Econ 380 exam 1 - labor economics ch 1-5

why would you invest in human capital

Higher education positively correlated with income. Profiles are steeper for those with more education.

what is the net effect of the added-worker and discouraged-worker effects

- Added-worker effect only impacts HHs where a primary earner becomes unemployed. - Discouraged-worker effect impacts all HHs. - Therefore, the Discouraged-worker effect > Added-worker effect - Result: Labor force participation decreases during a recession and increases during an expansion. - Marginally attached workers compound these effect (e.g. married women).

what generalizations can we make about the human capital model in relation to earnings differential

- Larger college-high school earnings differential increases NPV & IRR. • College attendance rose in the 1980s as the college-high school premium increased.

determinants of elasticity of the market demand for labor: supply elasticity of other inputs

- The greater the elasticity of supply of other inputs for labor, the greater will be the elasticity of labor demand.

labor force participation rate trends

-decrease in male participation -increase in female participation -gender convergance

work-leisure model: undermployment

A situation in which the worker could increase utility by taking less leisure and more income; a level of work wherein the wage rate exceeds the marginal rate of substitution of leisure for income. This term may also refer to a situation in which the worker is employed in a position for which he or she is overqualified

The work-leisure decision: indifference curves

As applied to the work-leisure decision, an indifference curve shows the various combinations of real income and leisure time that will yield some specific level of utility or satisfaction to the individual.

least-cost combination of capital and labor

By overlaying the isocost curve onto the isoquant map, we can determine the firm's cost-minimizing combination of K and L for a given quantity of total output. Stated somewhat differently, this allows us to determine the lowest cost per unit of output. This least-cost combination of resources occurs at the tangency point of the isoquant curve Q and the isocost curve I

what reason other than diminishing rates of return does the internal rate of return decline as additional education is acquired?

Costs tend to rise and benefits tend to fall for successive years of schooling. In addition to having essentially fixed mental and physical characteristics, the individual also possesses a fixed amount of time; that is, a finite work life. It follows that the more years one invests in education, the fewer one has during which to realize the benefits of incremental income from that investment, hence the lower rate of return. The rate of return also declines because the costs of successive years of schooling tend to rise.

the end of welfare as an entitlement

In August 1996, President Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), which fundamentally changed the welfare system in the United States. A major goal of the law is to make receiving welfare a transition period before returning to work. The law replaced the existing Aid to Families with Dependent Children (AFDC) program with the Temporary Assistance for Needy Families (TANF) program. In contrast to AFDC, TANF requires welfare recipients to work after two years of receiving assistance with few exceptions. Welfare recipients may meet the work provision by being employed, attending vocational training, or performing community service. The Act also mandates a five-year lifetime limit on the receipt of cash welfare payments. It also provides child care and health insurance for families entering the job market. Finally, most forms of public assistance are denied to legal immigrants for five years or until they become citizens

real world applications of labor demand and the elasticity of labor demand: fast-food workers

In Becker's terms, people have substituted goods (restaurant meals) for time (home-prepared meals). The growing demand for restaurant meals has increased the demand for fast-food workers. Because the labor supply of traditional fast-food workers—teenagers—has not kept pace, many restaurants are now recruiting homemakers and semire-tired workers.

"Only that portion of the MP curve that lies below AP constitutes the basis for the firm's short-run demand curve for labor." Explain.

In competitive markets, MP > AP implies that labor costs exceed total revenue; the firm should shut down in the short run. In stage I of the production relationship, increasing labor will increase the efficiency of both capital and labor: the firm will not want to operate in Stage I.

human capital model controversies: non-wage compensation

Non pecuniary fringe benefits and a more pleasant work environment.

the market demand for labor

Specifically, a lower product price will reduce MRP and shift the labor demand curve of each firm to the left. This implies that the market demand for labor is in fact less elastic than that yielded by a simple summation of each firm's labor demand curve.

income maintenance programs: break-even level of income

The basic benefit and the benefit reduction rate permit the calculation of the break-even income. This is the level of earned income at which the actual subsidy payment received by an individual or family becomes zero.

income maintenance programs: income guarantee or basic benefit

This is the amount of public subsidy an individual or family would be paid if no earned income were received

income maintenance programs: the benefit reduction rate

This refers to the rate at which a family's basic benefit is reduced as earned income increases.

Use the total wage bill rules and the labor demand schedule in Question 4 to determine whether demand is elastic or inelastic over the $6 to $11 wage rate range. Compute the elasticity coefficient using Equation (5.4).

Total wage bill: at a $6 wage, the total wage bill is $18; at an $11 wage, the total wage bill is $22. Demand is inelastic, Ed = .68.

the work-leisure decision: empirical evidence

What do empirical studies reveal about labor supply curves? The evidence differs rather sharply between males and females. Specifically, most studies indicate that male labor supply is quite insensitive to changes in wage rates, whereas female labor supply is more responsive to changes in wage rates.

Labor force participation rate

actual labor force/ potential labor force

what is the human capital model (study slides page 3)

age on x-axis annual earning on y • The HH curve is the age-earnings profile if a person does not attend college. • The CC curve is the cost-earnings profile if one attends college. • The total cost of attending college is the sum of the direct costs (area 1) plus indirect costs (area 2). • The benefit of attending college is the increase in earnings due to the college degree (area 3). • Whether it is rational to attend college depends on whether the value of the benefits exceeds the value of the costs. • How method can we use to determine "value"?

real world applications of labor demand and the elasticity of labor demand: textile and apparel industries

another factor has been the spread of automation in textile and apparel manufacturing. Industrial robots and assembly-line labor are gross substitutes, meaning that lower prices for robots have produced substitution effects exceeding output effects. The net effect has been a decline in the demand for textile and apparel workers. Coupled with the reduced demand for the product, the substitution of robots for workers has sharply reduced employment in these industries.12

becker's allocation of time model

extends the work-leisure model

the work-leisure decision: income effect

the change in the desired hours of work resulting from a change in income, holding the wage rate constant. -when wage rates rise, and leisure is a normal good, the income effect reduces the desired number of hours of work.

what is the elasticity coefficient

the responsiveness of labor demand to changes in the wage rate. formula in picture midpoint method: E(D) = ((∆quantity)/((Σquantities)/2))/ ((∆wage)/((Σwages)/2))

what are the non-wage determinants of labor demand

• Product demand - A change in product demand will shift labor demand in the same direction. • Productivity - A change in labor productivity will shift labor demand in the same direction. • Number of employers - A change in the number of firms will shift labor demand in the same direction. • Prices of other resources - Gross Complements • Demand for one input moves inversely with the price of the other input. - Gross Substitutes • Demand for one input moves directly with the price of the other input.

human capital model controversies: education consumption value

- Education has consumption, not just investment value

income maintenance programs: three basic features

- income guarantee or basic benefit - benefit reduction rate -break-even level of income

real world applications of labor demand and the elasticity of labor demand: minimum wage

Critics contend that an above-equilibrium minimum wage moves employers upward along their downward-sloping labor demand curves and causes unemployment, particularly among teenage workers. Workers who remain employed at the minimum wage will receive higher incomes than otherwise. The amount of income lost by job losers and the income gained by those who keep their jobs will depend on the elasticity of demand for minimum-wage labor. Studies have generally found that a 10 percent increase in the minimum wage reduces employment from 1 to 3 percent, meaning that demand is inelastic. Thus, the minimum wage increases the wage income to minimum-wage workers as a group (increases the wage bill). The case made by critics of the minimum wage would be stronger if the demand for low-wage labor were elastic.

isoquant curves: higher output to the northeast

Each isoquant farther to the northeast reflects combinations of K and L that produce a greater level of total output than the previous curve.

what topics in labor economics are mainly macroeconomic

Macroeconomics stresses the aggregative aspects of labor markets and, in particular, the distribution of earnings, labor productivity, and the overall level of employment.

what topics in labor economics are mainly microeconomic

Microeconomics focuses on the determinants of labor supply and demand and how supply and demand interact to determine wage rates and employment in various labor markets. In these labor markets, the types and composition of pay are determined, as is the wage structure. Some wage differences persist; others are eroded by mobility and migration. Labor unions, government, and discrimination all affect labor markets through either supply or demand.

human capital model controversies: recapitulation

Most economists reject the various criticisms of human capital theory, believing that education and training directly increase productivity and earnings. But they also recognize that not all investments in education and training have a positive net present value; some investments are poor ones, and others have sharply diminishing returns. Thus, human capital theory cannot be used uncritically as a basis for public policy.

the population base

Population and the labor force have both grown significantly in the United States, but rates of growth have varied from one period to another.

work-leisure model: premium pay vs straight time

Premium wage rates for overtime work will be more conducive to more hours of work than a straight-time wage rate that would yield an equivalent daily income

the work-leisure decision: graphic portrayal of income and substitution effects

Remember that the substitution effect reflects the change in desired hours of work arising solely because an increase in the wage rate alters the relative prices of income and leisure. Therefore, to isolate the substitution effect, we must control for the increase in income created by the increase in the wage rate. Recall, too, that the income effect indicates the change in the hours of work occurring solely because the higher wage rate means a larger total income from any number of hours of work. In portraying the income effect, we must hold constant the relative prices of income and leisure—in other words, the wage rate.

empirical data on human capital: rate-of-return studies

Speaking very generally, most rate-of-return studies have estimated such rates to be on the order of 10-15 percent. The social rate of return for the corresponding period was estimated to range from 7.5 to 11.1 percent.

short run production function: stages of production (stage 1)

Stage IA: Specialization of labor causes increasing MP which causes TP to increase at an increasing rate. MP > AP so AP rises. Stage IB: Diminishing returns to labor cause decreasing MP which causes TP to increase at a decreasing rate. MP > AP so AP rises. Stage IA & IB show that increases in L improve the efficiency of L & K. • AP of L & K increase • Firm will add labor and progress to Stage II.

world of work: what is a GED worth?

The main avenue for economic benefits from the GED is through greater access to postsecondary education. However, relatively few GED recipients pursue postsecondary education: Only 40 percent attend college at all. Furthermore, only 3 percent of GED recipients complete a four-year college degree, and 5 percent complete an associate degree at a two-year college.

the work-leisure decision: net effect

The overall effect of an increase in the wage rate on the number of hours an individual wants to work depends on the relative magnitudes of these two effects. -If the substitution effect dominates the income effect, the individual will choose to work more hours when the wage rate rises. -if the income effect is larger than the substitution effect, a wage increase will prompt the individual to work fewer hours.

"It would be incorrect to say that an industry's labor demand curve is simply the horizontal sum of the demand curves of the individual firms." Do you agree? Explain.

The statement is true. As labor (and output) increase in the industry, it is no longer the case that the price of the product remains constant as is assumed in constructing the individual firm's labor demand curve.

world of work: making the right choices does it matter which college or university one attends?

The study's results indicate that it does not pay to attend a more selective college as measured by the average SAT score of entering freshmen. For example, a student who attended a highly selective school such as Princeton University did not earn more than one who attended a less selective school such as the Pennsylvania State University. An exception to this finding is that minorities and students with poorly educated parents do tend to benefit from attending a highly selective school. This may be the result of these students getting connections they would not be otherwise able to obtain.

income maintenance programs: controversy

The various income maintenance programs have long been surrounded by controversy. This stems in part from fundamental ideological differences among policy makers. But it also reflects the fact that the accepted goals of income maintenance programs are in conflict with one another and that it is easy to disagree over the proper or optimal trade-offs. In particular, it is generally agreed that income maintenance programs should (1) effectively get poor people out of poverty, (2) maintain incentives to work, and (3) achieve goals 1 and 2 at a reasonable cost.

the work-leisure decision: rationale for backward-bending supply curve

What is the rationale for this reversal? The answer is that points u1 and u2 are at positions on indifference curves where the amount of leisure is large relative to the amount of income (goods). That is, u1 and u2 are located on relatively flat portions of indifference curves, where MRS L, Y is small because the individual is willing to give up substantial amounts of leisure for an additional unit of income or goods. This means that the substitution effect is large—so large that it dominates the income effect. The individual's labor supply curve is forward-rising: Higher wage rates induce more hours of work. But points u3, u4, and u5 are reached only after much leisure has been exchanged in the labor market for income. At these points, the individual has a relatively large amount of income and relatively little leisure. This is reflected in the relative steepness of the indifference curves. In other words, MRS L, Y is large, indicating that the individual is willing to give up only a small amount of leisure for an additional unit of income. This means that the substitution effect is small and in this case is dominated by the income effect. Consequently, the labor supply curve of the individual becomes backward-bending: Rising wage rates are associated with fewer hours of work.

other factors that make a firm's long run labor demand curve more elastic than its short run: technology

When the price of labor falls relative to the price of capital, these efforts get channeled toward technologies that economize on the use of capital and that increase the use of labor. The long-run response to the wage rate decline therefore exceeds the short-run response.

deriving the long-run labor demand curve

When the price of labor rises from $4 to $12, the substitution effect causes the firm to use more capital and less labor, while the output effect reduces the use of both. The labor demand curve is determined in (b) by plotting the quantity of labor demanded before and after the increase in the wage rate from $4 to $12.

real world applications of labor demand and the elasticity of labor demand: contingent workers

Why has the demand for contingent workers increased so rapidly? Several factors have been at work. These workers are usually paid less than permanent workers. Also, increasingly expensive fringe benefits are minimal or nonexistent for many contingent workers. A second and closely related reason for the growing demand for contingent workers is that these workers give firms more flexibility in responding to changing economic conditions. As product demand shifts, firms can readily increase or decrease the sizes of their workforces through altering their temporary, on-call, and subcontracted employment. This flexibility enhances the competitive positions of firms and improves their ability to succeed in international markets.

Why must the concepts of supply and demand as they pertain to product markets be modified when applied to labor markets?

With respect to labor supply, it is impossible to separate the labor services provided from the worker: the worker cares not only about the price, but all of the non-wage characteristics of the job as well. On the demand side, labor is demanded because of its productivity in creating goods and services, not for its own sake.

"The added-worker effect can be explained in terms of the income effect, while the discouraged-worker effect is based on the substitution effect." Do you agree?

Yes. The added-worker effect is based on a reduction in the partner's non-wage income. The discouraged-worker effect can be explained by a reduction in the expected wage rate (the potential wage adjusted for the reduced probability of finding a job.)

indifference curves: indifference map

a whole family or field of indifference curves -Every possible combination of income and leisure will lie on some indifference curve. Curves farther from the origin indicate higher levels of utility.

work-leisure model: nonparticipants

an individual who decides not to be in the labor force -A high subjective evaluation of nonwork time (reflected in steep indifference curves), the availability of nonlabor income (HN), and low earning ability (NW is relatively flat) are all factors conducive to not participating in the labor force.

actual labor force

employed or unemployed but actively looking for a job

world of work: work hours linked to pollution

examine the impact of pollution on work hours by analyzing the effect of the closure of a large oil refinery in Mexico City in March 1991. Pollution, as measured by the levels of sulfur dioxide, fell by 19.7 percent for neighborhoods within a 5-kilometer radius of the oil refinery after the closure. As result, individuals living near the oil refinery increased their average weekly work hours by 1.3 hours (or 3.5 percent) relative to individuals living farther away from the refinery. The distribution of work hours was also affected as well as the level of work hours. Neighborhoods affected by the closure experienced a 6 percentage point increase in the probability of working over 40 hours a week and about a 2.5 percentage point increase in the probability of working more than 10 hours per week.

what perspective does the becker model use

household perspective -Household rather than individual decision-making -households produce utility yielding commodities (UYCs) with their time

look at question 4 chapter 5

look at question 4 chapter 5

not in the labor force

not actively looking for a job

long run labor demand curve (page 8 chapter 5 notes)

results from both the output and substitution effects and is found by connecting points A and C

other factors that make a firm's long run labor demand curve more elastic than its short run: labor-capital interactions (this one sucks)

the long-run employment response resulting from the wage decrease will be greater than the short-run response.

Indicate whether each of the following statements pertains to microeconomics or macroeconomics: (a) The unemployment rate in the United States was 6.2 percent in 2014. (b) Workers at the Sleepy Eye grain elevator are paid $10 per hour. (c) The productivity of American workers as a whole increased by more than 2 percent per year in the last decade. (d) The money or nominal wages of nursing aides increased by 2 percent in 2014. (e) The Alpo dog food plant in Bowser, Indiana, laid off 15 workers last month.

(a) macro (b) micro (c) macro (d) micro (e) micro

what generalizations can we make about the human capital model in relation to length of income stream

- A longer stream of earnings increases the NPV and IRR. - Greater the probability of college investment among: • Younger people • Demographics that exhibit continuity in employment (e.g. men).

human capital model controversies: ability problem

- College is correlated, not necessarily causal, with increased earnings. - Self discipline, motivation, intelligence, desire to learn, etc. correlate with college and higher earnings. - Significant implications for policy prescriptions to educate low-earning individuals.

what investment in human capital can be done to improve quality of labor?

- Formal education - On-the-job training - Experience - Physical & mental health

what are the two types of on-the-job training

- General training • Transferable training: applicable to all firms. - Specific training • Non-transferable: only applicable to the firm providing the training. - Training is typically a mixture of both.

why did the income effect cease to lower hours after ww2 despite rising incomes?

- Higher education attainment • Preference for intrinsically pleasing and safer careers. • Flatter indifference curves. - Firm resistance • Higher fixed costs for the firm per worker (e.g. training & fringe benefits) cause firms to resist reductions in hours per week (costs per hour rise). • Overtime premiums via the Fair Labor Standards Act of 1938 (FLSA) led to a standardized work-week. - Higher marginal income tax rates • Decreased take-home pay. • Income effect > substitution effect.

what generalizations can we make about the human capital model in relation to costs of attending college

- Lower costs (direct and/or indirect) of attending college increase NPV and IRR. - Greater probability of attendance among: • Younger people • Student's with lower direct costs of borrowing: - Loan guarantees - Government subsidized loans (Sally Mae)

how do you determine if training is a worthwhile investment and what are the costs and benefit

- NPV > 0 and r > i - Costs • Direct costs: classroom instruction, books, trainers. • Indirect costs: opportunity cost of working time lost. - Benefits • Increased productivity.

human capital model controversies: screening (signaling) hypothesis

- Related to the ability problem. - Suggests education itself has minimal productivity enhancing benefits but signals employers of higher quality workers.

determinants of elasticity of the market demand for labor: elasticity of product demand

- The greater the elasticity of demand for the product, the greater the elasticity of demand for the labor. - Product elasticity is highest in competitive markets with many substitutes. - Greater elasticity limits the firm's ability to pass on wage increases to consumers in the form of higher prices.

determinants of elasticity of the market demand for labor: Substitutability of other inputs

- The greater the substitutability of other inputs for labor, the greater the elasticity of labor demand.

determinants of elasticity of the market demand for labor: ratio of labor costs to total costs

- The larger the share of labor to total costs, the greater the elasticity of labor demand. • A 10% wage rise if labor accounts for 10% of total costs, will raise total costs by 1%. • A 10% wage rise if labor accounts for 50% of total costs, will raise total costs by 5%.

economic perspective: adaptability

-Because relative scarcity forces people to make choices, and because choices are made purposefully, labor market participants respond to changes in perceived costs and benefits. -the economic perspective assumes that workers, employers, and other labor market participants adapt, adjust, or alter their behaviors in response to changes in expected costs and expected gains. Contemporary labor economics sorts out these responses, finds predictable patterns, and by so doing, adds to our understanding of the economy.

payoffs: social perspective

-From a societal viewpoint, a knowledge of labor economics should help make you a more informed citizen and more intelligent voter. The issues here are broad in scope and impact. -Although detailed and definitive answers to such questions cannot be guaranteed, an understanding of labor economics will provide valuable insights that should help you formulate opinions on these and similar issues.

world of work: Gary Becker: Nobel Laureate

-Gary becker was named the 1992 Winner of the Nobel Prize in economics -Becker's theories presume that individuals or households make purposeful choices in attempting to maximize their utility and that these choices depend heavily on incentives. -Becker's theory of marriage is illustrative. People allegedly seek marriage partners much as they search for jobs or decide which products to buy. Couples stop far short of obtaining complete information about each other before marriage. At some point the costs of obtaining additional information—the main cost being the benefits of marriage forgone—exceed the extra benefits of more information. After being married for months or years, however, a person learns additional information about his or her spouse's personality and attributes. This new information in some cases places the spouse in a less favorable light, ending the optimality of the original match and causing divorce. -Becker views the household as a little factory, allocating its time between labor market work, household production, and household consumption in producing utility-providing "commodities" (Chapter 3). Households have fewer children—time-intensive 'durable goods"—as the "price" of children rises. A major component of this "price" is the forgone earnings associated with having and caring for children. -Becker's theory of human capital (Chapter 4) holds that decisions to invest in education and training are analogous to decisions by firms to purchase physical capital. Applying his approach to crime, Becker concludes that criminals rationally choose between crime and normal labor market work. Also, they respond to changes in costs and benefits, just as noncriminals do. Becker analyzes labor market discrimination (Chapter 14) as a preference or "taste" for which the discriminator is willing to pay.

how does comparative advantage factor into household choices?

-HH allocates time based on each member's opportunity cost -traditionally, children have had a comparative advantage in household time toward acquiring human capital (i.e. schooling)

household choices: why is allocation of time important

-HH members allocate competing uses of time to maximize household utility -must determine which HH members will produce UYCs with labor, HH, and consumption time

World of Work: Lotto Winners: who quit?

-Of the many reasons people work, monetary compensation usually is the leading incentive. Indeed the word compensation implies that workers require reimbursement or indemnification—in this case, for the loss of utility associated with forgone leisure. -less than 1 million 7% quit -between 1 and 2 million 29% quit -between 2 and 4 million 53% quit -4 million or more 77% quit

world of work: labor supply of Florida lobster fisherman

-One would expect that lobster fishermen would increase their labor supply when the hourly wage rate is higher. Stafford finds support for that conjecture. Lobster fishermen are more likely to work at the beginning of the season when lobsters are more plentiful and thus earnings are higher. They are also more likely to work near new moons when it is easier to catch lobsters. -Most of the responsiveness of labor supply of lobster fishermen comes from the decision to participate rather than hours of work per day. Stafford finds a 10 percent higher hourly wage rate increases the probability of participating by 13 percent to 14 percent. However, the same 10 percent rise in the hourly wage rate increases hours of work by only 0.7 percent.

world of work: the labor supply impact of the earned income tax credit

-The EITC has two effects on labor supply. First, labor force participation should rise because only employed people may participate in the program. Second, it has an uncertain effect on the hours worked by employed people. Below the plateau level the EITC is the equivalent to a wage increase, and in the phase-out range above the plateau it acts as a wage decrease. Because wage changes have income and substitution effects that work in opposing directions on hours worked, the labor supply effects among those currently working cannot be determined in theory. -There are many studies of the labor supply effects of the EITC. Hotz and Scholz conclude that the EITC has increased the labor force participation rate, particularly for single parents. In fact, another study has found that the EITC could account for nearly two-thirds of the rise in the participation rate of single mothers between 1984 and 1996. Also, though the program appears to slightly reduce the hours of those currently working, the overall impact on hours worked is positive once the EITC's hours-increasing effect on participation is accounted for

economic perspective: purposeful behavior

-assumes people compare costs with expected benefits -Workers will compare the extra utility (income) gained from an added hour of work with the value of the lost leisure -a firm will compare the added revenue from hiring a worker with the extra wage cost etc -relative scarcity necessitates that choice be made; the economic perspective assumes that these choices will be made purposefully rather than randomly

payoffs: personal perspective

-at the personal level, the vast majority of readers have already been labor market participants. -Such topics as job search, unemployment, migration, discrimination, unionism, and labor productivity, to enumerate only a few, will take on new meaning and relevance. -The background and analytic perspective provided by an understanding of labor economics should be useful in making rational managerial decisions concerning the hiring, firing, promotion, training, and remuneration of workers.

labor economics as a discipline: unique characteristics

-derived demand -rented, not purchased -non-pecuniary elements (pecuniary means relating to or consisting of money) -institutional factors (e.g. licensing, minimum wages, work-hour standards, OSHA, etc)

what four things determine the elasticity of the market demand for labor

-elasticity of product demand -ratio of labor costs to total costs -substitutability of other inputs -supply elasticity of other inputs

why is labor economics justified as a special field of inquiry

-helps us understands causes and outcomes of major socioeconomic trends occurring over the past several decades -quantitatively labor is our most important economic resource -labor is unique in that the complexity of labor markets means that the concepts of supply and demand must be substantially revised and reoriented when applied to labor markets

becker's income effect

-higher wages increase income causing a reallocation of time from the labor market to consumption -more nuanced then the work-leisure model but same result

Becker's substitution effect

-higher wages increase the oppurtunity cost of leisure causing a reallocation of time from household/consumption to the labor market -reallocation from time-intensive to good-intensive commodities

the old and the new

-labor economics has long been recognized as an important area of study but what it studies has changed dramatically the old approach was descriptive • Uses a historical, non-analytical framework to understand labor markets. • e.g. wages and employment opportunities have increased in the past 30 years for individuals that possess a college degree. new approach is analytical • Uses micro and macroeconomic theories to understand labor markets. • Constructs scientific models to predict future outcomes. • e.g. higher education leads to higher wages.

why have men traditionally had a comparative advantage in the labor market and women in the household?

-socialization -types of jobs available -biology -labor market discrimination

what two effects work on the business cycle and participation

1. Added-worker • Primary earner loses their job causing other HH members to look for a job. • Increases labor force participation during recessions. • Income effect: other HH members see a decrease in their non-wage income. 2. Discouraged-worker • Person stops looking for work due to pessimism about the job market. • Decreases labor force participation during recessions. • Substitution effect: perceived lower wages decrease the cost of leisure.

empirical data on human capital: college-high school wage premium

1970s decline • Baby Boomers: labor supply increased relative to demand. 1980s rise • Demand > Supply for college-educated workers to compliment growth of high-tech industries. • Demand < Supply for high school grads as companies began hiring college grads to fill jobs not historically requiring a degree. Future college premiums? • What does past data suggest? • Will there be structural changes in the economy shifting demand/supply for educated workers? • Will the perceived value of a "Degree" increase or decrease?

the work-leisure decision: budget constraint

A line plotted on a graph that shows all the combinations of market goods (real income) and leisure that the consumer can obtain at any given wage rate

how do high school grades affect future educational attainment and earnings

A one-point increase in high school grade point average (GPA) doubles the probability of completing college, from 21 percent to 42 percent, for both men and women. These estimates control for other factors that may affect future educational attainment, such as family size, school characteristics, innate ability, motivation, and parents' education. Those with higher high school GPAs were also more likely to complete graduate degrees. Similarly, a one-point rise in high school GPA raises annual earnings by 12 percent for males and 14 percent for females.

work-leisure model: overemployment

A situation in which the worker could increase utility by taking more leisure and less income; a level of work where the marginal rate of substitution of leisure for income exceeds the wage rate

Suppose marginal productivity tripled while product price fell by half in Table 5.2. What would be the net impact on the location of the short-run labor demand curve in Figure 5.2?

A tripling of productivity coupled with a halving of product price would increase marginal revenue product. The short-run demand for labor would increase.

body of work: the Carnegie conjecture

Although inheritances reduce labor force participation, they permit the children to attain higher indifference curves—to achieve greater total utility. Moreover, those taking extra "leisure" may use it for socially beneficial activities such as volunteer work and educational pursuits. The point is simply that nonlabor income—be it from lottery winnings, pensions, intra-household transfers, or inheritance—is an important factor in understanding labor supply behavior.

One way of aiding low-income families is to increase the minimum wage. An alternative is to provide a direct grant of nonlabor income. Compare the impact of these two options on work incentives.

An increase in the minimum wage may either increase or decrease desired work hours for those already in the labor market depending on the relative strengths of the substitution and income effects. The substitution effect of the higher wage will increase desired hours of work while the income effect will decrease desired hours of work. For those not in the labor force, there is only an income effect, encouraging participation. A direct grant of nonlabor income has only an income effect, reducing desired hours of work.

isocost curves

An isocost (equal expenditure) curve shows the various combinations of two inputs—in this case, capital and labor—that can be purchased with a specific dollar outlay, given the prices of the two inputs. The slope of an isocost line measures the price of one input divided by the price of the other.

why does human capital investment suffer from diminishing rates of return

As with any other situation where a variable input is added to some fixed input, the resulting increases in the amount of human capital produced—the new knowledge and skills acquired by the individual—will ultimately decline. And diminishing returns mean that the rate of return on successive human capital investments will also diminish.

isoquant curves: downward slope

Assuming that capital and labor are substitutes in production, if a firm employs less capital (K), then to maintain a specific level of output, it must employ more labor (L). Conversely, to hold total output constant, using less of L will require it to employ more of K. There is thus an inverse relationship between K and L at each output level, implying a downward-sloping isoquant curve.

caveats to empirical data on human capital

But all such empirical data must be interpreted with some care. First, we have no way of accurately predicting the future. Economists cannot accurately estimate the future earnings of a new college graduate. Data used in research studies to calculate rates of return on human capital investments or the college wage premium are historical data. Also, while incremental earnings affect the decision to invest in a college education, the decision to invest in a college education affects incremental earnings. Second, the historical data used in human capital studies are in the form of average (median) earnings, and the distribution of earnings by educational level around the average is wide. Although a given study may calculate that the average rate of return on a college education is 10 percent, some individuals may earn 30 or 50 percent, whereas the return may be negative for others.

short run production function: stages of production: stage 3

Diminishing returns to labor cause negative MP which cause TP to decrease. MP < AP so AP decreases. Stage III shows that increases in L compromise the efficiency of L & K. • AP of L & K decrease • Firm will subtract labor and progress to stage II.

male labor participation rates trends

General decrease across all age groups. • Most significant for older males • Males over 65 since 1950. • Males 55-64 since 1970.

chapter 3. question 13 The accompanying diagram restates the basic work-leisure choice model presented in Chapter 2. Use this diagram to explain the declining workweek occurring in the pre-World War II period, making explicit the assumptions underlying your analysis. We noted in the present chapter that the stability of the workweek in the post-World War II era has been attributed by various scholars to such considerations as (a) higher taxes on earnings, (b) acquisition of more education, and (c) advertising. Make alterations in the indifference curves or budget line of the diagram to indicate how each of these three factors might contribute to a relatively stable workweek despite rising before-tax real wages.

Higher taxes decrease the slope of the budget line. Increased education, while resulting in higher wages that increase the slope of the budget line, may also reflect changed preferences with regard to market work. This higher commitment to work would make the indifference curves flatter. Advertising may have changed preferences in favor of work so that more goods can be acquired.

world of work: the changing face of america

If the Census Bureau's predictions are accurate, they have several important implications for the labor force. First, the projected slowdown in labor force growth raises the potential for labor shortages. Second, the lower immigration and smaller fertility rates will accelerate the present aging of the American population. This means, for example, that the ratio of receivers of Social Security benefits to the number of people paying into the system will rise faster than once expected. Third, a renewed emphasis on education and training will be necessary to prepare the growing number of racially diverse youth for high-quality jobs. Finally, workplaces will be transformed, with owners, managers, and workers increasingly being nonwhite. Greater tolerance for racial and ethnic differences will be an absolute necessity if the United States is to retain its high labor productivity and standard of living.

The work-leisure decision: basic model

Imagine an individual with a certain amount of education and labor force experience and, therefore, a given level of skills. That individual, having a fixed amount of time available, must decide how that time should be allocated between work (labor market activity) and leisure (non-labor market activity).

real world applications of labor demand and the elasticity of labor demand: personal computers

In some offices, personal computers have been gross substitutes for labor, thus reducing the demand for labor and allowing these firms to use fewer workers to produce their outputs. But in other instances, computers and labor have proven to be gross complements. The decline in computer prices has reduced production costs to the extent that product prices have dropped, product sales have increased, and the derived demand for workers has risen. Also, keyboard personnel and computers are pure complements. Thus, there is no substitution effect; a keyboard worker is needed for each computer.

isoquant curves: convexity to the origin

Isoquants are convex to the origin because capital and labor are not perfect substitutes for one another.

Floyd is now working in a job that pays $18,000 per year. He is contemplating a one-year automobile mechanics course that costs $1,000 for books and tuition. Floyd estimates that the course will increase his income to $23,000 in each of the three years following completion of the course. At the end of those three years, Floyd plans to retire to a commune in Boulder, Colorado. The current interest rate is 10 percent. Is it economically rational for Floyd to enroll in the course?

It is economically rational to enroll in the course. The net present value is -(8000 + 1000) + 5000/1.1 + 5000/(1.1)^2 + 5000/(1.1)^3 = $3,434.26.

indifference curves: different work-leisure preferences

Just as the tastes of consumers for specific goods and services vary greatly, so do individual preferences for work and leisure. Different preferences for the relative desirability of work and leisure are reflected in the shape of one's indifference curves. leisure lover: -steep curve workaholic: shallow curve

"Empirical evidence for the United States suggests that labor force participation varies directly with unemployment." Do you agree? Explain in terms of the discouraged-worker and added-worker effects.

No. The discouraged-worker effect reduces labor force participation as the unemployment rate increases while the added-worker effect increases it. Empirical evidence generally suggests the discouraged-worker effect is dominant so that the labor force participation rate varies inversely with the unemployment rate.

empirical data: private vs social perspective

Private Perspective • Considers private costs & benefits only. Social Perspective • Considers private and external costs & benefits. - Lower unemployment rates. - Decreased crime. - Reduced dependency on others. - Improved quality of political participation. - Superior home environment for - Differences between social and private IRR can cause inefficient allocation: • Efficiency occurs when the social IRR = private IRR • Resources will be under allocated if social IRR > private IRR • Resources will be over allocated if social IRR < private IRR • Example: too much or too little education?

Describe the expected effects that college scholarships based on (a) student ability and (b) student need are likely to have on the distribution of earnings.

Scholarships based on ability will likely increase the dispersion of earnings to the extent that ability and schooling are positively correlated. By reducing the dispersion of supply curves, scholarships based on need are likely to reduce the dispersion of earnings.

Use a work-leisure diagram to demonstrate that (a) if African-Americans have labor market opportunities that are inferior to those of whites and (b) nonlabor income is available in the form of, say, disability benefits, African-Americans will have lower participation rates even though the work-leisure preferences (indifference curves) of African-Americans and whites are identical.

See the diagram at right. An African-American with these preferences and the bold budget line would choose not to enter the labor force. A white person with the same preferences but facing the lighter budget line would enter the labor force. (chapter 3 study guide)

Suppose Lauren is given two options by her employer. First option: She may choose her own hours of work and will be paid the relatively low wage rate implied by budget line HW1 shown in the accompanying diagram. Second option: She can work exactly HR hours and will be paid the relatively high wage rate implied by budget line HW2. Which option will she choose? Justify your answer.

She will choose the high-wage option. She will feel underemployed, but this option will allow her to reach a higher indifference curve (a higher level of utility.)

world of work: time stress

Surveys show that many workers face time stress: a lack of time to do their desired activities. Some interesting patterns related to household production also appeared in these data. Household production work appears to generate less time stress than an equivalent amount of market work. Increased efficiency in household production should reduce the amount of time stress. Consistent with that conjecture, an improvement in health status from fair or poor to at least good reduced time stress by the equivalent of at least 10 hours of market work per week.

In 2014 the United States had a population of 319 million, of which 71 million were either under 16 years of age or institutionalized. Approximately 156 million people were either employed or unemployed but actively seeking work. What was the participation rate in 2014?

The 2014 labor force participation rate was 156 / (319 - 71) = 62.9%.

what is the internal rate of return (IRR) method

The Internal Rate of Return is the discount rate (r) at which NPV = 0 Implies that the PV of costs = PV of earnings Represents the maximum interest rate one would be willing to pay or forgo for the investment. NPV = 0 = (FV0)/(1+r)^0 + Fv1/(1+r)^1 .... Method Set NPV = 0 Solve for r Better yet, use Excel or a Calculator's IRR function If IRR is: > i investment is efficient < i investment is inefficient = i investment is neutral

What has happened to the aggregate labor force participation rate in the postߝWorld War II period? To the participation rates of males and females?

The aggregate labor force participation rate has increased. The participation rate of males has decreased while that of females has increased.

world of work: why has the labor force participation rate fallen

The aging of the population and the retirement of the baby boom generation certainly contributed to the fall in participation. However, the Great Recession of 2007-2009 also likely played a role by causing individuals to drop out of the labor force due to their diminished job prospects. If most of the decline in the participation rate is due to cyclical factors, then policymakers may want to take actions to tighten the labor market and thus encourage individuals to reenter the labor market. If the decline in participation is mostly due to structural factors such as population aging or higher school enrollment rates, then such counter-cyclical measures would not be so desirable.

What is the college wage premium? Can you explain why the premium (a) declined in the 1970s and (b) increased since the 1980s?

The college wage premium is the ratio of earnings for college graduates to the earnings of high school graduates. In the 1970s there was a large flow of new college graduates into the labor force that depressed the college wage premium. Since the 1980s, the demand for college-trained workers increased and the college wage premium increased.

indifference curves: convex to origin

The convexity of an indifference curve reflects the idea that an individual becomes increasingly reluctant to give up any good (in this case income) as it becomes increasingly scarce.

do recessions increase or decrease the number of college students?

The empirical evidence indicates that the decreased opportunity cost of college in recessions dominates the reduced ability to pay because college enrollment rates tend to rise significantly during recessions. Dellas and Sakellaris find that a 1 percent increase in the unemployment rate increases the college enrollment rate of 18- to 22-year-olds by .8 percentage points. Their models indicate that some recessions may have added more than 400,000 college students. Men and women do not appear to respond differently to recessions. However, the college enrollment rate of nonwhites is less sensitive than that of whites to business downturns.

world of work: power of the pill

The first birth control pill was released to the public in 1960. The first birth control pill was released to the public in 1960. Bailey also utilized interstate differences in timing of legal access to the pill to examine the effects of the pill on female labor supply. Her results show that early access to the pill can account for 3 of the 20 percentage points of increase in labor force participation rates between 1970 and 1990. It can also account for 67 of the 450 additional annual hours worked on average by women aged 16-30 over that period.

the work-leisure decision: utility maximization

The individual's optimal or utility-maximizing position can be determined by bringing together the subjective preferences embodied in the indifference curves and the objective market information contained in each budget line.

world of work: more college students are employed

The large decline in labor supply in 2009 appears to have been caused by the poor economic conditions during that year. Thus, college students are likely to increase their hours of work as the unemployment rate drops. Credit constraints were a significant factor in explaining recent changes in employment rates. As a result, whether student aid continues to rise at a faster rate than tuition will likely play an important role in the labor supply of college students in the future.

Use a work-leisure diagram that includes nonlabor income to portray an individual who is maximizing utility by working, say, eight hours per day. Now compare the labor supply effects of imposing (a) a lump-sum tax (a tax that is the same absolute amount at all levels of earned income) and (b) a proportional tax of, say, 30 percent on earned income. Do hours of work rise or fall in each case? Can you generalize these outcomes to all individuals in the economy? Explain.

The lump-sum tax increases work effort through a pure income effect; the proportional tax may either increase or reduce work effort depending on the relative strengths of the opposing income and substitution effects.

The "supply-side" economics of the Reagan administration (1981-1988) presumed that income tax cuts would stimulate incentives to work and thereby increase economic growth. Demonstrate this outcome with a work-leisure diagram. What does this outcome assume about the relative sizes of the income and substitution effects? Explain: "The predicted increase in work incentives associated with supply-side tax cuts might in fact be more relevant for women than for men."

The outcome assumes the substitution effect is stronger than the income effect. The statement reflects empirical evidence that the substitution effect strongly dominates the income effect for females, but they roughly offset each other for males.

benefits that derive from understanding labor economics

The payoffs from a basic understanding of the field may be both personal and social. Labor economics yields information and develops analytic tools that may be useful in making personal and managerial decisions relevant to labor markets. Also, a grasp of the field puts you in a better position as a citizen and voter to develop informed positions on labor market issues and policies.

What are the major features or assumptions of the economic perspective?

The primary assumptions are a) the scarcity of resources relative to wants and desires; b) purposeful behavior, comparing expected costs and benefits; c) changes in behavior in response to changes in expected costs and benefits

If an income maintenance program entails a $3,000 basic benefit and a benefit reduction rate of .30, what will be the size of the subsidy received by a family that earns $2,000 per year? What will be the family's total income? What break-even level of income does this program imply?

The subsidy is $2400 ($3000 - .3 x $2000). The total income is $4400 ($2000 + the $2400 subsidy.) The break-even level of income is $10,000 ($3000 / .30).

world of work: Why Do So Few Women Work in New York and So Many in Minneapolis?

Their results indicate that commuting can explain a large portion of the cross-city variation in the labor supply of married women. They find that each one minute increase in commuting time will lower the labor force participation rate by 0.3 percentage points for high school educated white non-Hispanic married women. Thus, commuting time can explain about one-third of the differences in the labor force participation rates between the longest and shortest commuting distance cities. In addition, they find that cities with the largest increases in commuting time between 1980 and 2000, had the smallest growth in the labor supply of married women.

the work-leisure decision: elasticity versus changes in labor supply

To this point, we have been discussing the direction in which wage changes cause an individual to alter the hours of work supplied. Implicitly, our discussion has focused on the wage elasticity of individual labor supply. More precisely, wage elasticity of labor supply is defined in the picture Over specific ranges of an individual's labor supply curve, the elasticity coefficient given in the wage elasticity of labor supply may be zero (perfectly inelastic), infinite (perfectly elastic), less than 1 (relatively inelastic), greater than 1 (relatively elastic), or negative (backward-bending). The elasticity will depend on the relative strengths of the income and substitution effects generated by a wage rate change.

Indicate in each of the following instances whether the specified circumstances will cause a worker to want to work more or fewer hours: a) The wage rate increases and the substitution effect is greater than the income effect. b) The wage rate decreases and the income effect is greater than the substitution effect. c) The wage rate decreases and the substitution effect is greater than the income effect. d) The wage rate increases and the income effect is greater than the substitution effect.

Work more hours in (a) and (b); fewer hours in (c) and (d).

Explain how each of the following would affect the demand schedule you derived in Question 4: (a) an increase in the price of a gross substitute for labor, (b) a decrease in the price of a pure complement in production with labor, (c) a decrease in the demand for the product that the labor helps produce.

a. Demand will shift to the right. b. Demand will shift to the right. c. Demand will shift to the left.

Indicate the implications of each of the following for estimates of the rate of return on a college education: (a) the screening hypothesis, (b) the possibility that a portion of one's expenditures on college should be considered as consumption rather than investment, (c) the fact that people who go to college are generally more able than those who do not, and (d) the fact that jobs acquired by college graduates generally entail larger fringe benefits than the jobs of high school graduates. What implications do the ability problem and the screening hypothesis have for public policy toward education?

a. The private rate of return will be unbiased, but the social rate of return will be overstated b. The estimate will understate the rate of return c. The estimate will overstate the rate of return d. The estimate will understate the rate of return

short run production: law of diminishing marginal returns

as successive units of a variable resource (labor) are added to a fixed resource (capital), beyond some point the marginal product attributable to each additional unit of the variable resource will decline.

list and explain the choice-theoretic approach to labor economics

contemporary labor economics employs theories of choice to analyze and predict the behavior of labor market participants and the economic consequences of labor market activity

what has influenced the labor participation rates of older males

decreases participation: real wage growth • Income effect > substitution effect deteriorating health • Indifference curve becomes steeper pensions (social security & private pensions • More lucrative pensions have led to an income effect. • Benefit reduction rate for social security creates substitution effect. increased labor force participation of spouse • Income effect disability benefits • Income effect • Low wage workers may respond more significantly since benefits represent a larger fraction of their pre-disability income. increases participation: education • Higher wages may cause substitution effect > Income effect. • Indifference curve becomes flatter due to decreased physical demands at work. increased labor force participation of spouse • Men may prefer "shared leisure", inducing more work. • Income effect offset by flatter indifference curve.

derived demand for labor

demand for labor depends on the demand for the product labor produces

what three types of investing can be done and what is meant by investing

increasing productivity of resources toward a future return (i.e. Yield) Physical capital Financial assets Human capital

the work-leisure decision: substitution effect

indicates the change in the desired hours of work resulting from a change in the wage rate, keeping income constant. -when wage rates rise and leisure becomes more expensive, it is sensible to substitute work for leisure. For a wage increase, the substitution effect makes the person want to work more hours.

economic perspective: relative scarcity

individuals face a relative scarcity of time and spendable income -they must choose how much time to devote to jobs, to work in the home, and to leisure -relative scarcity -- of time, personal income, and societal resources is a basic element of the economic perspective

labor economics as a discipline: socioeconomic issues

labor economics helps us understand causes and outcome of major socioeconomic trends occurring over the past several decades such as: - wage, income, and wealth inequality -gender and racial discrimination -legal and illegal immigration -unionization -globalization and free trade -technology and unemployment

what competes for time in the becker model

labor time -time allocated in labor markets to acquire market goods to generate UYCs household time -time allocated in household to generate UYCs consumption time -time allocated in consumption of UYCs

short run labor demand for a perfectly competitive firm (Perfectly competitive product market: Firm can sell all units of its product at $200. for example)

marginal product (MP) = ∆total product/∆total labor Marginal revenue = ∆total revenue/∆total product marginal revenue product (MRP) = MR*MP - The value the firm sees from hiring an additional worker. - Maximum willingness to pay for labor. - MRP → SR labor demand curve; slopes downward due to diminishing MP. Value of Marginal Product(VMP) = price*MP - The value society sees from hiring an additional worker. • Perfectly competitive firms → Price = MR so MRP = VMP • Firms hire workers if the MRP ≥ MWC (Marginal Wage Cost).

potential labor force (age eligible)

persons 16 years of age and older who are non-institutionalized

Of what practical significance are such estimates of labor demand elasticity?

private and public policies might be greatly affected by the size of the wage rate-employment trade-off suggested by the elasticity estimates. In the private sphere, a union's bargaining strategy might be influenced by the elasticity of labor demand for its workers. We might expect a union of higher-skilled engineers in the aerospace industry (where the demand for labor is inelastic) to bargain more aggressively for higher wages than a union of restaurant workers (where the demand for labor is elastic). The effectiveness and impact of government policies often depend on the elasticity of labor demand. The employment consequences of a rise in the minimum wage rate, for example, will depend on the elasticity of demand for workers affected by the change.

other factors that make a firm's long run labor demand curve more elastic than its short run: product demand

product demand is more elastic in the long run than in the short run, making the demand for labor more elastic over longer periods. Other things being equal, the greater the consumer response to a product price change, the greater the firm's employment response to a wage rate change.

income maintenance programs

programs whose purpose is to provide some minimum level of income to all families and individuals. These programs include Supplemental Security Income, Temporary Assistance for Needy Families, food stamps, and Medicaid.

female labor force participation rate trend influences

real wage growth • Small or zero income effect since it depends on hours already working. changing preferences & attitudes • Feminist, anti-discrimination movement, and cultural acceptance, and educational attainment • Indifference curves becoming flatter rising divorce rates • Increased probability of divorce may incentivize women to stay connected to the labor force. - Indifference curve becomes flatter • Lower non-labor income after divorce (alimony, child support, welfare, etc. ) may induce increased participation. - Income effect > substitution effect rising household productivity • Technology has decreased necessary household time allowing for increased labor time. - Indifference curve becomes flatter declining birth rates • Higher wage rates have increased the opportunity cost of having a child. • Advent of "the pill" (1960). • Indifference curve become flatter expanding job accessibility • Availability of part-time work and job opportunities in female dominated professions. • Indifference curve becomes flatter. stagnant growth in husband wages • Income effect causes women to "pick up the slack".

isoquant curves

shows the various possible combinations of two inputs that are capable of producing a specific quantity of physical output. By definition, then, output is the same at all points on a single isoquant.

lower labor force participation rate for african american male influences

supply side factors (willingness to work): - Non-market income • Lower black wages may make social security and other public assistance programs appealing. • Income effect - Health of older black males • Statistically worse compared to other races. • Steeper indifference curves - High participation rate of black wives • Income effect demand side factors (opportunity for work): - Systemic "Discouraged Worker" effect - Lower education attainment - Discrimination - Geographic location of jobs • Job opportunities have moved from urban to suburban areas. • Decreased transportation for lower income demographics.

short run production function: marginal product

the change in total product associated with the addition of one more unit of labor. initially increases due to specialization, reaches a maximum, then decreases due to diminishing returns

work-leisure model: reservation wage

the highest wage rate at which an individual chooses not to work or, if you prefer, the lowest wage rate at which one would decide to work.

net present value: time preference

the idea that, given the choice, most people prefer the pleasure of indulgence today to the promise of indulgence tomorrow.

indifference curves: negative slope

the indifference curve is downward-sloping because as an individual gets more of one good (leisure), some of the other good (real income) must be surrendered to maintain the same level of utility.

short run production: zone of production

the left boundary of stage II in is where the efficiency of labor—as measured by its average product—is at a maximum. Similarly, the right boundary is where the efficiency of the fixed resource capital is maximized. Notice first that at point Y on TP and y on AP and MP, total product per unit of labor is at its maximum. The generalization here is that if a firm chooses to operate, it will want to produce at a level of output where changes in labor contribute to increasing efficiency of either labor or capital.

estimates of wage elasticity

the overall long-run labor demand elasticity in the United States is 1.0.8 This coefficient implies a unitary elastic labor demand curve, Page 154 which means that for every 10 percent change in the wage rate, employment changes in the opposite direction by 10 percent. Hamermesh concludes that about two-thirds of the long-run elasticity response takes the form of the output effect, with the other third consisting of the substitution effect.

optimal work-leisure position

the point on the worker's budget constraint at which the marginal rate of substitution of leisure for income is equal to the wage rate. At this point the budget constraint is tangent to the individual's highest attainable indifference curve.

short run production function: total product

the total output produced by each combination of labor and fixed capital. as units of the variable input L are added to fixed K, TP will increase . . . • First at an increasing rate. • Then at a decreasing rate. • Eventually at a negative rate

short run production function: average product

the total product divided by the number of units of labor. has the same general form as MP except that its maximum point will be at a higher output level.

what are the two types of UYCs (commodities) and what are they

time-intensive UYCs -uses a large amount of household or consumption time relative to market goods (such as preparing a meal at home) good-intensive UYCs -use a small amount of household or consumption time relative to market goods(such as fast food)

total wage bill and rules

total wage bill = W*Q -wage times quantity - Increase in wages over elastic range → Lower wage bill - Increase in wages over inelastic range → Higher wage bill

standard workday

we have implicitly assumed that workers can individually determine the number of hours they work. This is typically not the case. In the United States, a standard workday of 8 hours (40 hours per week) has evolved. This is partly due to federal legislation that obligates employers to pay time and a half for hours worked in excess of 40 per week. Furthermore, industries whose technologies involve the continuous processing of goods or components can divide the workday into three 8-hour shifts.

are time and good intensive commodities usually substitutable?

yes -can produce with more time and less goods or vice verse -as wages increase, labor time becomes more valuable causing HHs to substitute from time-intensive to good-intensive commodities

short run production function: stages of production: stage 2

zone of production Diminishing returns to labor cause decreasing MP which causes TP to increase at a decreasing rate. MP < AP so AP decreases. • Increases in L improve efficiency of K but not L. • At (Y, y) AP of labor is at a maximum • At (Z, z) AP of K is at a maximum • Over this range: • Increases in L will decrease AP of L. • Increase in L will increase AP of K. • MP Curve over this range determines the firms SR demand curve for L.

labor economics as a discipline: quantitative importance

~65% of national income goes to labor -The primary source of income for the vast majority of households in the United States is from providing labor services. Quantitatively, labor is our most important economic resource.

male labor force participation rate trends white vs african american

• A relatively stable gap of 7 percentage points exists between White and African-American men.

long run labor demand

• Both L & K are variable. • TP for a firm in the long run is: TP = f(K,L) • Like the SR labor demand curve, the long-run curve is downward sloping because a wage decline has two simultaneous effects:

what is the net present value (NPV) method

• Converts the value of future dollars (FV) into present dollars (PV) to determine the efficiency of an investment. Method: 1. Determine a discount rate (r). (return on an alternative investment or cost to borrow funds) 2. Apply the following formula for each future payment. (costs are represented by a negative number) PV = FV/((1+r)^n) for each future value 3. Sum the present value (PV) of all future payments to derive NPV. • If NPV is: > 0 investment is efficient < 0 investment is inefficient = 0 investment is neutral

what determines the return on investment of specific training

• During training, the employer pays a wage greater than the worker's productivity (Wt = Wu > MRPt). • Post training, the employer gets a return on training investment by paying a wage less than the worker's productivity (Wp = Wu < MRPp). • Employers incur the entire cost and receive the entire benefit of training.

short run labor demand for an imperfectly competitive firm (Imperfectly competitive product market: Firm must lower price to sell more units. )

• For an imperfectly competitive firm P ≠ MR so MRP ≠ VMP. • MRP → SR labor demand curve; slopes downward due to diminishing MP and lower product price. • Demand curve is less elastic so fewer workers will be hired at a given wage.

female labor force participation rate trends

• General increase across all age groups. • Approximately 2/3 of increases come from married women.

female labor force participation rate trends white vs african american

• In the 1950s rates among African-American women were12-15 percentage points higher than for white women. • The gap has closed because of a rise in participation among white women

long run labor demand: subtitution effect (page 8 chapter 5 notes)

• LR only. • Wage rate decreases cause firms to substitute relatively more expensive capital the cheaper labor. • Since capital is fixed in the SR, this is a LR effect only. • A to C

what is MRP and how does it relate to general training

• Marginal Revenue Product: change in total revenue from adding an additional unit of labor. • In training, workers receive a lower wage (Wt < Wu) equal to their diminished productivity (MRPt < MRPu) • Post training, workers receive a higher wage (Wp< Wu) equal to their new higher level of productivity (MRPp > MRPu) • Workers incur the entire cost and receive the entire benefit of training

how do minimum wage laws affect general training

• Minimum wage laws limit a firms ability to pass general training expenses onto employee since wages cannot be lowered below the wage floor. • May result in less general training for employees.

what was the trend is weekly hours of work pre and post world war 2

• Pre-WWII, weekly hours fell due to rising real wages. • Income effect > substitution effect • Post-WWII, weekly hours stabilized around 40.

long run labor demand: output effect (page 8 chapter 5 notes)

• SR & LR. • Wage rate decreases lower the marginal cost (MC1 to MC2) and increase the profit maximizing level of output (40 to 70). • To produce the higher output level, the firm will have to hire more workers. • A to B

short run production function: important relationships

• When MP > AP, AP increases. • When MP < AP, AP decreases. • When TP is highest MP is zero. • The slope of a tangent line at any point on the TP curve is the MP (e.g. Z). • The slope of a line drawn from the origin to any point on the TP curve is the AP over that range (e.g. 0a).