Econ 315 Exam 2
According to empirical research, the two best explanations for increased female participation in the work force
- Rise in real wage - Expansion of women's jobs - no longer have to be a teacher, nurse, or secretary
what have been two of the biggest factors to affect male LFPR?
-Baby boomers retiring -People going back to school full time
Why are workers at larger firms more productive and thus better paid?
-Better training -Better workers are attracted to them -More capital is available
What kind of forces lead to a flatter indifference curve?
-Buying new appliances (inventions allow for easier substitution) -Children grow up -Greater future wage penalties associated with staying at home -Growing value on purchased goods easily observed with others (Keeping up with the jonses)
What does a flat indifference curve represent?
-Indifferent between work and leisure -Time at home becomes less necessary or more easily replaced with good and services -Tangency with the budget constraint will be farther to the left -Examples: people whose children are older, easier to substitute -A steeper budget constraint or flatter indifference curve can increase the hours of market work
What does a steep indifference curve represent
-Reducing time at home has to be compensated by a large increase in income -Tangency with the budget constraint likely will be farther toward the right -Examples of people with it: gifted caregiver, work at home is hard to replace, enjoys working at home
What is implied when we say married women are only marginally attached to market work?
-it is rational for them to participate during good times and not participate when unemployment is high and wages low so their participation will decrease during a recession
Why has the LFPR for women risen over time?
1) Increased real wages has increased married women's participation and women have more education now 2) Changing preferences has lead more women to focus on careers in market work 3) New technology has allowed for greater household work productivity 4) Declining birthrates (higher wages have raised the OC of having kids) 5) Increased divorce rates 6) Expanded job opportunities 7) Inflation has grown and to keep the same standard of living women have had to work
Why has the participation rate of older males has declined?
1) Real earnings have risen since 1940 so income effect suggests you need to work less to earn the same utility 2) Social Security benefits and coverage have risen over time (nonlabor income) which encourages people to not work 3) Private pension coverage has expanded (nonlabor income) which encourages early retirement 4) Social Security disability program has become more generous encourages low-wage workers to exit the labor force (Baby Boomers were a large generation and government didn't expect that)
Sources of Compensating Differentials
1) Risk of injury or death on the job (higher wages) 2) fringe benefits like sick leave, health and dental insurance will pay lower wages 3) Job status (jobs with titles will pay less because prestige is a benefit) 4) Job location (better location, lower pay and vice versa) 5) Job Security (greater job security means lower wage) 6) Prospect of Wage Advancement (lower starting salaries) 7) Extent of control over the workplace (less control means higher pay)
Determinants of labor supply
1) wages of other occupations 2) nonwage income 3) preferences for work 4) nonwage aspects of the job 5) number of qualified jobs
how can policymakers attempt to address the work-incentive problems caused by welfare programs?
1) work requirements 2) lifetime limits 3) incentives for jobs
Which of the following is not true of a worker's indifference curves? A worker is indifferent among all his indifference curves. The curves are convex to the origin. Indifference curves do not cross. All indifference curves are negatively sloped.
A worker is indifferent among all his indifference curves.
Why does the discouraged worker effect tend to be empirically larger than the added worker effect
Added worker only applies to families where the primary worker is unemployed, discouraged worker applies to everyone
A person who receives time-and-a-half overtime for working more than 8 hours per day will have a ________ which is ________ beyond 8 hours of labor.
BC; steeper
Why might higher wages at bigger firms be a compensating differential?
Bigger firms are less pleasant and personal, more bureaucracy
What causes wage differentials in the model
Decreased Labor Supply for a job that has undesirable job characteristics and an increased labor supply for the alternative job
why do African American men face worse labor market conditions
Demand: -Lower education as a percentage of labor force -Discrimination -Unmatched job and residence Supply: -Non-labor income may be more appealing and reduces labor participation -Illegal activities may offer higher rates of compensation -Health of African American older men tends to be worse than white older men -Higher participation of African-American wives may lower the participation rate for African-American husbands
what causes steeper budget constraints?
Increase in the wage rate
In the context of the models presented in class, why are low-income workers more likely to take dangerous jobs?
Low-income workers are not willing to pay as much for more safety as high-income workers.
Who is more likely to acquire human capital?
People with low discount rates which is another cause of wage differentials
what information do we need to determine the optimal distribution of an individual's time between work and leisure
Subjective preferences of workers - do they like it? Objective market information - wage rates?
What is the significance of the slope of the worker's indifference curve?
The absolute value of the slope is equal to the MRS of consumption for leisure.
What is the significance of the slope of the worker's budget constraint?
The slope, multiplied by negative one, represents the worker's hourly wage rate.
Why are prostitutes paid so highly?
Unpleasant job, not a lot of control or job security, prestige isn't there = compensating differentials
Which of the following is not an assumption on which the theory of compensating differentials is based?
Workers always try to choose the highest paying job available to them.
An increase in nonlabor income due to a rise in the value of stocks and bonds will cause
a pure income effect
If child care costs are purely hourly and have no fixed component, the effects of a government subsidy for child care are the same as _________
a wage increase
Holding all else constant, workers who have a high tolerance for risk will tend to have jobs that pay
above average wages.
primary earner loses their job and other family members look for a job Increases LFPR
added worker effect
Present-oriented people discount future earnings _________ forward-looking people.
at a higher rate than
the partner with greater access to resources carries more influence
bargaining model
Indifference curves drawn with leisure and income on the axes have negative slopes
because people are willing to give up income to obtain more leisure and vice versa.
Holding all else constant, workers who are strongly averse to risk will tend to have jobs that pay
below average wage
shows all the various combinations of income and leisure that a worker might realize or obtain, given the wage rate
budget contstraint
extra wage/pay that an employer must provide a worker for some undesirable job characteristics that does not exist in an alternative job
compensating differential
person stops looking for a job because they've become pessimistic about finding a job Decreases LFPR Tends to be larger
discouraged worker effect
child-care subsidies that reduce/remove the fixed cost of child care can:
encourage working among those previously not working
the gains from staying at home depend on:
enjoyment of, and skill, at child rearing
The labor force ______ during an economic expansion which means the official unemployment rate is _______
grows, overstated
workers with fewer nonwage amenities will get ________
higher wages
change in desired hours of work resulting from a change in income (holding the wage rate constant)
income effect
For those already working, removing the fixed cost of child care acts as a pure _______________ effect. This pushes the mother toward _________ hours of work. Spending time with child is a _________ good
income, fewer, normal
As wives' wages and labor-market opportunities rise, the share of household work done by husbands _______ and the share done by husbands _____
increases and decreases
An increase in the wage rate when the substitution effect dominates will ________ labor force participation and ________ hours of work.
increases; increases
An individual's reservation wage
is the value of the marginal hour of leisure time if the individual does no work.
unpaid activities including household work
leisure
a wife's increased hours of paid work could either:
make the husband's indifference curve steeper -Takes on more household duties makes the husband's indifference curve flatter -doesn't like to be home without his wife
the amount of income one must give up to get one more hour of leisure
marginal rate of substitution, the absolute value of the indifference curve
the losses from staying at home are related to:
market wage of each spouse
Part of the male-female differential may be a reflection of different preferences in _______
nonwage amenities
People who are present oriented (have a high discount rate) are not willing to sacrifice present consumption unless they get a ___________ increase in future income
relatively large
People who are future-oriented (have a low discount rate) are willing to sacrifice present consumption for a ____________ increase in future income
relatively smaller
Workers performing dangerous jobs in the economy are typically people that
see the jobs as paying well compared to alternative employment.
If Alice's wage increases from $6.00 per hour to $6.50 per hour, then
she may want to work more, fewer, or the same number of hours as before her raise.
firms will pay above market wages where it is costly to monitor employee performance or the employer's cost of poor performance is high
shirking model
The labor force ________ during recessions which means the official unemployment rate is _____
shrinks, understated
the difference in wage due to education or training that makes up for human capital investments
skill differential
What effect can skill differentials have on compensating differentials?
skill differentials can increase, decrease or reverse wage differences caused by compensating differentials Ex: nurses get paid more than ditch diggers
Why are most "good" jobs also high paying?
skill differentials offset compensating differentials
A person with ________ indifference curves is most likely to decide not to participate in the labor force.
steep
Which effect will cause the worker to decide to enjoy less leisure time and work more?
substitution effect
the change in desired hours of work resulting from a change in the wage rate (holding utility/income constant)
substitution effect
Suppose that the compensating differential associated with working in a noisy workplace is $500 per year. This $500 payment can be interpreted as
the amount that the marginal worker is willing to pay for a quiet environment.
A professor declared "with the recent drop in the value of my stock portfolio, I will have to put off retirement by another two years." This decision reflects
the income effect
On the portion of a worker's labor supply curve that is backward-bending,
the income effect outweighs the substitution effect
firms will pay above market wages when hiring and training costs are high
turnover model
one spouse makes all the decisions, they act as a "social planner" or two parties have the same preferences
unitary model
time spent on paying job
work
If all workers like nice working conditions and labor markets are competitive (such that workers are mobile and fully informed), then in equilibrium
workers will be indifferent between jobs with and without nice working conditions.