Question

Households tend to gradually reduce their labor force participation as they near retirement. The US labor force is aging, with many nearing retirement age. Draw a graph illustrating a labor market in equilibrium. Illustrate and explain the effect of an increase in the preference for leisure by workers. What is the impact on GDP?

Answer 1

As workers preference for leisure increases, they will prefer sitting at home to relax instead of working.

As a result of this, workers start supplying less labor, thereby shifting the labor supply curve to the left. Keeping Demand unchanged, this leads to an increase in wage rate and fall in labor employment.

Graphically this can be seen as below:

As labor supply shifts to left from S2 to S1, their wage rate increases to W2 while employment falls to Q1.

As employment of labor falls, less workers are now available to produce goods and services. This shifts the aggregate supply curve in the economy to the left. This leads to a fall in output produced in the economy and thus fall in GDP.