Chapter

Supply and Demand

Casey B. Mulligan

in The Redistribution Recession

Published in print November 2012 | ISBN: 9780199942213
Published online January 2013 | e-ISBN: 9780199980772 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199942213.003.0004
Supply and Demand

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This chapter introduces one of the book's major conclusions by presenting a supply and demand model of the labor market that includes total factor productivity, population growth, wealth effects, population aging, and various labor market distortions as important variables affecting market outcomes. Using Chapter 3's self-reliance rates to examine some of the consequences of changes in redistribution, this chapter concludes that at least half, and probably more, of the drop in aggregate hours since 2007 would not have occurred, or at worse would have been short-lived, if the safety net had been constant. The chapter relates supply and demand parameters to household level econometric studies of labor supply and unemployment duration. It also addresses a number of misconceptions about labor market equilibrium analysis such as the income maximization fallacy, and the claim that supply-induced recessions should be characterized as pleasant experiences for the unemployed.

Keywords: labor market; labor supply; social safety net; work incentives; 2008–9 recession

Chapter.  9590 words.  Illustrated.

Subjects: Public Economics

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