welfare economics

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Welfare Economics

The study of how to distribute income in order to achieve social good. In other words, welfare economics takes the preferences of individuals at the microeconomic level and tries to apply them in macroeconomics. It attempts to discourage inequality to improve utility. Welfare economics is rather controversial, in part because there is no one way to measure social good; therefore, its study can be subjective.

welfare economics

A normative branch of economics that is concerned with the way economic activity ought to be arranged so as to maximize economic welfare. Welfare economics employs value judgements about what ought to be produced, how production should be organized, the way income and wealth ought to be distributed, both now and in the future. Unfortunately, each individual in a community has a unique set of value judgements, which are dependent upon his or her attitudes, religion, philosophy and politics, and the economist has difficulty in aggregating these value judgements in advising policy makers about decisions that affect the allocation of resources (which involves making interpersonal comparisons of UTILITY).

Economists have tried for many years to develop criteria for judging economic efficiency to use as a guide in evaluating actual resource deployments. The classical economists treated utility (see CLASSICAL ECONOMICS) as if it was a measurable scale of consumer satisfaction, and the early welfare economists, such as PIGOU, continued in this vein, so that they were able to talk in terms of changes in the pattern of economic activity either increasing or decreasing economic welfare. However, once economists rejected the idea that utility was measurable, then they had to accept that economic welfare is immeasurable and that any statement about welfare is a value judgement influenced by the preferences and priorities of those making the judgement. This led to a search for welfare criteria, which avoided making interpersonal comparisons of utility by introducing explicit value judgements as to whether or not welfare has increased.

The simplest criterion was developed by Vilfredo PARETO, who argued that any reallocation of resources involving a change in goods produced and/or their distribution amongst consumers could be considered an improvement if it made some people better off (in their own estimation) without making anyone else worse off. This analysis led to the development of the conditions for PARETO OPTIMALITY, which would maximize the economic welfare of the community, for a given distribution of income. The Pareto criterion avoids making interpersonal comparisons by dealing only with uncontroversial cases where no one is harmed. However, this makes the criterion inapplicable to the majority of policy proposals that benefit some and harm others, without compensation.

Nicholas Kaldor and John Hicks suggested an alternative criterion (the compensation principle), proposing that any economic change or reorganization should be considered beneficial if, after the change, gainers could hypothetically compensate the losers and still be better off. In effect, this criterion subdivides the effects of any change into two parts:

  1. efficiency gains/losses;
  2. income-distribution consequences.

As long as the gainers evaluate their gains at a higher figure than the value that losers set upon their losses, then this efficiency gain justifies the change, even though (in the absence of actual compensation payments) income redistribution has occurred. Where the gainers from a change fully compensate the losers and still show a net gain, this would rate as an improvement under the Pareto criterion. Where compensation is not paid, then a SECOND-BEST situation may be created where the economy departs from the optimum pattern of RESOURCE ALLOCATION, leaving the government to decide whether it wishes to intervene to tax gainers and compensate losers.

In addition to developing welfare criteria, economists such as Paul Samuelson have attempted to construct a social-welfare function that can offer guidance as to whether one economic configuration is better or worse than another. The social-welfare function can be regarded as a function of the welfare of each consumer. However, in order to construct a social-welfare function, it is necessary to take the preferences of each consumer and aggregate them into a community preference ordering, and some economists, such as Kenneth Arrow, have questioned whether consistent and noncontradictory community orderings are possible.

Despite its methodological intricacies, welfare economics is increasingly needed to judge economic changes, in particular rising problems of environmental POLLUTION that adversely affect some people while benefiting others. Widespread adoption of the ‘polluter pays’ principle reflects a willingness of governments to make interpersonal comparisons of utility and to intervene in markets to force polluters to bear the costs of any pollution that they cause. See also MARKET FAILURE, NORMATIVE ECONOMICS, RESOURCE ALLOCATION, UTILITY FUNCTION, CARDINAL UTILITY, ORDINAL UTILITY.

References in periodicals archive ?
They conclude that "government old-age support programs can have large effects on labor supply."
These findings--that [partial derivative]H/[partial derivative]w < 0 and [partial derivative]H/[partial derivative]y [greater than or equal to] 0--imply a nonpositive substitution effect which some would find a cause for concern for the interpretation of the hours-wage observations as a conventional labor supply function.
Peterman, William B, "Reconciling Micro and Macro Estimates of the Frisch Labor Supply Elasticity: A Sensitivity Analysis," Technical Report, Federal Reserve Board of Governors 2014.
Thus, it Is very difficult to grasp in all Its complexity how the economic cycle may affect labor supply without taking into account gender differences (Rubery and Rafferty, 2013) since women's decisions to enter the labor market have always been more sensitive than male ones to economic cycles (Lundberg, 1985; Tano, 1993) because of the traditional secondary nature of female labor and lower women's activity rates linked to their historical specialization in unpaid domestic work.
* Henry Farber, Princeton University and NBER, "Why You Can't Find a Taxi in the Rain and Other Labor Supply Lessons from Cab Drivers" (NBER Working Paper No.
2000), it is unclear a priori if the labor supply patterns observed in a sample of men who cohabit with men will also be observed in a sample of single and cohabiting behaviorally gay men.(1) Researchers have long noted that marriage is an important determinant in many economic experiences (Loh 1996).
This view has been supported by low estimates of the effect of unemployment insurance extensions on labor supply. Economists have used the cross-sectional variation across states in extension initiation and duration to estimate the effect of benefit variation on the search behavior of the subset of the unemployed who receive benefits.
Or would the benefits of a flexible labor supply be a boon to our economy, all while raising the standard of living for anyone willing to work?
This immense volume of over twenty essays contains influential essays on labor relations, wages, worker-satisfaction, the effects of unemployment insurance on the labor supply, the effect of uncertainty on the labor supply, schooling and the effects of education on the labor-supply, job mobility among younger men, and more.
When one compares one cyclical peak with the next, thus holding the unemployment rate more or less fixed, the employment-population ratio necessarily reflects the labor force participation rate, which is the common measure of labor supply. Long-term trends in the employment-population ratio can therefore likewise be taken as reflecting trends in labor supply.
ERIC Descriptors: Labor Force; Futures (of Society); Social Change; Job Skills; Skilled Occupations; Technical Occupations; Skilled Workers; Employment Qualifications; Postsecondary Education; Educational Attainment; Middle Class; Associate Degrees; Education Work Relationship; Labor Supply; Access to Education; Influence of Technology; Employment Opportunities
(1999) 'Labor supply: A review of alternative approaches' in O.