We have suggested in this chapter that labor economists believe that labor supply curves typically slope up when wages are low and down when wages are high. This is sometimes referred to as a backward bending labor supply curve.
A: Which of the following statements is inconsistent with the empirical finding of a backward bending labor supply curve?
(a) For the typical worker, leisure is an inferior good when wages are low and a normal good when wages are high.
(b) For the typical worker, leisure is a normal good when wages are low and an inferior good when wages are high.
(c) For the typical worker, leisure is always a normal good.
(d) For the typical worker, leisure is always an inferior good.
B: Suppose that tastes over consumption and leisure are described by a constant elasticity of substitution utility function u(c,ℓ) = (0.5c−ρ +0.5ℓ−ρ )−1/ρ.
(a) Derive the labor supply curve assuming a leisure endowment L.
(b) Illustrate for which values of ρ this curve is upward sloping and for which it is downward sloping.
(c) Is it possible for the backward bending labor supply curve to emerge from tastes captured by a CES utility function?
(d) For practical purposes, we typically only have to worry about modeling tastes accurately at the margin - i.e. around the current bundles that consumers/workers are consuming. This is because low wage workers, for instance, may experience some increases in wages but not so much that they are suddenly high wage workers, and vice versa. If you we remodeling worker behavior for a group of workers and you modeled each worker's tastes as CES over leisure and consumption, how would you assume ρ differs for low wage and high wage workers (assuming you are persuaded of the empirical validity of the backward bending labor supply curve)?