The labour market is at the centre of the economy. Labour is the most important factor of production, accounting for around two-thirds of output compared to one-third for capital. In this article, I look at one aspect of the labour market, namely labour supply. In doing so, I question why some individuals work while others do not, and why labour force participation behaviour varies with gender. Also, I examine the factors that lie behind recent changes in the labour market behaviour of men and women.
This article starts by outlining a simple model of individual labour supply, which describes both how individuals decide whether or not to enter the labour market — the labour force participation decision — and the desired hours of work of each labour market participant. The terms economically active, economically inactive and unemployed are also defined. I then apply the model of labour force participation to understand recent changes in the pattern of economic activity and inactivity among men and women in the United Kingdom (UK). Wage rates, taxation and government transfers to both working and nonworking individuals are all shown to be determinants of labour force participation decisions and to have contributed to recent changes in labour force participation.
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