Life Cycle Model of Labor Supply

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Life Cycle Model

The effective practice of human resource management in the enterprise should be based on clear understanding of the employees’ motivations and changes in his/her behavior on different stages of a life cycle. In this way, it is possible to analyze and predict the possible changes in the level of work motivation and risk of quitting for employees. This paper discusses the classic Life Cycle Model of labor supply and its application in the discussion of relevant cases of the employees quitting their work after winning the lottery. The paper seeks to answer the question of whether the classic Life Cycle Model of labor supply can be applied for adequate prediction and analysis of the employees’ behavior or if the changes should be applied to the model.

Life Cycle Model of labor supply is used to estimate the changes in the labor supply behavior of a person depending on the changes that occur at the different stages of his/her life cycle. In this way, the researchers use the presented model to predict the changes in working motivations of the potential or actual employee on the basis of different life cycle characteristics – age, gender, education, level of income, etc. The basic assumption that defines the vector of the model’s development can be described by a single idea: “The consumer is assumed to choose consumption and hours of leisure at each age to maximize a lifetime preference function that is strongly separable over time, subject to a wealth constraint” (MaCurdy, 1981, p.1060). Therefore, the level of labor supply for each consumer will be dependent on the existing level of income, the general level of wealth and savings, and the level of prices of consumption and leisure. In this context, the researchers can assume that the increase of wealth or decrease of prices of consumption and leisure could affect the person’s labor supply negatively. It is possible to assume that if leisure and consumption did not require any costs, the person would not display any intention to work. If the abstract costumer is placed on the tropical island where all his/her demands are satisfied for free, there will be no motivation for such person to present labor supply at all. However, such attitude to the assessment of labor supply model lacks discussion on several key aspects of the life cycle decision making that will be discussed in this paper.

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This paper aims to discuss the relevance of the classic Life Cycle Model of labor supply on the basis of the discussion of the role of lottery winning as the life event that can affect the labor supply of the consumer. According to the Life Cycle Model of labor supply, the significant increase of person’s wealth as a result of victory in the lottery will cause the reduction of labor supply reflected in the person’s decision to abandon the workplace. In this situation, since a person has already acquired the necessary level of capital, it is possible to satisfy leisure and consumption demands without working. At the same time, the recent research performed by Bengt Furaker and Anna Hedenus (2012) demonstrated that the standard Life Cycle Model of labor supply cannot be applied for the real-life cases of lottery winners’ behavior.

Findings of Furaker & Hedenus

In their research, Bengt Furaker and Anna Hedenus (2012) aimed to study the influence of the fact of winning the lottery on people’s decision to abandon the workplace. For this aim, three types of human reactions connected to labor supply practices were defined, characterized by the decision to quit working, to take unpaid full-time leave, or to reduce working hours (Furaker & Hedenus, 2012, p.9). On the basis of the performed study on the actual lottery winners, the researchers concluded that most of the winners preferred to stay in their social group (Furaker & Hedenus, 2012, p.2). While lottery victory is usually considered as a threat to the working ethics (Furaker & Hedenus, 2012, p.2), the results of the study demonstrated that the winners were not likely to change their work habits significantly.

Among the factors that could affect the consumers’ attitude to the labor supply process, the following features were defined as important: gender, age, level of education (Furaker & Hedenus, 2012, p.4), and the group of non-financial “intrinsic” factors. The most interesting factor was revealed to be that of education, which determined that the workers with a lower level of it are more likely to quit working after receiving the required level of capital for consumption. It is explained by the fact that they display a lower level of demand for self-realization and professional development. The authors stated that people with lower level of education do not feel the need for personal growth and development, meaning that they will abandon working with fewer negative emotions.

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The non-financial factors include “stimulating nature of the work tasks, work autonomy, one’s personal role and influence at the workplace, social contacts, and other such immaterial aspects” (Furaker & Hedenus, 2012, p.3). In this way, it is obvious that the researchers understood the changes in labor supply as life cycle changes, and they did it from a wider perspective as compared to the traditional approach of the Life Cycle Model of labor supply. The employee may not abandon the workplace after winning the lottery due to the immaterial importance of work to him/her as they might see it as a tool of social relations development, means of self-realization in the spheres of creativity and professional development, etc. From this point, the person’s motivation is not limited by the questions of financial capital and consumption as it is in the traditional model. At the same time, gender characteristic could play an important role in the definition of labor supply behavior of a person, with males seen as more likely to maintain the existing working practice after winning the lottery.

As for the empirical results of the presented research, it became obvious that only about 12% of participants have made a decision to quit working in general (Furaker & Hedenus, 2012, p.9). At the same time, only 25% of those who made a decision to quit working stated that the lottery winning was a vital factor in such decision (Furaker & Hedenus, 2012, p.9). Among other important causes for making a decision to stop working, the participants mentioned the factors of age, gender, and the level of actual fortune won in the lottery. At the same time, the researchers defined different key factors of decision making for each group of employees. For those who decided to quit working in general, the factor of age was vital (Furaker & Hedenus, 2012, p.10). For those who have chosen a part-time leave, the factor of the won amount was important (Furaker & Hedenus, 2012, p.10). For those who took part-time work, the feature of gender was the determining factor (Furaker & Hedenus, 2012, p.10). Thus, the conclusions of the research demonstrate that the traditional Life Cycle Model of labor supply does not include many vital factors that should be used to analyze and predict changes in labor supply behavior of people as a result of life cycle transformations.

Consideration & Improvement of Model

The discussion of the results of research by Bengt Furaker and Anna Hedenus (2012) defined the analytical and predictive weakness of the classic Life Cycle Model of labor supply as a tool of the employees’ decisions, explanations, and predictions. The results of the empirical study were completely opposite to the main assumptions regarding the existing theory and model. The factor of sudden increase of consumption capital did not affect the working habits of the majority of participants. At the same time, the decision to quit working was supported only by 12% of participants. In this situation, it is important to consider all the factors that affect the existing practice of labor supply changes analysis and prediction.

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First, it is important to provide the clear division of the types of changes in the employees’ behavior based on the difference in the factors that affect each type of them. It would be possible to avoid such division if different reactions were caused by different levels of changes of a similar value. As opposed to this, Bengt Furaker and Anna Hedenus (2012) demonstrated that decision to quit was affected by age factor, part-time leave was caused by the level of capital received from the lottery, and the part-time work decision was influenced by the gender factor. Altogether, it is useful to increase the general complexity of the model so it would be able to adequately predict all the possible changes. It can be quite a complex task, but without its realization, it is impossible to reach the required level of model’s effectiveness.

Second, the factor of employee’s education should be integrated into the model. Though the results of the study did not define its role in the employees’ behavior, it was mainly caused by the fact that it was not included in the final regression model (Furaker & Hedenus, 2012, p.10). At the same time, the assumption about the influence of this factor was quite logical, and thus it requires additional study. The management of the companies should consider the factor of education as a potential cause for the employees’ decision to quit or continue working.

Finally, the classic model should consider the factor of gender. Though it did not play a vital role in the decision-making process for the participants of the presented study, it is obvious that females are more likely to abandon working in the conditions of better financial situation. The existing cultural and social norms play an important role here as well. The existing social roles are maintained despite the process of gender equality principles realization. As a result, women are more likely to choose caring about family and children if they do not face the need to earn money for the family.

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As a conclusion, it can be said that the existing model has a wide range of limitations. In fact, its potential to analyze and predict the real changes in labor supply is extremely low. Without the adoption of the proposed changes, it is difficult to use the model effectively.

Conclusion

The discussion of the classic Life Cycle Model of labor supply and its comparison to the results of the research by Bengt Furaker and Anna Hedenus (2012) demonstrated the existing weaknesses in the ability of the classic model to define the real motivation of the employees to continue or quit working and to predict their decisions on the basis of life cycle changes. While the classic model discussed only the role of a financial factor in changes in labor supply level, it did not consider the influence of age, gender, education, and intrinsic values. The results of the lottery winners study determined the fact that only 12% of winners actually abandoned the working practice in general. At the same time, only 25% of quitters considered financial factor as their main motivator. Consequently, it is possible to say that the classic model is not relevant for the analysis and prediction of employees’ behavior. To improve its quality, it is necessary to consider integration of all the discussed factors — age, gender, education, and intrinsic values, into the model.

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