Labor Economics: Chapter 6

for a given amount of leisure, whose marginal rate of substitution is higher, the "workaholics" or the "leisure-lovers"?

"leisure-lovers"; their indifference curve is much steeper and they are willing to sacrifice a large amount of income to get a small increase in leisure

as the EITC phases in, it is calculated at a set percentage of earnings called the:

"phase-in rate", which depends on marital status and number of children

the amount of EITC depends on:

-a recipients income -marital status -number of children

a dominant substitution effect will occur if:

-a wage increase induces the decision to participate -a wage fall causes someone to drop out of the labor force

reasons for the backward-bending supply curve:

-at higher wages, further increases in wages result in reduced hours of work (the income effect dominates) -the substitution of leisure for work -increase in income which leads to rise in demand of normal commodities including leisure

although firms have an important say in how many hours an employee works, workers can adjust their hours through:

-choice of occupation -choice of full-time or part-time work -absenteeism -working more than one job -vacations -leaves of absence

PRWORA designed to:

-encourage work -reduce poverty -move people off welfare

wealth and income include:

-family's holding of bank accounts -financial investments -physical property or properties -workers' skills

The personal responsibility and work opportunities reconciliation act (PRWORA):

-gave states more authority on how to design their own welfare programs -placed a five-year lifetime limit on recipients -potential welfare recipients much choose when to receive the subsidy and when to "save" their eligibility in the event of a future need -introduced a work requirement in 1996 by requiring 6 hours of work per day or at least 30 yours per week after a recipient has been on welfare for two years -enrollment in education and training programs count toward work requirement -creates positive net wages

The Earned Income Tax Credit is now viewed by many as being the most effective way of raising the incomes of the working poor because:

-it is much more closely targeted on the working poor than the minimum wage -the estimated impact on hours worked by the working poor is positive -since the subsidy comes through the tax system rather than through employers, there is no negative stigmatizing effect on recipients

a worker takes into consideration some key factors in determining whether or not to work in the labor market:

-reservation wage and the earning possibilities -commute time per day (fixed costs of working)

indifference curves characteristics:

-the curve that lies to the most northeast represents a higher level of utility -they do not intersect -negatively sloped -convex to the origin -what is relatively scarce is assumed to be more highly valued -different people have different sets of indifference curves

the demand for a god/service depends on:

-the opportunity cost of the good (market price) -one's level of wealth -one's set of preferences

labor supply theory suggests that the choices workers make with respect to the desired hours of work depends on:

-wealth -wage rate -leisure-income preferences

ETIC recipients could experience:

1) income effect that pushes them in the direction of less work--- those whose annual income falls between $13,090 and $41, 952 2)substitution effect that pushes the recipients in the direction of more work, thus the labor force participation of low-income workers will increase---those whose annual income is less than $13,090

indifference curve two properties:

1) negative slope 2) convex to origin

labor supply decisions can be roughly divided into two categories:

1) the first includes decisions about whether to work at all and, if so, how long to work 2) the second deals with the questions that must be faced by a person who has decided to seek work for pay: the occupation or general class of occupations in which to seek offers and the geographical area in which offers should be sought

a person's discretionary time (16 hours a day) can be spent:

1) working for pay to derive income for consumption and 2) on leisure

example of observing the substitution effect by itself:

1980 presidential campaign, John Anderson prospsed raising the gasoline tax but offsetting this increase by a reduced social security tax payable by individual on their earnings

initially, American workers worked ___ hours per week, but that has declined to less than __ hours per week

55; 40

similar labor force participation rate trends have been observed in other advanced countries:

Canada, France, Germany, Japan, and Sweden

under current law, a childless adult or noncustodial parent working full time, year-round at the federal minimum wage is ineligible for the:

EITC (such an individual would receive the maximum EITC if he or she had children)

what does the convex shape of indifference curves mean?

This is due to the concept of the diminishing marginal rate of substitution between the two goods. Example: Therefore, as a person consumes more of one good (i.e. work) then they will receive diminishing utility for that extra unit (satisfaction), hence, they will be willing to give up less of their leisure to obtain one more unit of work.

often, people are thought to behave as if they have both a reservation wage and:

a certain number of work hours that must be offered before the consideration to take a job

the decision to work is ultimately:

a decision about how to spend time

when indifference curves are drawn with a convex shape, it ensure that when one moves from an extreme combination (one where there is a lot of one good but not much of the other) to one where the goods are more evenly consumed:

a higher indifference curve will be attained

for households whose income is above the second threshold, the point where the EITC phase-out begins:

a households EITC amount decreases by a set percentage of income (the "phase-out rate") until the EITC is reduced to zero, where the phase-out ends

"leisure-lovers" are willing to sacrifice:

a large amount of income to get a small increase in leisure

with LOW hours of leisure, individuals are willing to give up:

a large amount of income to get one more leisure hour

"workaholics" must be given:

a large increase in leisure to compensate for a small decrease in income

paying people the difference between their earnings and their needs creates what?

a net wage of zero because they increase the income of recipients and drastically reduce the price of leisure

suppose the government promises to pay workers who lose their sight in a workplace accident $100,000 regardless of their earnings before the accident. This payment would create:

a pure income effect; a lump sum payment unrelated to earnings is an increase in non-labor income that shifts the budget constraint out parallel to the old constraint, thus creating a pure income effect

with HIGH hours of leisure, individuals are willing to give up:

a small amount of income to get one more hour of leisure

if a person has preferences that lead to a choice of zero work hours, an increase in the wage rate will result in:

a substitution effect only

a budget constraint (wage constraint) line shows:

all the various combinations of income and leisure that a worker might realize or obtain, given the wage rate

the presence of both effects working in opposite directions creates:

ambiguity in predicting the overall labor supply response in many cases

under the Earned Income Tax Credit program, the theoretical effects on labor supply are ________ for the lowest income recipients, and ________ for the highest income recipients

ambiguous; a decrease

ETIC functions as:

an earnings (cash) subsidy, which goes only to those who work

leisure time refers simply to:

any time not spent working for pay

labor supply, extensive margin:

are we participating in the labor market, yes or no?

the substitution effect occurs because:

as the cost of leisure changes, income held constant, leisure and work hours are substituted for each other

if a person responds to a wage increase by decreasing their labor supply, why will this decrease be smaller than if the same change in wealth were due to an increase in non-labor wealth?

because the substitution effect is present and acts as a moderating influence

implicit tax rate:

benefits are scaled back by some fraction for every dollar individuals earn on their own

research has found that lifting low income families income when a child is young not only tends to improve a child's immediate well-being, but is also associated with:

better health, more schooling, more hours worked, and higher earnings in adulthood

if non labor income is zero or unchanged and the wage rate increases, this would cause:

both an income and a substitution effect (if a worker increases their hours of work in the labor market, substitution effect is stronger.... if a worker reduces their hours of work in the labor market income effect is stronger)

hours worked are influenced by:

both the demand and supply side of the labor market

indifference curves never intersect because:

by definition, all points on the same curve represent equivalent satisfaction. If they did intersect the point of intersection would represent one combination of money income and leisure that yielded two different levels of satisfaction

marginal rate of substitution=

change in income over change in leisure

single EITC phase-in ends:

childless---$6,610 1 child-----$9,920 2 children----$13,930 more than 2----$13,930

married EITC phase-out begins:

childless----$13,820 1 child----$23,740 2 children----$23,740 more than 2----$23,740

single EITC phase-out ends:

childless----$14,880 1 child----$39,296 2 children----$44,648 more than 2----$47,955

married EITC phase-out ends:

childless----$20,430 1 child----$44,846 2 children----$50,198 more than 2----$53,505

married EITC maximum credit amount:

childless----$506 1 child----$3,373 2 children----$5,572 more than 2----$6,269

single EITC maximum credit amount:

childless----$506 1 child-----$3,373 2 children----$5,572 more than 2----$6,269

married EITC phase-in ends:

childless----$6,610 1 child----$9,920 2 children----$13,930 more than 2----$13,930

single EITC phase-in rates:

childless-----7.65% 1 child------34% 2 children----40% more than 2----45%

married EITC phase-out rate:

childless----7.65% 1 child----15.98% 2 children----21.06% more than 2----21.06%

single EITC phase-out begins:

childless----7.65% 1 child----15.98% 2 children----21.06% more than 2----21.06%

married EITC phase-in rate:

childless----7.65% 1 child----34% 2 children----40% more than 2----45%

when analyzing the work incentive effects of income maintenance programs, be sure to watch for the tendency of individuals to cluster around sharp:

corners

over the past ten decades, labor force participation rates of men have:

decreased due to a host of factors

most of the short-run changes in hours of work seem to emanate from the:

demand side of the market

indifference curves differ among individuals because of the:

differences in tastes/preferences or values

workers with different wages will face:

different budget constraints and will maximize utility at different levels of work

an income replacement program based on scheduled benefits generally preserves work incentives better than one guarantees replacement of the actual income loss because the scheduled benefits approach:

does not alter the price of leisure

the labor force participation decisions brought about by wage changes exhibit a:

dominant substitution effect

when the income effect dominates the substitution effect, what is the shape of the labor supply curve?

downward sloping; the person will respond to a wage increase by decreasing his or her labor supply, the labor supply curve will be negatively sloped

the EITC functions as an:

earnings subsidy, and because the subsidy goes only to those who work, the EITC is seen by many as an income maintenance program that preserves work incentives (creates an incentive for people to leave welfare for work and for low-wage workers to increase their work hours)

many who work for minimum wages do not live in low-income households, and although their impact on work incentives may be positive (they are theoretically ambiguous), they may result in reduced hours because of:

employer cutbacks

a highly regarded study found that EITC expansions are the most important reason why:

employment rose among single mothers with children during the 1990s

why is the most northeast indifference curve always preferred?

every level of leisure consumption on that curve is combined with a higher income

bottom right EITC section:

experience substitution effect that pushes them in the direction of more work

the EITC for workers not raising children in the home remains:

extremely small, too small even to fully offset federal taxes for workers at the poverty line

the MRS of leisure for income is illustrated by the:

graph of the slope of the indifference curve at any point

other things equal, people who are working longer hours will exhibit:

greater income effects when wage rates change

the standard approach to modeling consumer demand is to assume that an individual chooses between two goods so as to maximize:

happiness, or utility, subject to a budget constraint

the trends in American labor force participation rates:

have been observed in other industrialized countries as well

indifference curves further from the origin indicate:

higher utility

work-incentive effects can be caused by:

higher wages and incomes, different kinds of taxes, and various forms of income maintenance programs

what is relatively scarce is more:

highly valued

suppose leisure is an inferior good (a good whose consumption goes down as income goes up). As the wage rate goes up:

hours supplied should go up

what should be the effect on labor supply of reducing marginal income tax rates while keeping the total taxes paid by a worker constant?

hours supplied should go up because such a change creates a pure substitution effect. The lower marginal tax rate is like an increase in the wage, but the assumption that the total taxes paid by workers remains constant means that income remained constant

most recent studies of labor supply have used large samples of individuals to analyze:

how labor force participation and hours of work are affected by changes in wages rates and income---often induced by changes in taxes---holding other influences constant

how does a person ideally maximize utility?

ideally, by consuming every available hour of leisure confined with the highest conceivable income (unfortunately, the resources anyone can command are limited. Thus, all that is possible is to do the best one can, given limited resources)

indifference curves have a negative slope because:

if either income or leisure hours are increased, the other is reduced in order to preserve the same level of utility

Income effect

if income increases, holding wages constant, desired hours of work will go down--- demand for leisure hours will increase while the hours of work supplied by a worker to the labor market decreases

Substitution effect

if income is held constant, an increase in the wage rate will raise the price and reduce the demand for leisure, thereby increasing work incentives--- an increase in the opportunity cost of leisure reduces the demand for leisure. Likewise a decrease in the wage rate will deduce leisures opportunity cost and the incentives to work, holding income constant.

the EITC is "refundable" which means:

if it exceeds a low-wage worker's income tax liability, the IRS will refund the balance

labor supply, intensive margin:

if you are participating in the labor market, how much?

a burgeoning literature links EITC receipt to:

improved school performance and higher college attendance rates

when a person actively seeks work, he or she is, by definition:

in the labor force

the labor supply response to a simple wage increase will involve both:

income and substitution effects are simultaneously present, often working against each other (in opposite directions)

an ______ would be observed if non labor income increased and the person supplied 0 hours of work to the labor market

income effect

all EITC recipients experience an:

income effect that pushes them in the direction of less work, but since the program creates quite different net wage rates in the zones the substitution effect differs across zones

for higher income eligibles, either a zero implicit tax, or a positive implicit tax on earnings exists, so there is nothing to counteract the:

income effect, and a substitution effect may even reinforce it, reducing work effort

the main application of labor supply theory is to the analysis of:

income replacement and income maintenance programs like workers compensation, unemployment insurance, and welfare

one of the most dramatic changes in the labor market over the past six decades has been the:

increased labor force participation of women, especially married women

beginning with the first dollar of earnings, as a low-income household earns more, its EITC:

increases ("phasing in")

any particular level of utility can be represented graphically by an:

indifference curve

the problem with reducing the implicit tax rate pertaining to the welfare program is that:

individuals well above the poverty level may receive benefits AND the cost of the program increases

the substitution effect of increased wages would:

induce people to work more, ceteris paribus

indifference curves DO NOT:

intersect

the EITC (earned income tax credit) program:

is a federal tax credit for low and moderate income working people. it encourages and rewards work as well as offsets federal payroll and income taxes

the opportunity cost of leisure:

is equal to one's wage rate or the extra earning a worker can take home from an extra hour of work

any combination to the right of the budget constraint:

is not achievable, the persons command over resources is simply not sufficient to attain these combinations of leisure and money income

unemployment compensation:

is paid to those who have lost a job and have not been able to find another

marginal rate of substitution of leisure for income:

is the amount of money income one must give up to get one more hour of leisure

labor force participation rate:

is the percentage of a given population that either has a job or is looking for one

a reservation wage:

is the wage below which a person will not work in the labor market

while reducing the implicit tax rate tends to preserve work incentives, :

it extends the reach of the welfare program (potentially to everyone if t=0). As more people are eligible for the program, the cost of the program tends to go up

since 1950, how has the labor force participation rate among females changed?

it has approximately doubled

studies of the labor supply behavior of women generally have found:

it is becoming much more similar to that for men, meaning the labor supply of women is becoming less responsive to wage changes than it used to be

when the income effect dominates, the substitution effect is not large enough to prevent:

labor supply from declining

generally the more a person is already working, the more valuable a marginal hour of leisure will be and hence the:

larger the income effect

a backward-bending labor supply curve occurs when:

leisure is a normal good and the substitution effect dominates at low wage levels OR leisure is a normal good and the income effect dominates at high wage levels

absolute values refers to the:

magnitude of the slope, disregarding whether it is positive or negative

any economy relies heavily on goods and services produced for:

market transactions

workers with different preferences (different shaped indifference curves) will:

maximize utility at different levels of work

for households whose income falls between the point where the phase-in ends and a second higher threshold, the EITC stays constant at the:

maximum amount

over the past ten decades, labor force participation rates of women has:

more than doubled

labor is the:

most abundant and important factor of production

the absolute value of the indifference curve's slope diminishes as we:

move down the curve to the southeast

top EITC section:

net wage is below market wage, both income and substitution effects push in the direction of reduced labor supply

middle EITC section:

net wage=market wage; experience pure income effect

income and leisure are both:

normal goods

typically, goods do not switch from being:

normal to inferior

subsidies given to employers to hire low-income workers have:

not been very successful, and in some cases appear to have worsened the target population's chances of finding employment by identifying them as potential problem employees

the convex shape of the indifference curves means that when leisure is high and income low, additional units of leisure are:

not very valuable

studies of male and female labor force behavior are done separately because:

of the different roles men and women typically play in performing household work and child-rearing

the MRS falls as:

one moves southeast along an indifference curve

as the implicit tax rate increases, the effective wage rate decreases, lowering the:

opportunity cost of leisure, and reducing work incentives for most individuals

which age group of males showed the most dramatic reduction in labor force participation rates between 1900 and 1999?

over 65

scheduled benefits unrelated to earnings create a _____________. Hence, the opportunity cost of leisure remains the market wage rate, and so an incentive to work is preserved.

parallel shift of the constraint

research indicates that families mostly use the EITC to:

pay for necessities, repair homes, maintain vehicles that are needed to commute to work, and in some cases obtain additional education or training to boost their employability and earning power

welfare:

pays benefits based on the difference between ones actual earnings and ones needs

the convex shape of indifference curves is a way to make the statement that:

people prefer variety to extremes

one cannot predict the net response on labor supply under the Earned Income Tax Credit Program without knowing about:

preferences

non labor incomes that shift the budget constraint upward holding wage rate constant:

property income, inheritances, lottery prizes, and dividends

"workaholic" indifference curves are:

relatively flat; they place a relatively low value on leisure

"leisure-lover" indifference curves are:

relatively steeper; they place a relatively high value on leisure

workers compensation insurance:

replaces most of the earnings lost when workers are hurt on the job

unemployment insurance:

replaces something like half of lost earnings for the typical worker, but the program puts an upper limit on the weeks each unemployed worker can receive benefits

workers' compensation:

replaces two-thirds of lost earnings for the average worker but must rely on doctors and sometimes judicial hearings

with programs that create spikes, the best policy makers can do is:

set a no-work benefit as some fraction of previous earnings and then use administrative means to encourage the return to work among those whose utility is greater when not working

the convex shape of the indifference curves means that people generally prefer having:

some leisure and some income to having much income and little leisure, or much leisure and little income

for a person working zero hours, an increase in the wage cannot lead them to reduce hours even further. So, although there is theoretically an income effect if the person makes any changes, his or her income will rise---in practical terms it must be dominated by the:

substitution effect

the lowest income recipients actually face an above-market wage, creating a:

substitution effect in favor of working, working against the income effect allowing more leisure

low-wage workers not raising children are the sole group that the federal tax system:

taxes into or deeper into poverty

the objective of the consumer is not to maximize income or leisure but to find:

that combination of income and leisure that is consistent with the budget constraint and leads to the highest level of utility

the phase-in ends when:

the EITC reaches its maximum amount

which of the following programs creates positive net wage rates for program recipients?

the Earned Income Tax Credit program

the optimal or utility maximizing point is where:

the budget constraint is tangent to the highest attainable indifference curve

an indifference map is:

the collection of indifference curves possessed by an individual

income and substitution effect:

the effects of increases in income and wages on leisure-work preferences of a person

the "steeper" a person's income-leisure indifference curve:

the higher the value they place on an extra unit of leisure

a person will maximize utility by getting to:

the highest attainable indifference curve

the optimal level of leisure occurs where:

the highest attainable indifference curve is tangent to the budget constraint

the actual labor supply response is the sum of what?

the income and substitution effects

many income maintenance programs create budget constraints that increase income while reducing the take-home wage rate, thus causing:

the income and substitution effects to work in the same direction

receiving an inheritance offers an example of what?

the income effect by itself; the bequest enhances wealth independent of the hours of work thus income is increased without a change in the compensation received from an hour of work

over the "backward-bending" range of the labor supply curve:

the income effect outweighs the substitution effect

two notable trends in labor force participation in the U.S. and other developed countries are:

the increase in the participation of women, particularly married women, and the decrease in the length of working life for men (other trends include the decrease in the length of the work week and changes in the flexibility of work hours)

the wage rate

the increment in income derived from an increment in hours of work; change in y over change in h

an individual with standard downward-sloping indifference curves will participate in the labor market provided at the point where leisure is at its maximum:

the indifference curve is flatter than the budget constraint (when this condition holds, a window of opportunity exists for the individual to attain a higher level of utility by moving to a point involving less than the maximum leisure time)

indifference curves representing preferences for leisure and income should be drawn in such a way that they do not cross. if they do, it can be inferred that:

the individual is inconsistent in his ranking of different income and leisure combinations OR the indifference curves that cross pertain to different individuals

the substitution effect grows larger when leisure and work hours are viewed as being highly substitutable, this could happen when:

the individuals leisure time consists largely of work around the home

labor supply preferences of employees must be satisfied in:

the long-run

in the typical income maintenance program, the higher the implicit tax rate:

the lower the work incentive

a worker's reservation wage is:

the lowest wage they would accept to offer their labor services

the demand for leisure depends on:

the opportunity cost of leisure

if the substitution effect dominates:

the persons labor supply curve will be positively sloped, this is because under the substitution effect the numerator and denominator always move in the same direction

breakeven point

the point on the budget constraint separating those who receive benefits from those who do not

budget constraint spike:

the program pays out a subsidy only at a specific leisure value

note that it is impossible for both leisure and income to be maximized at:

the same point

the difference between the substitution effect and the income effect of a wage increase lies solely on:

the shape (slope) of the indifference curves (and the new budget constraints)

studies of retirement behavior of men find:

the substitution effect dominates the decision to withdraw from the labor force

an income-leisure indifference curve shows:

the trade off between income and leisure for a given level of utility

an indifference curve shows:

the various combinations of money income and the hours of leisure/work per day that yield the same level of utility (satisfaction) for the individual

the slope of the budget constraint is:

the wage rate

the budget constraint is a straight line and thus has a constant slope, which reflects the assumption that:

the wage rate at which one can work is fixed and that it does not change with the hours of work

which of the following is not a determinant of the demand for leisure?

the weighted-average currency exchange rate between the U.S. and the most popular currencies of Europe

a country's economic performance depends on:

the willingness of its people to work

why would someone choose not to work?

there was no tangency between an indifference curve and the budget constraint and the reason they stay out of the labor force is the wage was everywhere lower than his or her marginal value of leisure time

since both leisure and money ca be used to generate satisfaction (or utility):

these two goods are to some extent substitutes for each other

indifference curves are convex, meaning:

they are steeper at the left than at the right--when income is high, leisure hours are relatively few

a person's utility is maximized at the "corner":

they desire no work at all and are therefore not in the labor force

it is generally true that income replacement programs share a common characteristic:

they pay benefits only to those who are not working

programs such as welfare are needs-based, meaning:

they pay the recipient the difference between what he earns and some standard

suppose an individual wins the lottery, and will now be paid an annuity payment of $100,000/year every year, how will this affect the wage constraint?

this non labor income would shift the budget constraint upward holding the wage rate constant

economists often use _____ as an indicator of total wealth

total income

since higher indifference curves represents higher levels of utility, maximizing utility can be thought of as:

trying to get on the highest attainable indifference curve

consumer preferences on indifference curves are usually:

usually northeast on the higher or highest indifference curve

moving down n the indifference curve reflects:

value---when income is low, leisure hours are abundant

the convex shape of the indifference curves means that when leisure is low and income is high, additional units of leisure are:

very valuable

labor supply is the relationship between:

wage and hours supplied

suppose that an individual experienced a wage decrease, how will this effect the wage constraint?

wage constraint will be flatter and closer to the origin of the graph

the demand for leisure can eventually be expressed in terms of the:

wage rate

if leisure were an inferior good, then the income effect associated with the wage increase would actually cause the person to cut back on leisure. This, together with a positive substitution effect would ensure:

work hours would go up

how the EITC works:

workers receive the credit beginning with their first dollar of earned income, the amount of the credit rises with earned income until it reaches a maximum level and then begins to phase out at higher income

moving out of poverty is particularly important for:

young children