11. (8 points) An econometrician collects information on hours worked, wage rate

Question

11. (8 points) An econometrician collects information on hours worked, wage rates, and nonlabor income. She uses the data to estimate a regression equation of the form h- a+bwtcv+h where hi s hours worked, to, is the wage rate, ti is nonlabor income, and 'h captures other factors that affect labor supply (a) Describe why there might be a positive relationship in the data between the wage rate and hours worked. (b) Describe why there might be a negative relationship in the data between nonlabor income and hours worked.

Explanation / Answer

A because greater wage offers people greater incentive to work hard. They substitute more work for labour. Thus substitution effect overpowers income effect

B This is because people need less to work to earn enough to satisfy their wants. They already have sufficient non labour income and need just small amount of working to satisfy their needs.

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