.

728
00:30:01,960 --> 00:30:05,260
OK, if we won the lottery,
if you guys won the lottery,

729
00:30:05,260 --> 00:30:07,520
you would use that
to do a startup.

730
00:30:07,520 --> 00:30:09,240
If a normal person
won the lottery,

731
00:30:09,240 --> 00:30:12,440
they'd use it to not work, OK?

732
00:30:12,440 --> 00:30:13,928
That's the income effect.

733
00:30:13,928 --> 00:30:15,470
OK, when normal
people win lotteries,

734
00:30:15,470 --> 00:30:16,970
they don't go work harder.

735
00:30:16,970 --> 00:30:19,040
They don't work, OK?

736
00:30:19,040 --> 00:30:20,270
So that's the point.

737
00:30:20,270 --> 00:30:23,130
You are now richer
because your wage went up.

738
00:30:23,130 --> 00:30:25,550
So you work less,
and that offsets it.

739
00:30:25,550 --> 00:30:27,180
So let's show this in a graph.

740
00:30:27,180 --> 00:30:29,555
Let's go back to our income
and substitution effect graph

741
00:30:29,555 --> 00:30:33,108
that we did before,
figure 15-4, OK?

742
00:30:33,108 --> 00:30:33,900
Now we're back to--

743
00:30:33,900 --> 00:30:36,870
once again, this is just
applied consumer theory, OK?

744
00:30:36,870 --> 00:30:39,270
Let's go back to the income
and substitution effects.

745
00:30:39,270 --> 00:30:42,840
We start with budget
constraint one at wage one,

746
00:30:42,840 --> 00:30:47,630
and we have our initial tangency
at A, OK, with leisure of N1

747
00:30:47,630 --> 00:30:50,450
or little l1.

748
00:30:50,450 --> 00:30:53,450
Now our wage goes up.

749
00:30:53,450 --> 00:30:54,260
Our wage goes up.

750
00:30:54,260 --> 00:30:56,880
Therefore, the budget
constraint pivots up.

751
00:30:56,880 --> 00:30:58,250
Think of what that means.

752
00:30:58,250 --> 00:31:00,500
You can still only have
24 hours of leisure.

753
00:31:00,500 --> 00:31:02,090
That's a fixed point.

754
00:31:02,090 --> 00:31:06,290
But as you take less
leisure, you make more money.

755
00:31:06,290 --> 00:31:08,510
So the budget trade
now pivots up.

756
00:31:08,510 --> 00:31:10,340
Well, that has two effects.

757
00:31:10,340 --> 00:31:12,980
The first is the
substitution effect.

758
00:31:12,980 --> 00:31:14,090
Remember how we get that.

759
00:31:14,090 --> 00:31:16,370
We draw an imaginary
budget constraint

760
00:31:16,370 --> 00:31:18,812
at the new price ratio.

761
00:31:18,812 --> 00:31:20,270
The price ratio is
just W because I

762
00:31:20,270 --> 00:31:22,570
assume the price of goods is 1.

763
00:31:22,570 --> 00:31:25,390
The new price ratio, tangent
to the old indifference

764
00:31:25,390 --> 00:31:29,970
curve, that is point B. So
the substitution effect says,

765
00:31:29,970 --> 00:31:35,000
take less leisure, OK?

766
00:31:35,000 --> 00:31:38,660
The price of leisure has gone
up, so holding utility costs,

767
00:31:38,660 --> 00:31:40,760
you want to take less leisure.

768
00:31:40,760 --> 00:31:42,560
The income effect,
however, says,

769
00:31:42,560 --> 00:31:46,326
you are now richer
so take more leisure.

770
00:31:46,326 --> 00:31:48,450
So the income effect
goes the opposite way

771
00:31:48,450 --> 00:31:50,440
of the substitution
effect naturally.

772
00:31:50,440 --> 00:31:52,440
You don't need a weird
thing for that to happen,

773
00:31:52,440 --> 00:31:53,790
like with pizza and cookies.

774
00:31:53,790 --> 00:31:55,680
It comes naturally.

775
00:31:55,680 --> 00:31:59,370
So for normal goods, the income
effect goes the opposite way.

776
00:31:59,370 --> 00:32:03,150
Now, in this case, we end up
with leisure still going down.

777
00:32:03,150 --> 00:32:06,060
We end up with, the wage
goes up, leisure goes down,

778
00:32:06,060 --> 00:32:07,612
and therefore labor
supply goes up.

779
00:32:07,612 --> 00:32:09,570
So we end up with our
standard intuition, which

780
00:32:09,570 --> 00:32:11,220
is, I tell you, if I'm
going to pay you more,

781
00:32:11,220 --> 00:32:12,928
you're going to work
harder or less hard?

782
00:32:12,928 --> 00:32:16,280
The standard intuition
is I work more hard, OK?

783
00:32:16,280 --> 00:32:19,910
But as figure 15-5
shows, it would not

784
00:32:19,910 --> 00:32:24,520
be super odd to get a
Giffen good effect here,

785
00:32:24,520 --> 00:32:27,430
which is, the wage goes up.

786
00:32:27,430 --> 00:32:29,740
The substitution effect
shifts you to the left,

787
00:32:29,740 --> 00:32:32,620
but the income effect shifts
you even more to the right,

788
00:32:32,620 --> 00:32:37,380
and you actually end
up with more leisure.

789
00:32:37,380 --> 00:32:40,910
So once again, my intuition, if
I say to you the price of pizza

790
00:32:40,910 --> 00:32:43,310
went up, what happens to
your demand for pizza?

791
00:32:43,310 --> 00:32:45,250
You think of a standard--
you say, "Well, I'm

792
00:32:45,250 --> 00:32:46,580
going to demand less pizza."

793
00:32:46,580 --> 00:32:48,260
If I say to you
the wage went up,

794
00:32:48,260 --> 00:32:50,570
what happened to
how hard you work?

795
00:32:50,570 --> 00:32:52,980
It's not clear.

796
00:32:52,980 --> 00:32:55,080
Think of a simple example.

797
00:32:55,080 --> 00:32:56,843
Think of yourself
actually back before you

798
00:32:56,843 --> 00:32:58,260
were an MIT student,
when you were

799
00:32:58,260 --> 00:33:00,330
a kid saving for something.

800
00:33:00,330 --> 00:33:04,910
You were saving to buy a
bike, and the bike was $150.

801
00:33:04,910 --> 00:33:09,500
OK, bike was $200, and you're
earning $10 an hour, OK?

802
00:33:09,500 --> 00:33:12,550
So you had to work 20
hours to get the bike.

803
00:33:12,550 --> 00:33:16,270
Now I gave you a
raise to 15 hours--

804
00:33:16,270 --> 00:33:19,360
to $15 an hour or $20 an hour.

805
00:33:19,360 --> 00:33:21,670
Would you work
harder or less hard?

806
00:33:21,670 --> 00:33:24,207
Well, if all you want is the
bike, you'd work less hard.

807
00:33:24,207 --> 00:33:25,540
You don't have to work 20 hours.

808
00:33:25,540 --> 00:33:27,150
You only have to work 10 hours.

809
00:33:27,150 --> 00:33:29,830
So in fact, a higher wage
caused you to work less hard.

810
00:33:29,830 --> 00:33:31,690
That's not that
bizarre a case, right?

811
00:33:31,690 --> 00:33:33,190
That makes sense.

812
00:33:33,190 --> 00:33:36,010
The point is, it's
actually quite sensible

813
00:33:36,010 --> 00:33:38,620
that you couldn't end up with
the labor supply being a Giffen

814
00:33:38,620 --> 00:33:42,160
good, with a higher wage
causing you to work less.

815
00:33:42,160 --> 00:33:43,590
It's not a crazy outcome.

816
00:33:43,590 --> 00:33:45,790
Giffen goods and
consumer goods are crazy.

817
00:33:45,790 --> 00:33:48,820
It's not at all crazy
to think that in cases

818
00:33:48,820 --> 00:33:51,023
like having a target,
a purchase target,

819
00:33:51,023 --> 00:33:52,940
a higher wage would cause
people to work less.

820
00:33:52,940 --> 00:33:53,516
Yeah.

821
00:33:53,516 --> 00:33:58,090
AUDIENCE: So does the law
of nonsatiation not apply?

822
00:33:58,090 --> 00:34:01,060
JONATHAN GRUBER:
Absolute applies.

823
00:34:01,060 --> 00:34:02,075
Absolutely applies.

824
00:34:02,075 --> 00:34:02,950
There's no violation.

825
00:34:02,950 --> 00:34:04,630
We haven't violated
any of the laws.

826
00:34:04,630 --> 00:34:06,700
All we've done is just
said income effects--

827
00:34:06,700 --> 00:34:08,915
it didn't apply with
Giffen goods too.

828
00:34:08,915 --> 00:34:11,290
It's all just saying income
effects dominate substitution

829
00:34:11,290 --> 00:34:12,880
effects, which we
thought was sort

830
00:34:12,880 --> 00:34:15,850
of going to be pretty bizarre
in the consumption good context,

831
00:34:15,850 --> 00:34:18,562
but it's not at all bizarre
in the labor supply context.

832
00:34:18,562 --> 00:34:20,130
So this is pretty wild.

833
00:34:20,130 --> 00:34:22,889
What this says is
that basically, you've

834
00:34:22,889 --> 00:34:25,830
got a situation where
even in the normal world,

835
00:34:25,830 --> 00:34:27,330
you can get that
paying workers more

836
00:34:27,330 --> 00:34:32,310
makes them work less, which
is kind of bizarre, OK?

837
00:34:32,310 --> 00:34:34,727
Questions about that, about
that intuition, or the math,

838
00:34:34,727 --> 00:34:35,310
or the graphs?

839
00:34:35,310 --> 00:34:37,040
Well, the math we haven't
done, but the graphs?

840
00:34:37,040 --> 00:34:38,260
We'll do the math on Friday.

841
00:34:38,260 --> 00:34:40,659
The graphs or anything?

842
00:34:40,659 --> 00:34:41,810
OK.

843
00:34:41,810 --> 00:34:45,230
Let's then say, well, does
that happen in reality?

844
00:34:45,230 --> 00:34:46,440
What does the evidence say?

845
00:34:49,500 --> 00:34:51,010
Let's go to the evidence.

846
00:34:51,010 --> 00:34:53,989
What does the evidence say?

847
00:34:53,989 --> 00:34:56,480
And there may be sort
of no question more

848
00:34:56,480 --> 00:35:00,440
worked on in economics than
the elasticity of labor supply

849
00:35:00,440 --> 00:35:02,880
or the shape of the
labor supply curve.

850
00:35:02,880 --> 00:35:07,530
There is thousands of articles
written on this question, OK?

851
00:35:07,530 --> 00:35:10,810
And what I want to do here
to make the intuition easy,

852
00:35:10,810 --> 00:35:13,560
I want to go back to
the literature circa

853
00:35:13,560 --> 00:35:15,143
probably 40 years
ago, when it was

854
00:35:15,143 --> 00:35:17,060
sort of the initial burst
of interest in this,

855
00:35:17,060 --> 00:35:18,800
in like the 1970s.

856
00:35:18,800 --> 00:35:20,900
In 1970s, there was a
burst of interest in this.

857
00:35:20,900 --> 00:35:24,170
And what the literature did
was it looked separately

858
00:35:24,170 --> 00:35:28,100
at men and married women,
because most of women

859
00:35:28,100 --> 00:35:30,840
were married, and back then we
didn't care about single women,

860
00:35:30,840 --> 00:35:33,520
OK?

861
00:35:33,520 --> 00:35:36,800
OK, it was a dark time, OK?

862
00:35:36,800 --> 00:35:39,200
So the literature
looked at men and women,

863
00:35:39,200 --> 00:35:41,330
and married women,
and asked what

864
00:35:41,330 --> 00:35:44,420
was their elasticity
of labor supply.

865
00:35:44,420 --> 00:35:47,350
Well, let's think for a
second about what we'd expect,

866
00:35:47,350 --> 00:35:51,740
and to do that, let's think
about the substitution effect

867
00:35:51,740 --> 00:35:53,570
and the income effect.

868
00:35:53,570 --> 00:35:58,962
Let's start with men, the
male substitution effect.

869
00:35:58,962 --> 00:36:00,170
Let's go substitution effect.

870
00:36:00,170 --> 00:36:04,080
Men versus married women,
who has a bigger substitution

871
00:36:04,080 --> 00:36:05,400
effect and why?

872
00:36:05,400 --> 00:36:10,500
That is, when the wage goes up,
who has a bigger substitution

873
00:36:10,500 --> 00:36:12,405
response to that and why?

874
00:36:12,405 --> 00:36:13,280
Men or married women?

875
00:36:16,490 --> 00:36:18,910
Think about the world--

876
00:36:18,910 --> 00:36:21,030
think about the Mad
Men world or the world,

877
00:36:21,030 --> 00:36:22,285
you know, circa 40 years ago.

878
00:36:22,285 --> 00:36:23,660
You guys seen
enough TV and stuff

879
00:36:23,660 --> 00:36:26,387
to know how life was
a little bit, OK?

880
00:36:26,387 --> 00:36:27,470
So who's going to respond?

881
00:36:27,470 --> 00:36:28,562
Who's the bigger-- yeah.

882
00:36:28,562 --> 00:36:30,530
AUDIENCE: Are you assuming
men were primary providers?

883
00:36:30,530 --> 00:36:32,550
JONATHAN GRUBER: Well, they
certainly were in the 1970s.

884
00:36:32,550 --> 00:36:33,258
AUDIENCE: Oh, OK.

885
00:36:33,258 --> 00:36:34,340
In that case, the men.

886
00:36:34,340 --> 00:36:35,750
JONATHAN GRUBER: Men have a
bigger substitution effect?

887
00:36:35,750 --> 00:36:38,210
AUDIENCE: Yeah, they'll
work more, probably.

888
00:36:38,210 --> 00:36:41,520
JONATHAN GRUBER: OK,
that's one option, yeah.

889
00:36:41,520 --> 00:36:44,110
AUDIENCE: It'll be married
women, because they're only

890
00:36:44,110 --> 00:36:45,322
working if they have to.

891
00:36:45,322 --> 00:36:46,280
JONATHAN GRUBER: Right.

892
00:36:46,280 --> 00:36:48,613
So it's actually married
women, because men were already

893
00:36:48,613 --> 00:36:50,300
working 40 hours.

894
00:36:50,300 --> 00:36:52,220
They can't-- there's no--

895
00:36:52,220 --> 00:36:55,050
So think about a
married man in 1975.

896
00:36:55,050 --> 00:36:56,477
OK, men didn't raise their kids.

897
00:36:56,477 --> 00:36:58,310
Men quite frankly didn't
give much of a shit

898
00:36:58,310 --> 00:37:00,650
about their kids, OK?

899
00:37:00,650 --> 00:37:01,670
Men just worked.

900
00:37:01,670 --> 00:37:04,807
That's what men did in 1975, OK?

901
00:37:04,807 --> 00:37:06,640
They worked, and they
worked their 40 hours,

902
00:37:06,640 --> 00:37:07,890
and then went home.

903
00:37:07,890 --> 00:37:10,050
OK, maybe they worked less
or more than 40 hours,

904
00:37:10,050 --> 00:37:11,630
but certainly, the
notion of saying,

905
00:37:11,630 --> 00:37:12,630
"Well, the wage went up.

906
00:37:12,630 --> 00:37:14,970
Maybe I'll take more
leisure," never really crossed

907
00:37:14,970 --> 00:37:16,712
a man's mind in 1975.

908
00:37:16,712 --> 00:37:18,170
Because what were
they going to do?

909
00:37:18,170 --> 00:37:19,628
They have no one
to play golf with.

910
00:37:19,628 --> 00:37:22,050
They didn't want to spend
time with their kids.

911
00:37:22,050 --> 00:37:23,610
What were they going to do?

912
00:37:23,610 --> 00:37:28,110
Whereas women had a real
substitution possibility, OK?

913
00:37:28,110 --> 00:37:31,650
This was an era women were
entering the labor force.

914
00:37:31,650 --> 00:37:33,300
There were real
opportunities for work,

915
00:37:33,300 --> 00:37:35,750
but it was also fine
to hang out at home.

916
00:37:35,750 --> 00:37:37,260
You had-- a lot of your friends
were hanging out at home.

917
00:37:37,260 --> 00:37:38,190
You could take care of kids.

918
00:37:38,190 --> 00:37:39,750
There were a lot
of things to do.

919
00:37:39,750 --> 00:37:46,270
So women had a much larger
substitution effect than men,

920
00:37:46,270 --> 00:37:46,840
OK?

921
00:37:46,840 --> 00:37:50,260
Because men-- remember, what's
the substitution effect?

922
00:37:50,260 --> 00:37:52,780
It's about the next
best alternative.

923
00:37:52,780 --> 00:37:54,840
For men, there was no
next best alternative.

924
00:37:54,840 --> 00:37:55,915
It was just work.

925
00:37:55,915 --> 00:37:57,790
Basically, between 9:00
to 5:00 on a weekday,

926
00:37:57,790 --> 00:38:00,280
there was nothing
else to do, OK?

927
00:38:00,280 --> 00:38:01,980
For women, there was
other things to do,

928
00:38:01,980 --> 00:38:04,480
which is, you can hang out with
friends who weren't working,

929
00:38:04,480 --> 00:38:06,170
or you could take
care of the kids.

930
00:38:06,170 --> 00:38:06,670
Yeah.

931
00:38:06,670 --> 00:38:08,628
AUDIENCE: But what about
like working overtime?

932
00:38:08,628 --> 00:38:10,790
JONATHAN GRUBER: OK, well,
let's-- but once again,

933
00:38:10,790 --> 00:38:13,270
if I'm a man, you might
think that I could then--

934
00:38:13,270 --> 00:38:15,400
but then once again, if I work--

935
00:38:15,400 --> 00:38:18,227
the substitution effect could
work that way for overtime.

936
00:38:18,227 --> 00:38:19,810
But let's talk about
just the decision

937
00:38:19,810 --> 00:38:22,360
to work at all, in some
sense, or the decision

938
00:38:22,360 --> 00:38:23,860
to work sort of
your first 40 hours.

939
00:38:23,860 --> 00:38:26,360
Overtime is hard, because then
you get paid more, et cetera.

940
00:38:26,360 --> 00:38:28,340
OK, now let's go
to the other side.

941
00:38:28,340 --> 00:38:29,810
Let's go to the income effect.

942
00:38:29,810 --> 00:38:31,150
So let's not say this is zero.

943
00:38:31,150 --> 00:38:35,205
Let's say it's small, because
this is big and this is small.

944
00:38:35,205 --> 00:38:36,580
Because you can
work a little bit

945
00:38:36,580 --> 00:38:38,050
overtime or something
like that, and some men

946
00:38:38,050 --> 00:38:39,050
did care about the kids.

947
00:38:39,050 --> 00:38:40,805
I'm obviously being facetious.

948
00:38:40,805 --> 00:38:42,930
So it could be, some men
were willing to spend time

949
00:38:42,930 --> 00:38:44,260
with their kids, et cetera.

950
00:38:44,260 --> 00:38:48,617
OK, now let's go to
the income effect.

951
00:38:48,617 --> 00:38:50,075
For whom is the
income effect going

952
00:38:50,075 --> 00:38:54,570
to be bigger, men or women?

953
00:38:54,570 --> 00:38:57,435
For whom is the income
effect going to be bigger?

954
00:38:57,435 --> 00:38:58,920
Yeah.

955
00:38:58,920 --> 00:39:00,080
AUDIENCE: Maybe men.

956
00:39:00,080 --> 00:39:01,160
JONATHAN GRUBER: Because?

957
00:39:01,160 --> 00:39:04,410
AUDIENCE: Because they
have a goal of like,

958
00:39:04,410 --> 00:39:06,230
they need x amount of
money to just provide

959
00:39:06,230 --> 00:39:07,160
for their families.

960
00:39:07,160 --> 00:39:10,310
So if they get this
huge raise in wage,

961
00:39:10,310 --> 00:39:12,385
then they become wealthier,
and they could start

962
00:39:12,385 --> 00:39:13,820
doing more leisure in the week.

963
00:39:13,820 --> 00:39:15,660
JONATHAN GRUBER: Exactly.

964
00:39:15,660 --> 00:39:17,885
There's actually two
reasons it's men.

965
00:39:17,885 --> 00:39:20,010
One, you're more likely to
have your target income.

966
00:39:20,010 --> 00:39:24,000
Two is, you can't have an
income effect if you don't work.

967
00:39:24,000 --> 00:39:26,160
The income effect is
proportional to how hard

968
00:39:26,160 --> 00:39:27,730
you are working.

969
00:39:27,730 --> 00:39:29,580
If you weren't
working, then there's

970
00:39:29,580 --> 00:39:30,990
no income effect, right?

971
00:39:30,990 --> 00:39:33,870
Income effect is essentially--
the income effect for labor

972
00:39:33,870 --> 00:39:38,400
is essentially the
hours times dH dy.

973
00:39:41,240 --> 00:39:43,120
What Manny said
was the reason why

974
00:39:43,120 --> 00:39:45,367
dH dy might be bigger
for men than women,

975
00:39:45,367 --> 00:39:46,700
because they have these targets.

976
00:39:46,700 --> 00:39:48,500
More relevantly, if
women weren't working,

977
00:39:48,500 --> 00:39:50,042
they didn't have
dH, so this is zero.

978
00:39:50,042 --> 00:39:51,530
So the income effect is zero.

979
00:39:51,530 --> 00:39:57,740
So for men, this was big, and
for women, this was small, OK?

980
00:39:57,740 --> 00:39:59,720
Put this together,
and what does it

981
00:39:59,720 --> 00:40:02,810
suggest about the relative
shapes of labor supply for men

982
00:40:02,810 --> 00:40:03,620
and women?

983
00:40:03,620 --> 00:40:05,238
Someone raise their
hand and tell me.

984
00:40:05,238 --> 00:40:07,030
What does it suggests
what the labor supply

985
00:40:07,030 --> 00:40:09,197
curve would look like for
men and women in this era?

986
00:40:14,730 --> 00:40:17,190
OK, given the
intuition we talked

987
00:40:17,190 --> 00:40:19,857
about here, what does it
suggest the female and male--

988
00:40:19,857 --> 00:40:22,440
the married women labor supply
and the male labor supply curve

989
00:40:22,440 --> 00:40:25,050
should look like?

990
00:40:25,050 --> 00:40:27,680
You guys can get this, come on.

991
00:40:27,680 --> 00:40:29,430
Well, let's talk--
what did we talk about?

992
00:40:29,430 --> 00:40:31,940
We talked about the
substitution effect.

993
00:40:31,940 --> 00:40:34,910
If the wage goes up, it leads
to more leisure, which means

994
00:40:34,910 --> 00:40:36,910
it leads to more labor supply.

995
00:40:36,910 --> 00:40:38,660
By the income effect,
if the wage goes up,

996
00:40:38,660 --> 00:40:41,140
it leads to less labor supply.

997
00:40:41,140 --> 00:40:42,780
So for men, with--

998
00:40:42,780 --> 00:40:45,810
for women, with a big
substitution effect

999
00:40:45,810 --> 00:40:50,160
and a small income effect,
this suggests a standard steep

1000
00:40:50,160 --> 00:40:51,150
upward--

1001
00:40:51,150 --> 00:40:54,700
standard upward-sloping
supply curve.

1002
00:40:54,700 --> 00:40:56,350
Think of the income
effect being zero.

1003
00:40:56,350 --> 00:40:58,225
Then we get the standard
substitution effect.

1004
00:40:58,225 --> 00:40:59,590
We know the sign of that.

1005
00:40:59,590 --> 00:41:02,440
So for women, this suggests an
upward-sloping supply curve,

1006
00:41:02,440 --> 00:41:04,270
just like a substitution
effect suggests

1007
00:41:04,270 --> 00:41:06,450
a downward-sloping demand curve.

1008
00:41:06,450 --> 00:41:08,860
For men, it's not clear.

1009
00:41:08,860 --> 00:41:11,980
You could very much get
a Giffen effect here,

1010
00:41:11,980 --> 00:41:15,010
because basically, there's not
much option for substitution,

1011
00:41:15,010 --> 00:41:19,560
but they might work a lot
less if they get rich, OK?

1012
00:41:19,560 --> 00:41:21,290
So that is sort of this--

1013
00:41:21,290 --> 00:41:23,040
what I like with this
example-- it's hard,

1014
00:41:23,040 --> 00:41:24,390
but I like that this
example sort of illustrates

1015
00:41:24,390 --> 00:41:27,060
how substitution and income
effects can come together

1016
00:41:27,060 --> 00:41:29,580
to get a bottom line answer.

1017
00:41:29,580 --> 00:41:31,290
What do we know?

1018
00:41:31,290 --> 00:41:34,810
What we know is that actually,
evidence is that female labor

1019
00:41:34,810 --> 00:41:37,712
supply was very elastic,
that circa this era,

1020
00:41:37,712 --> 00:41:39,420
female labor supply
was in the elasticity

1021
00:41:39,420 --> 00:41:41,610
of between 0.5 and 1.

1022
00:41:41,610 --> 00:41:45,660
That if you raised women's wage
by 10%, there was a 5% to 10%

1023
00:41:45,660 --> 00:41:47,400
increase in their
labor supply, which

1024
00:41:47,400 --> 00:41:51,900
is pretty not elastic-elastic,
but reasonably elastic, OK?

1025
00:41:51,900 --> 00:41:55,760
Whereas for men it
was pretty much zero.

1026
00:41:55,760 --> 00:41:56,618
It wasn't negative.

1027
00:41:56,618 --> 00:41:57,410
It wasn't positive.

1028
00:41:57,410 --> 00:41:58,460
It was basically zero.

1029
00:41:58,460 --> 00:42:02,410
Basically, men just worked 40
hours and then went home, OK?

1030
00:42:02,410 --> 00:42:05,890
So basically, in an era where
for women, the labor supply was

1031
00:42:05,890 --> 00:42:08,758
very elastic and of
the standard direction,

1032
00:42:08,758 --> 00:42:10,300
higher wages lead
you to work harder,

1033
00:42:10,300 --> 00:42:12,758
an upward-sloping supply curve.

1034
00:42:12,758 --> 00:42:14,800
But for men, it was pretty
much a vertical supply

1035
00:42:14,800 --> 00:42:16,720
curve, maybe even a
bit backward bending,

1036
00:42:16,720 --> 00:42:19,240
maybe even a wrong
sign supply curve.

1037
00:42:19,240 --> 00:42:22,800
But pretty much, you could
think of it as zero, OK?

1038
00:42:22,800 --> 00:42:26,160
Now, what do we think has
happened in the 40 years

1039
00:42:26,160 --> 00:42:28,020
since these two numbers?

1040
00:42:28,020 --> 00:42:30,120
So elasticity of woman
of between 0.5 and 1,

1041
00:42:30,120 --> 00:42:32,130
and men of zero,
what do we think

1042
00:42:32,130 --> 00:42:34,560
has happened to these two
numbers in the 40 years

1043
00:42:34,560 --> 00:42:38,850
since these studies, and why?

1044
00:42:38,850 --> 00:42:41,350
What do you think has happened
to these elasticity estimates

1045
00:42:41,350 --> 00:42:42,480
and why?

1046
00:42:42,480 --> 00:42:42,980
Yeah.

1047
00:42:42,980 --> 00:42:45,130
AUDIENCE: Are we talking
about these together?

1048
00:42:45,130 --> 00:42:45,850
JONATHAN GRUBER: Let's
talk about women.

1049
00:42:45,850 --> 00:42:47,764
What do you think has happened
to the female estimate?

1050
00:42:47,764 --> 00:42:49,420
AUDIENCE: Probably
gotten less elastic.

1051
00:42:49,420 --> 00:42:51,530
JONATHAN GRUBER: Because?

1052
00:42:51,530 --> 00:42:53,742
AUDIENCE: More of them are
working in a primary role.

1053
00:42:53,742 --> 00:42:54,700
JONATHAN GRUBER: Right.

1054
00:42:54,700 --> 00:42:56,075
Well, first of
all, this is going

1055
00:42:56,075 --> 00:42:58,840
to come down, because in fact,
it's now more standard just

1056
00:42:58,840 --> 00:43:00,460
to work, right?

1057
00:43:00,460 --> 00:43:05,122
In fact, now, for a woman
today, in many communities,

1058
00:43:05,122 --> 00:43:06,580
it's like being a
man in 70s, which

1059
00:43:06,580 --> 00:43:08,038
is if you don't go
to work, there's

1060
00:43:08,038 --> 00:43:10,300
no one to hang out with, OK?

1061
00:43:10,300 --> 00:43:12,190
So basically, this is
going to get smaller.

1062
00:43:12,190 --> 00:43:14,315
And they're more of a
primary winner in the family.

1063
00:43:14,315 --> 00:43:15,642
This is going to get bigger.

1064
00:43:15,642 --> 00:43:17,600
So in fact, female labor
supply has fallen more

1065
00:43:17,600 --> 00:43:19,840
to like about an
elasticity about 0.2.

1066
00:43:19,840 --> 00:43:22,930
It's actually fallen over time.

1067
00:43:22,930 --> 00:43:26,460
Now, for men, the question is,
do you get the opposite effect?

1068
00:43:26,460 --> 00:43:29,075
Actually, men sort of care
more about their kids now,

1069
00:43:29,075 --> 00:43:31,200
and there's more sort of
activities going on during

1070
00:43:31,200 --> 00:43:33,500
the day, but in fact it hasn't.

1071
00:43:33,500 --> 00:43:37,410
In fact, male labor supply
still is pretty inelastic.

1072
00:43:37,410 --> 00:43:40,690
What's happened is kids
are now in childcare.

1073
00:43:40,690 --> 00:43:44,900
So basically, we've gone from a
world where, as wages went up,

1074
00:43:44,900 --> 00:43:46,850
women went--

1075
00:43:46,850 --> 00:43:48,063
men worked.

1076
00:43:48,063 --> 00:43:50,480
Women either worked or didn't
work, depending on the wage,

1077
00:43:50,480 --> 00:43:52,438
and if they worked, the
kids went in childcare.

1078
00:43:52,438 --> 00:43:55,738
Now men work and women work,
and kids are in childcare.

1079
00:43:55,738 --> 00:43:58,280
And that's basically the change,
the evolution of the labor--

1080
00:43:58,280 --> 00:44:00,230
roughly speaking, obviously.

1081
00:44:00,230 --> 00:44:01,970
Still, female labor
force participation

1082
00:44:01,970 --> 00:44:03,715
is only about 70%, OK?

1083
00:44:03,715 --> 00:44:05,840
Many women still do stay
home and raise their kids,

1084
00:44:05,840 --> 00:44:08,330
and are in and out of
the labor force, OK?

1085
00:44:08,330 --> 00:44:09,900
But by and large,
we moved to a world

1086
00:44:09,900 --> 00:44:12,870
with just overall less
elastic labor supply.

1087
00:44:12,870 --> 00:44:13,922
Yeah.

1088
00:44:13,922 --> 00:44:18,740
AUDIENCE: Between the average
two-income household is richer

1089
00:44:18,740 --> 00:44:19,370
now, or--

1090
00:44:19,370 --> 00:44:19,690
JONATHAN GRUBER: No.

1091
00:44:19,690 --> 00:44:20,770
The average-- well,
OK, we're going

1092
00:44:20,770 --> 00:44:23,360
to get into this when we talk
about income distribution.

1093
00:44:23,360 --> 00:44:25,527
What this has done is allowed
the average two-family

1094
00:44:25,527 --> 00:44:27,022
household to tread water.

1095
00:44:27,022 --> 00:44:28,730
So it's, the average
two-family household

1096
00:44:28,730 --> 00:44:31,440
today has the same income
as they did in the 1970s.

1097
00:44:31,440 --> 00:44:31,940
Why?

1098
00:44:31,940 --> 00:44:34,965
Because workers earn a ton less
in real terms than they did,

1099
00:44:34,965 --> 00:44:36,590
and that's facts
about inequality we'll

1100
00:44:36,590 --> 00:44:38,450
come to, that basically,
the average family

1101
00:44:38,450 --> 00:44:40,165
in America, despite having--

1102
00:44:40,165 --> 00:44:42,290
going from the wife not
working to the wife working

1103
00:44:42,290 --> 00:44:44,570
is no better off they
were 40 years ago.

1104
00:44:44,570 --> 00:44:47,990
And that has lots implications
we'll talk about, OK?

1105
00:44:47,990 --> 00:44:50,880
So any other
questions about that?

1106
00:44:50,880 --> 00:44:55,640
So let me end with one final
example, an application, OK?

1107
00:44:55,640 --> 00:45:01,868
Which is to the problem we have
in the world of child labor.

1108
00:45:01,868 --> 00:45:03,410
It's a huge problem
around the world,

1109
00:45:03,410 --> 00:45:05,180
is kids being forced to work.

1110
00:45:05,180 --> 00:45:07,430
It was a huge problem in the
US till the 20th century.

1111
00:45:07,430 --> 00:45:08,972
It's a huge problem
around the world,

1112
00:45:08,972 --> 00:45:11,180
because A, work can often
be dangerous and bad

1113
00:45:11,180 --> 00:45:14,120
for their health, but B,
they can't be going to school

1114
00:45:14,120 --> 00:45:16,010
and having the opportunity
better themselves.

1115
00:45:16,010 --> 00:45:18,170
If a kid is spending
all day working,

1116
00:45:18,170 --> 00:45:19,670
then that kid is
destined to a life

1117
00:45:19,670 --> 00:45:21,920
of working in the
same crappy job,

1118
00:45:21,920 --> 00:45:24,110
because there's no way to
get the skills that allows

1119
00:45:24,110 --> 00:45:27,220
them to grow and go further.

1120
00:45:27,220 --> 00:45:31,630
Now, one-- we will talk in the
next few lectures-- in a few

1121
00:45:31,630 --> 00:45:34,450
lectures about
international trade.

1122
00:45:34,450 --> 00:45:36,820
And one criticism of
international trade

1123
00:45:36,820 --> 00:45:39,490
is people say, "Well, if
you allow these developing

1124
00:45:39,490 --> 00:45:43,000
countries to sell more stuff
to the developed world,

1125
00:45:43,000 --> 00:45:45,520
that will-- they'll put
the kids to work more."

1126
00:45:45,520 --> 00:45:48,415
So if we have free trade and
Vietnam can suddenly sell

1127
00:45:48,415 --> 00:45:51,040
a bunch stuff to America, that's
more kids they;re going to put

1128
00:45:51,040 --> 00:45:52,750
to work making that stuff.

1129
00:45:52,750 --> 00:45:55,750
So one common argument you
hear against free trade

1130
00:45:55,750 --> 00:46:00,700
is it's bad for kids, but in
fact, that argument is not

1131
00:46:00,700 --> 00:46:04,800
necessarily right, because it
ignores an important point.

1132
00:46:04,800 --> 00:46:05,550
Manny?

1133
00:46:05,550 --> 00:46:10,680
AUDIENCE: [INAUDIBLE]

1134
00:46:10,680 --> 00:46:12,600
JONATHAN GRUBER: No,
that's a different issue.

1135
00:46:12,600 --> 00:46:15,360
The point-- that's right,
but the point it ignores

1136
00:46:15,360 --> 00:46:17,435
is free trade makes
families richer.

1137
00:46:17,435 --> 00:46:18,810
And the families
are richer, they

1138
00:46:18,810 --> 00:46:22,320
may want to buy more
education for their kids.

1139
00:46:22,320 --> 00:46:23,730
So on the one hand, it's true.

1140
00:46:23,730 --> 00:46:26,942
Free trade makes kids more
valuable in the labor force.

1141
00:46:26,942 --> 00:46:28,650
On the other hand, it
makes family richer

1142
00:46:28,650 --> 00:46:30,700
and they want more
education for their kids.

1143
00:46:30,700 --> 00:46:32,492
So to look at that two
Dartmouth professors

1144
00:46:32,492 --> 00:46:34,303
did a study, who
looked at Vietnam,

1145
00:46:34,303 --> 00:46:36,720
and looked at what happened
when Vietnam liberalized trade

1146
00:46:36,720 --> 00:46:37,870
in rice.

1147
00:46:37,870 --> 00:46:40,192
So let's go to figure 15-6.

1148
00:46:40,192 --> 00:46:42,150
Now, we haven't gotten
international trade yet,

1149
00:46:42,150 --> 00:46:44,310
so I'm just going to sort
of hand wave through this.

1150
00:46:44,310 --> 00:46:45,570
You don't need to really
understand this graph,

1151
00:46:45,570 --> 00:46:47,150
except what the bottom line is.

1152
00:46:47,150 --> 00:46:52,040
OK, what happened was
before trade liberalization

1153
00:46:52,040 --> 00:46:55,610
of Vietnam, before
1989, you could only

1154
00:46:55,610 --> 00:46:58,840
sell rice made in
Vietnam in Vietnam.

1155
00:46:58,840 --> 00:47:00,570
So what that meant
was the supply of rice

1156
00:47:00,570 --> 00:47:04,320
was s sub v. The demand
for rice was d sub v,

1157
00:47:04,320 --> 00:47:06,810
and the amount of rice
sold was q sub v. And kids

1158
00:47:06,810 --> 00:47:08,930
worked in the rice paddies.

1159
00:47:08,930 --> 00:47:11,870
When they liberalized
trade, suddenly Vietnam

1160
00:47:11,870 --> 00:47:14,090
could sell to a
much larger market.

1161
00:47:14,090 --> 00:47:18,030
They could sell to the
world market, d sub w.

1162
00:47:18,030 --> 00:47:19,830
That's a bigger market.

1163
00:47:19,830 --> 00:47:23,010
So they were able to shift
up their supply curve

1164
00:47:23,010 --> 00:47:24,210
and sell more rice.

1165
00:47:26,693 --> 00:47:28,610
They could sell more
rice, because now they're

1166
00:47:28,610 --> 00:47:31,110
selling to the whole
world, not just to Vietnam.

1167
00:47:31,110 --> 00:47:33,050
You don't need to notice this
in the graph so much intuition.

1168
00:47:33,050 --> 00:47:34,550
If you give someone
a bigger market,

1169
00:47:34,550 --> 00:47:36,350
they're going to
make more stuff, OK?

1170
00:47:36,350 --> 00:47:36,990
Yeah.

1171
00:47:36,990 --> 00:47:39,282
AUDIENCE: But doesn't that
also put them in competition

1172
00:47:39,282 --> 00:47:41,357
in other countries, whereas
if it was just like--

1173
00:47:41,357 --> 00:47:43,190
if each country is just
selling to themself,

1174
00:47:43,190 --> 00:47:45,127
then Vietnam would have--

1175
00:47:45,127 --> 00:47:47,210
JONATHAN GRUBER: No, they
liberalized in the sense

1176
00:47:47,210 --> 00:47:48,820
that they let it send out.

1177
00:47:48,820 --> 00:47:50,196
I didn't say they let more in.

1178
00:47:50,196 --> 00:47:50,970
AUDIENCE: Oh.

1179
00:47:50,970 --> 00:47:51,710
JONATHAN GRUBER: OK,
but we'll come back

1180
00:47:51,710 --> 00:47:53,480
to international trade, OK?

1181
00:47:53,480 --> 00:47:55,760
So basically, the
point is, there

1182
00:47:55,760 --> 00:47:59,130
was this demand shock that
allowed them to sell more rice.

1183
00:47:59,130 --> 00:48:01,938
So what effect does that have
on the market for child labor?

1184
00:48:01,938 --> 00:48:03,855
Let's go to the highly
complicated last figure

1185
00:48:03,855 --> 00:48:06,140
and let me walk
you through this.

1186
00:48:06,140 --> 00:48:09,980
Here is the market
for child labor, OK?

1187
00:48:09,980 --> 00:48:12,980
On the x-axis is the
amount of child labor.

1188
00:48:12,980 --> 00:48:16,430
On the y-axis the
wage of kids, OK?

1189
00:48:16,430 --> 00:48:21,430
We start at point one, initial
demand and initial supply,

1190
00:48:21,430 --> 00:48:23,210
wage 1, L1.

1191
00:48:23,210 --> 00:48:26,840
Now we liberalize
trade, and that

1192
00:48:26,840 --> 00:48:29,480
leads to more demand
for child labor,

1193
00:48:29,480 --> 00:48:32,500
because we want to
produce more rice.

1194
00:48:32,500 --> 00:48:36,210
So that shifts us out
to D2 and point two.

1195
00:48:36,210 --> 00:48:37,680
So we have more child labor.

1196
00:48:37,680 --> 00:48:39,840
That's bad.

1197
00:48:39,840 --> 00:48:44,400
But what this ignores is
families are now richer,

1198
00:48:44,400 --> 00:48:48,750
and with the income effect, they
will buy their kids education.

1199
00:48:48,750 --> 00:48:52,520
They'll pull their kids out of
working and put them in school.

1200
00:48:52,520 --> 00:48:57,580
That's represented as a shift
to the left of the supply curve.

1201
00:48:57,580 --> 00:48:59,660
So we move from point
two to point three

1202
00:48:59,660 --> 00:49:01,390
through the income effect.

1203
00:49:01,390 --> 00:49:02,620
Families are now richer.

1204
00:49:02,620 --> 00:49:05,600
And indeed, if the income
effect is large enough,

1205
00:49:05,600 --> 00:49:07,920
you could move to point four.

1206
00:49:07,920 --> 00:49:11,360
You could actually have a
reduction in child labor.

1207
00:49:11,360 --> 00:49:12,260
Why?

1208
00:49:12,260 --> 00:49:14,420
Because the benefits
of more kids working

1209
00:49:14,420 --> 00:49:16,310
in terms of producing
more rice is

1210
00:49:16,310 --> 00:49:18,982
exceeded by the value
of the firms of taking--

1211
00:49:18,982 --> 00:49:20,690
of the families of
taking the extra money

1212
00:49:20,690 --> 00:49:24,930
they're making and putting it
into education for their kids.

1213
00:49:24,930 --> 00:49:28,560
And in fact, the studies showed
that we did move to a point

1214
00:49:28,560 --> 00:49:31,230
like point four, OK?

1215
00:49:31,230 --> 00:49:33,870
We actually found
that child labor

1216
00:49:33,870 --> 00:49:37,280
fell when they
liberalized trade,

1217
00:49:37,280 --> 00:49:40,220
that the intuitive
argument, that gee, if they

1218
00:49:40,220 --> 00:49:42,950
sell more, more kids are
going to work, it's wrong.

1219
00:49:42,950 --> 00:49:46,230
That in fact, when you sell
more, yes, more kids-- demand

1220
00:49:46,230 --> 00:49:48,530
for more kids, but
families are so rich,

1221
00:49:48,530 --> 00:49:52,410
they put their kids in education
rather than their fields, OK?

1222
00:49:52,410 --> 00:49:55,230
And that is a wonderful sort
of counterintuitive story

1223
00:49:55,230 --> 00:49:56,310
of how what--

1224
00:49:56,310 --> 00:49:58,292
I'll talk about economies
like free trade, how

1225
00:49:58,292 --> 00:50:00,750
free trade can actually have
an unexpected positive effect.

1226
00:50:00,750 --> 00:50:01,940
We might think it's negative.

1227
00:50:01,940 --> 00:50:02,670
And there's a question.

1228
00:50:02,670 --> 00:50:04,920
Come up if you want to talk,
but we've got to end now.

1229
00:50:04,920 --> 00:50:06,720
So thank you for
saying a minute extra,

1230
00:50:06,720 --> 00:50:11,240
and I will see you
guys on Wednesday.