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Labor Economics

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Labor demand curves (wages as price and employees as quantity) slope...
downward.
What is the difference between the short run and long run?
In the short run, there are no adjustments to capital.
What is the two-factor production function?
Q = f(L,K)
What is the marginal product of output labor?
The additional output that can be produced by a firm when it employs one additional unit of labor (holding capital constant)
What are the two characteristics of the relationship between additional employees and output?
Always positive, diminishing marginal returns.
The only employment level consistent with profit maximization:
MR(L) = MC(L), or that the revenue obtained from hiring the last unit of labor is equal to its marginal cost.
How is a monopoly have a different marginal revenue from last unit sold than a normal firm?
It wouldn;t be the product price, it would be lerss than the product price, because it would apply to all units sold.
How would a monopoly maximize its profits?
The marginal revenue product (MRP) would equal the wage rate (as opposed to the revenue equaling the wage rate).
A monopoly will always have a demand for labor curve where in relation to the same type of non-monopoly firm?
Below and to the left.
Are monopolies always price makers in the labor market?
Not nessecarily, they may not have a monopsony on the labor market, and thus pay the same rates.
What is name a firm which is the only buyer of labor in a market?
Monopsonist.
How does a monopsonist labor supply curve differ from a normal firm's?
It is upward sloping as opposed to only horizontal. Therefore, the marginal cost of hiring labor exceeds the wage, because they must increase the wages of all the workers.
Where will a monopsonist stop hiring as opposed to a normal firm?
When the marginal revenue of the product is above the wage rate, as opposed to equal to it. Because for the monopsonist, at that point, marginal revenue of the product equals marginal labor costs.
If we increase wages, firms will have an incentive to do what with capital? And why?
Become more capital intensive, because capital will suddenly have a greater marginal utility then labor.
What is univariate analysis?
Analysis of the effect of one variable on just one other variable.
What do we use "epsilon i" for in the general equation Qi = a0 + a1Wi + Ei ?
Epsilon i is a random error term, because we assume the equation won't connect all the data points perfectly.
What is least squares regression analysis?
When we draw the line in which the squared vertical distances between the line and the individual data points is minimized.
What is standard error?
The estimated standard deviation of the coefficient of a variable and the intercept in the equation.
What is a t-statistic?
The ratio of the coefficient to its standard error.
If the absolute value of the t-statistic is greater than 2...
... the then hypothesis that the true value of the coefficient equals zero (isnt significant) can be rejected.
What is a dichotomous variable?
A dummy variable.
What is multiple regression analysis?
How we estimate the parameters of an equation containing multiple variables. Each parameter should tell us the effect on the dependent variable of a one-uni change in the corresponding independent variable, holding the other independent variables constant.
What is omitted variable bias?
When we use a univariate regression model in a situation calling for a multiple regression model.
In what sense is labor demand a "derived variable"?
In so much as labor demand is a function of product demand.
What is the marginal productivity of labor (MPL)?
The additional output that can be produced by a firm when it employs one additional unit of labor.
As long as output increases with labor, MPL is ...
positive.
In the simple model of labor demand, what are our 6 assumptions?
1) Labor and Capital is homogenous 2) diminishing MPL 3) Firms maximize their profits (pi) 4) Hourly wage is the sole cost of labor 5)Technology and capital are fixed. 6)No price floors or ceilings
The only employment level which is consistent with profit maximization is when marginal revenue of hiring is...
equal to marginal cost of hiring.
Will MPL be declining, the same, or increasing when MPL = MCL (and profits are maximized)?
Declining
When was the Fair Labor Standards Act passed?
1938
When does minimum wage increase unemployment?
When it is a very high percentage of the average wage
In a perfectly competitive market without wage restraints, wage equals...
the intersection of supply and demand.
Why does the labor supply curve for the individual exhibit increasing returns to scale?
Because each hour of your time is progressively more valuable to you.
What are the 4 Hicks-Marshall Laws of Derived Demand? Wage elasticity of demand is higher if...
1) Price elasticity of demand for product is high. 2) Other factors of production can be easily subsituted. 3) Supply of other factors of production is highly elastic, that is, usage of other factors of production can be increased without substantially increasing their prices. 4) Cost of employing labor is a large share of cost of production. (4 may not always hold)
Labor demand elasticity is less than, greater than or equal to labor demand elasticity at the industry level?
Greater than, because of lack of substitutes
Are wage elasticities higher in the short run or long run?
Long run.
What defines the "scale effects"?
In scale effects, we hold capital constant.
How is wage elasticity of demand higher affected by wage elasticity for a product?
By way of scale effects. Higher wages entail higher prices, and if consumers respond by buying less, they will higher less workers.
Why is wage elasticity of demand higher is other inputs can be substituted?
Substitution effects.
When is the 4th Hicks-Marshall law (wage elasticity is higher when the category of labor costs is a larger share) not true?
When the ease of substitutability for employer greater than the ease of substitutability for customers.
What is "spatial mismatch"?
When people live somewhere but there aren't jobs there.
Monopsonists can't set the price and quantitiy of labor to whatever they want, why?
Because the monopsonist, unlike a competitive firm, doesn't face a flat demand curve where it can higher as many workers as it wants. Each marginal worker demands higher pay, and they must pay all workers the same wage. A monopsonist will higher less workers for a lower wage.
Does scale effect of increased demand affect a monopsony's demand for labor more or less?
Less, because each marginal worker demands a higher wage. Monopsonists have to keep output below a certain level to maintain a price.
What policy could make a monopsony more efficient?
Setting a binding minimum wage at the competitive wage price, incentivizing the monopsony to hire the optimal number of workers.
As T increases...
Q increases for a given level of outputs.
If T reduces costs by 25%, how much does Q increase and wage increase for an elasticity greater than 1, 1, and less than 1? (What are scale and substitution effects))
>1, Q increases by more than 25, and wage increases. Pos scale and sub. 1, Q increases by 25 and wage stays the same. Neutral scale and sub. <1, Q increases by less than 25, and wage decreases. Neg scale and sub.
What defines the substitution effect?
Quantity is fixed.
If the cross elasticity of demand for labor and capital is positive they are ...
gross complements.
If the cross elasticity of demand for labor and capital is negative, they are...
gross substitutes.
Ones own wage demand elasticity will always be negative or positive?
Negative. Its absolute value will show its magnitude.
What do we mean when we say Social Security is actuarialy fair?
We mean that it accounts for the expected value of payout. If you retire earlier, you receive less per month to account for the larger total you will receive over your lifetime.
What does the substitution effect connote?
The idea that as prices rise, consumers will replace more expensive items with less costly ones.
What does the income effect connote?
as the wealth of individuals increases, lower-priced or inferior commodities are eschewed for more expensive, higher-quality goods and services.
If we only give social security to the poor, what happens to the incentive to work for poor people? (Income and substitution effect)
Income effect (through lower payrolls taxes) causes work to be less desirable, but substitution effect (leisure is now more expensive than it was) causes work to be more desirable: AMBIGUOUS.
If we only give social security to the poor, what happens to the incentive for work for those who the decrease in payroll taxes just offsets the loss of social security?
No income effect (no change in income). However, as less money will be taken out of their paycheck when young, the substitution effect will induce them to substitute work while younger.
What is the compensating wage differential?
The extra wage a job which has undesirable working conditions must pay to attract workers. It can also be thought of as the extra price workers are willing to pay to not work at a shite job.
When is the compensating wage differential an equilibrium differential?
When both firms can obtain the quality and quantity of workers they wanted (pareto optimum), ie the wage differential isnt so high that everyone goes to the shite job or so low that they still can't get workers. Represents what those at the margin are willing to pay for a normal work schedule. (who would possibly change their minds if the cwd was lower)
What are the 3 assumptions of compensating wage differentials and the conclusion we come to?
1) Workers maximize their utility, not their income. Net advantages tend to equalize for the marginal worker. 2) Workers know about information which is important to them. 3) Worker mobility over a period of time. Conclusion: Workers w/ worse job conditions will have higher pay holding other factors constant.
What is hedonic wage theory?
The theory that workers have compensating wage differentials.
What does the graph of indifference curves between wage rate (Y) and risk of injury (X) look like? What about someone who is more risk adverse?
SW to NE, increasing marginal returns to pay with increasing risk (convex). More risk adverse means it will be more steep (needs increasing wage returns for increasing risk to hold utility constant). Curves to the NW have the highest utility.
Employers are faced with a wage/risk trade off that derives from 3 assumptions...
1)First, it is presumably costly to reduce the risk of injury facing employees. 2) Competitive pressures will force many firms to operate at zero profit. 3) All other job characteristics are already given or already determined.
Forces on the employer side of the market tend to cause low rise to be associate with low wages on the assumption ----. The more a firm spends on safety, it must spend ---. The term wages can thus be thought of as ---------.
of holding other things constant, less on other things, terms of employment.
What does a company's wage(Y)/risk(X) isoprofit curve look like? How does it differ for a company whose risk is costly to reduce? Where can the companies offer wages?
SW to NE. Concave (we assume there are diminishing marginal returns to safety expenditures). More profits towards the SE. The company whose risks are more costly to reduce will have a steeper curve. The companies will offer wages where their curve is higher than the other. (better risk/wage payoff)
Short-run changes in hours of work seem to emanate from the ----- side of the market.
Demand.
Demand for a good (or leisure) is a function of 3 factors:
1) Opportunity cost (market price) 2) Wealth 3) Preferences.
The opportunity cost of an hour of leisure is equal to ....
one's wage rate (the extra earnings a worker can take home for an extra hour of work)
What does the income effect state?
If income increases, holding wages constant, desired hours of work will go down, (because leisure becomes more appealing, but its opportunity rate is held constant.) NEG relationship income and work
What is the algebraic equation of the income effect?
delta (hours working) / delta(income) given wages
What does the substitution effect state?
If income is held constant, an increase in the wage rate will raise the price (opportunity cost) and reduce the demand for leisure, thereby increasing work incentives. POS relationship wage and work
What is the algebraic equation of the substitution effect?
delta(hours worked) / delta(wage) given income
When wages rise, why is the impact on incentives to work ambiguous?
Because the income and substitution effects both come into play in opposite directions.
Are leisure/income indifference curves convex or concave? What assumption does this represent?
Convex. When money income is relatively high and leisure is relatively scare, leisure is highly valued. What is relatively scarce is more highly valued.
How would the leisure/income indifference curve differ for someone who places high value on leisure?
Steeper (needs more income per hour of leisure lost)
What is the leisure/income budget constraint?
The linear line which reflects the combinations of leisure and income that are possible for the individual.
What is the slope of the leisure/income budget constraint?
Delta (income) / delta (hours of work). Increment in income derived from an increment in hours of work.
The "spike" in the budget constraint for a worker who receives workers compensation (which cuts off benefits upon working) after injury (page 191) create work-incentive problems for two reasons.
First, the returns associated with the first hour of work are negative. That is, a person receiving benefits who returns to work for one hour would find her income reduced by working. Second, our assumed no-work benefit of AC is equal to previous earnings. If the worker values leisure at all, being able to receive the old level of earnings while enjoying more leisure enhances utility.
What is MPm / MEm (marginal product of number of workers)?
Added output (if more profit than expense) or expense associated with an added worker, holding both capital and average hours of worker constant.
What is MPh/ MEh?
Marginal product/expense of increasing average hours per workers, holding capital and numbers of employees constant.
To minimize the cost of producing any given level of output, a firm should adjust both its employment level and average workweek so that....
MEm / MPm = MEh / MPh
Why might overtime be regularly scheduled despite extra costs?
As long as MEm/MPm = MEh /MPh, this is profit maximizing for the firm. Perhaps quasi-fixed costs are very high.
Will an increase in the cost of hiring workers overtime lead to increased employment?
Not necessarily: It could lead to higher labor costs overall, causing employers to switch to more capital intensive methods. It could also lead to higher overall costs, then reduced demand, then reduced employment. There could also be reduced substitutability between those who work overtime and those who are unemployed.
What effect does a proposal mandating employers provide health insurance for all employees have on demand for part time workers?
Decrease. 1) Firms that hire mostly part time workers face the biggest cost increase. 2) Part time becomes more expensive relative to full time.
The earned income tax credit (EITC) is designed to raise employment and earnings for lower income families with children (adults without children are not eligible for the EITC) Assume that affected workers earn $5/hour, that there is no minimum wage, and that this program provides a wage subsidy of $2/hour with a maximum subsidy of $6/day. Once the maximum subsidy level is reached, workers continue to receive the full subsidy until they earn more than $40/day. For every dollar earned above $40/day the worker loses 60 cents of subsidy. Would you expect the adoption of the EITC to increase labor force participation? Average hours worked of those working prior to the adoption of the EITC?
Yes, it would likely increase workforce participation and average hours worked through the substitution effect. How much depends on the 4 ranges through income substitution effects. If in the range where you experience increasing marginal returns for each extra hour worked (1), AMBIGUOUS scale effects decrease work, but substitution effects increases price of leisure. If in (2), NEGATIVE as income effect decreases and no sub effect. If working in range in which EITC is reduced (3), its an effective tax on your income. Both scale and substitution are negative. If you used to work outside the range of the EITC, (4) NEGATIVE you may cut back your hours to reach the lower.
Increase in the payroll tax rate. Compare the effect and magnitude for Industry A which has flexible inputs technology, and Industry B which uses a technology with few substitutions.
The second factor of Hicks Marshall says that when other factors of production can be easily substituted for the category of labor we are talking about, then labor elasticity will be higher. Since substitutes can be more easily used in A and not B, employment and wages for workers in industry A will decline more than in industry B.
Meyer article: Explain why the simple comparison of injury duration before and after the policy change is unlikely to produce an unbiased estimate of the effect of worker's compensation.
It is unlikely to produce an unbiased estimate firstly because it would not account for other general changes overtime which might change the duration even if the policy change hadn't been enacted.
Meyers article: Does the estimate capture general equilibrium effects that may result from the policy change? Explain
No, the estimate does not necessarily capture general equilibrium effects. For one, higher benefits could induce changes in the composition of the population examined. Secondly, the structure of benefit might effect transitions from temporary total to permanent disability. Lastly, its possible these increased benefits could affect lower wage workers. We may see profits decrease, thus decreasing demand for employment, and this would have an effect on low wage workers.
Explain difference in differences comparisons. Their benefits? Their challenges?
The basic premise of DID is to examine the effect of some sort of treatment by comparing the treatment group after treatment both to the treatment group before treatment and to some other control group. Naively, you might consider simply looking at the treatment group before and after treatment to try to deduce the effect of the treatment. However, a lot of other things were surely going on at exactly the same time as the treatment. DID uses a control group to subtract out other changes at the same time, assuming that these other changers were identical between the treatment and control groups. (The Achilles' heel of DID is when something else changes between the two groups at the same time as the treatment.) For it to be an accurate estimation, we must also assume that the composition of the two groups remains the same over the course of the treatment.
What happens to wages and employment if the government increases the payroll tax rate?
In general, wage costs for employers increase, wages received by workers decrease, and employment decreases.
In what ways would you expect mandatory health care provision for all workers to affect the type of equipment used in restaurants?
We can assume the equipment will become better. As quasi-fixed costs of labor rise, restaurants invest in capital as a substitute for labor.
Will wage elasticities be higher in the short run or long run?
Like price elasticities, wage elasticities are higher in the long run.
How would an increase in the payroll tax rate affect Industry C which is protected by high tariffs on imports vs. Industry D which is not protected from foreign competition?
Because Industry C is not competing with firms who don't face a payroll tax, consumers have a lower price elasticity than they do for Industry D. The first law of Hicks Marshall says the when the price elasticity of demand for the product is high, own-wage elasticity of demand for labor is high. Industry D has a higher wage elasticity, so it will have a larger decline in employment and wages.
How would an increase in the payroll tax rate affect Industry E, which has a competitive labor market vs. Industry F that has a monopsony labor market structure?
The competitive firm will see a larger decrease in employment then the monopsony. The monopsonist doesn't need to decrease employment as much, because as she decreases employment, she can also decrease wages. In contrast, the competitive firm faces the industry level wage, and will have to decrease employment more to reach an equilibrium.
How would mandatory health insurance for all full-time workers likely affect the wages and employment levels of workers who presently do not receive health insurance at work? Who do?
Scale effect would decrease wages and employment for everyone. As costs increase, production decreases, and so does the level of demand for employment. For the same quality worker, total compensation must be equalized. For those who aren't receiving health insurance, there was possibly some reason before, such as workers valued increased pay over health benefits. Additionally, we might see employment decrease among these workers alot if we have a binding minimum wage, and wages cant decline enough to compensate for the increased cost of health benefits. On the other hand, substitution effect would shift us towards a preference for part-time workers, as opposed to full time, because the quasi-fixed cost of employing part-time workers if not reduced relative to full time. Firms which don't currently provide insurance to some workers may prefer to reduce hours of those workers and higher additional part time workers as a cheaper alternative to providing health insurance to all full time workers.
Scale effect of labor looks at
cost of producing, holding capital and labor constant
Substitution effect looks at
capital vs labor. Holding total cost of producing constant.
What does the concavity of the risk/wage isoprofit curve imply?
The marginal cost of reducing injury increases as reduction efforts increase.
What are the downsides to OSHA (Occupation Safety and Health Administration Office)? How can we argue for it economically?
Downside: Workers who are less risk adverse and may have accepted a higher wage for higher risk now have to accept a lower wage. Arguments for: Workers getting injured has negative externalities we must account for.
What does the wage/labor demand curve look like?
Downward sloping. Can be linear or not.
What does a long commute do to our supply of labor?
It wouldn't affect us through substitution, because wages for each hour of work would stay the same. However, scale effects come into play. Our whole "leisure-income" budget constraint curve shifts down. We will want to work more, but not enough to make up the lost income. We will be at a lower utility curve. Fixed costs of any kind reduce reservation wages and raise labor force participation....
Raises marginal value of leisure above the wage,
What if a special ferry is established to reduce a long commute which costs 5 dollars?
We see the same effect as the long commute. Fixed costs of any kind reduce reservation wages and raise labor force participation....
Raises marginal value of leisure above the wage, No substitution effects, but income effects make us work more, but not enough to compensate all the income. We are on a lower utility curve. Decrease in income, puts them outside their optimum value of labor... work enough more to make more income but not enough to reach pre-ferry level, because decreases leisure
The earned income tax credit (EITC) is designed to raise employment and earnings for lower income families with children (adults without children are not eligible for the EITC) Assume that affected workers earn $5/hour, that there is no minimum wage, and that this program provides a wage subsidy of $2/hour with a maximum subsidy of $6/day. Once the maximum subsidy level is reached, workers continue to receive the full subsidy until they earn more than $40/day. For every dollar earned above $40/day the worker loses 60 cents of subsidy. Would you expect the adoption of the EITC to lower the wage rate below $5/hour?
Yes, workers and firms would likely share the benefits of the subsidy. The firms would pay a lower wage.
A great deal of research has gone into trying to identify the effects of the EITC on hours worked for single mothers with children. One method used to identify the effects of the EITC was to compare the average hours worked by low wage women with children prior to the implementation of the EITC with the average hours worked by low wage women with children following the adoption of the EITC. Briefly describe an alternative method for identifying the causal effect of the EITC on the average hours worked of low wage women?
Comparing change in hours worked by middle-wage women before and after the EITC change and the change in hours worked by low wage women before and after the EITC change. Investigate using a difference-in-differences method. ALSO low wage men with children.
Assume that unemployment compensation is paid by the government out of general tax revenues and that workers do not switch industries. Industries A and B experience similar fluctuations in product demand during the business cycle. Hiring and training costs are much higher in industry A.

A) Which industry experiences a higher rate of unemployment during a recession?
Industry B experience a higher rate of unemployment.
Congress proposes that firms be required to provide their own unemployment insurance. In place of the current government payments, firms would pay their unemployed workers 2/3 of their previous salaries for 6 months or until the worker is reemployed. The benefit level is identical to that paid under the present government insurance system.

B) How would you expect privatization of the unemployment insurance program to effect the overall rate of unemployment during recessions?
It would likely decrease the overall rate of unemployment during recessions. Seen as insurance by the firms, ⅔ pay gets accounted in to every employees fixed costs. This would lower the wage, different amounts depending on supply and demand.
The marginal income associated with a unit of input is found by multiplying two quantities... & .... What is this called?
the change in physical output produced (called the units marginal product) and the marginal revenue generated per unit of physical output. This is called the marginal revenue product.
What is the marginal product of capital?
The change in output associated with a one-unit change in the stock of capital, holding labor constant.
why do we see a fall in average productivity -output per labor - in the early stages of a recession?
Labor Hoarding
How do we treat the analysis of wages in jobs with high uncertainty of continued labor?
Using the compensating wage differential model.
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