A classic assumption of conventional microeconomic theory is that there is a representative individual and that this individual is characterized by insatiable wants. As income increases, the demand for goods and services increases. No empirical backing for this assumption is provided. Moreover, it is noted that the insatiable wants assumption stands in stark contravention to the conventional model of market labor supply. This theory assumes that the typical individual prefers leisure to work. The modeling prediction here is that increasing real income from any source has the effect of reducing the supply of labor; there is a backward being labor supply curve. Increasing real income from increasing real wages, social benefits of any sort (sometimes referred to as demogrants), bequests, capital gains, all have the effect of reducing the supply labor. From this perspective, important aspects of unemployment causality are a product of prospective workers having access to non-labor market sources of income. Only by making prospective workers desperate will unemployment be reduced and labor supply increased. Also, increasing real wages will eventually have the perverse effect of increasing unemployment and reducing the supply of market labor. But, such analytical predictions are inconsistent with the conventional assumption of insatiable wants. In this paper, I present narrative supportive of the insatiable wants assumption. I also model the contradictory nature of these two core assumptions of conventional economic theory. If the insatiable wants assumption has empirical merit, the analytical predictions and public policy advice flowing from the conventional labor supply model can have little analytical standing. I argue and show that the insatiable wants assumption is most consistent with a variant of a target income modeling of labor supply. To the extent that target income is not reached, neither increasing real wages nor increasing non-market sources of real income need reduce the supply of market labor. This is especially the case when real target income increases over time, a scenario most consistent with the insatiable wants assumption. Economic theory is enriched by introducing empirically based insatiable wants assumptions into the modeling of the labor market, generating more accurate and consistent understandings of labor market behavior and more rational public policy advice. |
