EC356 PS4

Audit study

) are experiments to detect racial or sexual discrimination in labor markets, housing markets, and elsewhere in the society. These studies involve information about applicants for jobs or housing that is identical except for the race or sex of the applicant, for instance identical resumés to job openings, except that one has a white or male name and the other has a black or female name, and seeing if responses from potential employers are equal. They usually are not.

Draw a Lorenz curve and use it to explain what a Gini coefficient is. According to the CIA, what are the Gini coefficients for the US, China, and for a country that begins with the same letter as your last name.

A Lorenz curve has cumulative percent of the population along the horizontal axis and cumulative percent of income (or wealth or education) along the vertical axis. The curve traces out the percent of income received by the bottom 1%, 5%, 10%, 20%, etc up to 100%. If everyone receives the same income, the Lorenz curve is a 45° straight line from the origin to the upper right corner of the diagram. A Gini coefficient is the ratio of the area between the Lorenz curve and the 45° line to the entire area under the 45° line http://imgur.com/OQw6mBb

The lower limit of income for households in the top 1% of the US income distribution is about $600,000. The median income of US households is about $60,000. a. If the intergenerational income elasticity for the US is 0.47, what will be the ratio of incomes for children of the top 1% to children of median households? For grandchildren? For great grandchildren? b. Also calculate what these 3 ratios if the US had Scandinavian mobility elasticities of 0.2.

A) The ratio of incomes for the current generation = 600,000/60,000 = 10. The ratio for the children will be 10^.47 = 2.95 The ratio for the grandchildren will be 2.95^.47 = 1.66 The ratio for the great grandchildren will be 1.66^.47 = 1.27 B) The ratio for the children will be 10^.2 = 1.58 The ratio for the grandchildren will be 2.95^.2 = 1.10 The ratio for the great grandchildren will be 1.66^.2 = 1.02

Taxicab companies in the US typically own the cab and license. Taxicab drivers then pay a daily fee (rent) to the owner, and then keep all the fares they collect. By contrast, bus drivers are paid a salary for driving a bus. Why are cab drivers and bus drivers paid differently?

Bus companies can easily tell if bus drivers are doing their jobs, but taxicab companies cannot. Passengers will complain to the bus company if the bus driver does not drive his bus when and where he should, but taxicab companies cannot tell if cab drivers sleep instead of picking up fares. If cab drivers were paid by the hour, they would have little incentive to be productive and would find it easy not to work hard. Bus drivers paid by the hour have much less opportunity for slacking off.

Winner take all game (give example)

Competition between firms producing some products, for instance products with big network externalities, tend to lead to one firm driving all the others out of the market. The owners of the winning firm become immensely rich and the owners of the other firms lose their investments. For example, users of Facebook and other social media benefit if all their friends also use Facebook. This network effect resulted in Facebook dominating its market and making Mark Zuckerberg and his roommates immensely rich.

what are 4 other possible causes of increased US inequality among the bottom 99% since the mid 1970s?

Computer/IT revolution has increased the demand for high skilled workers who can use computers and decreased the demand for low skilled workers who cannot, or who are less able to use them than high skilled workers. This big increase in the demand for high skilled workers and decrease in demand for low skilled workers has increased the wages of the former relative to the wages of the latter, and increased inequality. Immigration has increased the supply of low skilled workers a lot and increased the supply of high skilled workers a little. This relative increase in the supply of low skilled workers has decreased their wages relative to the wages of high skilled workers, thus increasing inequality. Decline of unions. Unions represented about 35% of private sector workers in the 1950s and 1960s but represent less than 10% today. Unions tend to increase the wages of workers in the 2nd and 3rd quintiles, and also to narrow wage differences among union members. The decline in unions has thus lowered the wages of workers in the 2nd and 3rd quintiles and increased inequality among them. This has led to an increase in overall inequality. Erosion of minimum wage. The minimum wage tends to raise the wages of workers in the bottom quintile. It was a higher percent of the average wage 40-50 years ago so today the wages of workers in the bottom quintile are lower relative to other workers than they used to be. This also increases total inequality.

What is the Heckscher-Ohlin theory and what does it say about a cause of rising inequality in the US over the past 35 years?

Heckscher-Ohlin theory says that countries will export products that are made with a lot of the factor of production that they have more of than their trading partners and import products made with the factor of production that is relatively scarce. The US has more physical and human capital than its trading partners, and less unskilled labor. Therefore we tend to export products made with a lot of physical and human capital and import products made with a lot of unskilled labor. Hecksher-Ohlin theory goes on to say that increases in trade will tend to raise the return to the abundant factors of production, since the market for the types of goods produced with the abundant factor has gotten larger. And trade will tend to lower the return to the scarce factor of production, since domestically produced goods with a lot of the scarce factor now have to compete with imports. For the US, this means the return to physical and human capital goes up when trade increases and the return to unskilled labor falls. Since owners of physical and human capital have higher incomes than unskilled workers, Heckscher-Ohlin predicts that increased trade will increase inequality.

Some estimates are that immigration has increased the US labor force by 10%. Assume that the labor supply native and immigrant workers are both completely inelastic. Also assume that the elasticity of labor demand in the US is -0.2 and that labor's share of GDP is .65. a. By what percent will the wage rate of native workers fall? b. By what percent of GDP will the incomes of all US natives change? c. Draw and label a supply and demand diagram to show these changes.

Immigrants increase employment from E1 to E2 and cause a wage decline from W1 to W2. Immigration increases GDP from A + B + C to A+B+C+D+F. Immigrants receive their wage * their employment = F = W2*(E2 - E1). Native workers lose wages = B Native consumers/capitalists receive increased consumer surplus of B + D. Net benefit of immigration to natives = D = (W1 - W2)*(E2 - E1)/2 = (-∆W * ∆E)/2. By definition, the elasticity of labor demand = (∆E/E1)/(∆W/W1) = -0.2 in this question. Solving for ∆W/W1 = 0.1/-0.2 = -0.5 To find D as a percent of GDP, note that D/GDP = (-∆W * ∆E)/(2*W1*E1) * (W1*E1)/GDP = ((-∆W/W1) * (∆E/E1)/2) *(W1*E1/GDP) = change in W * change in Employment * Labor's share of GDP/2 = 0.5*0.10*0.65/2 = 0.01625 or 1.625% of GDP http://imgur.com/qXeAQNg

What is the Whitehall study? What did it find?

It studied the health of British civil servants. The first round studied only men, and the second round studied both men and women. It found that the higher the pay grade within the civil service, the lower the death rate and the lower the rate of heart attacks. This negative correlation between pay grade and death rates and heart disease was true even after controlling for risk factors such as high blood pressure, smoking, obesity, and diabetes. Higher mortality and heart disease was associated with higher levels of cortisol in low status workers, presumably caused by chronic stress, either on the job or off the job.

NLRB

National Labor Relations Board conducts elections to see if workers want a union to represent them, also reviews complaints that employers are treating workers unfairly.

How did the share of pretax income going to the top 1% of US households change between 1979 and 2005? The top 0.1 of 1%? The top .01 of 1%. What are 4 explanations offered to explain these changes?

Share of pretax income Top 1% Top 0.1% Top 0.01% 1979 9.2% 3.4% 1.4% 2005 18.0% 9.0% 4.2% Superstars. Audiences for professional entertainers and athletes are now global, and much larger than they were 35 years ago, when audiences were local, regional, or perhaps national but not international. Therefore top people in these fields earn much higher incomes than similar people did 35 years ago. In addition, the employers of top athletes and entertainers have lost their monopsony power and have less ability to pay low wages to professional athletes, movie stars, and musicians. Corporate governance may have gotten weaker. Corporate boards of directors are now more willing to pay CEOs and other top executives extremely high compensation than 35 years ago. Or corporations have gotten larger and more complex, and require higher skills for top executives. Rise of finance. Compensation in the financial sector is much less equal than compensation in other sectors of the economy, and finance's share of GDP has grown from about 4% in 1970 to about 8% today. Furthermore, as financial markets were increasingly deregulated in the 1980s and 1990s, compensation within the sector increased, as top performers were paid ever larger compensation. Both of these contributed to the increase in top shares. Technological change may have increased the importance of winner-take-all contests. When a product has network effects, the benefit of using it rises with the number of users. For such products, one firm may come to dominate its market, for instance Microsoft for PC operating systems, Google for search engines, and Facebook and Twitter for different parts of the social media market. This type of technological change doesn't necessarily increase the demand for high skilled workers, but it provides enormous rewards for the inventors or developers of the technologies, for instance the founders of Microsoft, Google, Facebook, and Twitter. Decrease in labor's share. Labor's share of total income seems to have fallen in most OECD countries over the past 20 years and capital's share has risen. People at the very top of the income distribution own a large share of total capital in these countries. This change in shares would disproportionately increase their share of total income. It is not clear why labor's share of income has fallen. Perhaps it is the result of all the forces that explain greater inequality among the bottom 99%.

Network externality

The benefit of owning a good with a network externality increases with the number of other people who also own it. For instance, the benefit of owning a telephone or fax machine increases as the number of people with phones and fax machines increases.

Suppose a Mexican immigrant to the US could earn $20,000 in the US and $4000 if she stayed home in Mexico. Also assume that she will live and work forever, and that her discount rate is 8%. If she does not migrate, what is the lowest possible implied cost to her of migrating?

The cost of emigrating is for someone who chooses not to migrate is at least equal to the difference in present values of earnings abroad and at home. (20,000 - 4000)/.08 = $200,000

Piece rate compensation

Workers are paid for each shirt they sew or each kilo of apples they pick, not by the hour or by the value of what they produce.

Suppose years of schooling s is the only variable that affects earnings. On average, assume that men have 14 years of schooling and women have 12 years of schooling. The equations for weekly salaries of male and female workers are given by wm = 500 + 100s and wf = 300 + 75s. a. What is the male-female wage differential (in dollars) in the labor market? b. Use the Oaxaca decomposition to calculate how much of this wage differential is due to labor market discrimination. c. What is an alternative Oaxaca decomposition that would lead to a different measure of discrimination? Which measure is better?

a) http://imgur.com/neJOiQA b) http://imgur.com/t3ZYqI7 c) http://imgur.com/9xv18ei Under this method, $550 of the $700 wage differential is due to discrimination. The difference between methods arises because of the way in which discrimination is defined. In one, discrimination is measured by calculating how much a woman would earn if she were treated like a man (as in the text), and in the second it is measured by calculating how much a man would earn if he were treated like a woman. On the surface, neither is a better measure. It can be shown, however, that the second approach (as in part c) attributes more variation to discrimination.

Some doctors in the US are paid a fee for all the services they perform for their patients. Other doctors receive a fixed payment (capitation) for each of their patients, regardless of the number of services performed. a. What are the advantages and disadvantages of the incentives under fee for service? b. What are the advantages and disadvantages of the incentives under capitation?

a) • Incentive to provide a high level of service and high quality care. • Also an incentive to provide unnecessary care and drive up costs without improving health b) • Incentive to lower costs with more preventive care that keeps patients healthy • Incentive to lower costs by not ordering unnecessary tests and other services • Perhaps incentive to provide too few services, lower quality care • Incentive to refuse to accept very sick patients, who will need lots of care

General purpose technology

can transform the entire economy in fundamental ways, by drastically changing how goods and services are produced. The effects usually take many years to occur. Examples of general purpose technologies include the steam engine, electricity, and computers/Internet.

Remittances

gifts from immigrants to their friends and family back home. In some source countries, they can be 5 or even 10% of GDP.

Brain drain

is the emigration of highly skilled workers, usually from developing countries to rich countries.

Why has the female/male wage gap narrowed over the past 50 years?

• Discrimination now illegal • Discrimination now socially not acceptable, or maybe less acceptable • Women now have more education than men, 50 years ago had less • Women study subjects that lead to better jobs than 50 years ago (economics not literature) • Custom and social barriers are less obstacle to women entering well paying occupations • Women now less likely to stop work to raise kids, earn more with more experience

Besides labor market effects, how can immigration affect government spending and taxes in receiving countries? Include political effects.

• Immigrants are usually less educated and earn less than natives in developed receiving countries. Immigrants and their children may increase government spending on education, health care, and income transfers. This may be especially true in countries with generous welfare programs, such as Scandinavia and some other European countries. • Young immigrants pay taxes that help pay for pensions and other government programs that benefit retired natives, and younger natives as well. Estimates for the US usually find that immigrants pay more in taxes than they consume in government services, even taking account of illegal immigrants who often get paid under the table and don't pay income or payroll taxes. • Immigration can also weaken political support among natives for government spending. Voters are more generous about paying taxes to finance services for people like themselves and less generous to people they think of as not like themselves. For instance, California voters supported very high quality public education 50 years ago, but as the percentage of Hispanic children in the state increased, they became less generous. In US states with high percentages of blacks, white voters are less willing to pay taxes for welfare. As immigration increases the percent of the population who are "not like" native voters, the native voters tend to become less generous, both in the US and in Europe. This is even more true when the immigrants don't feel the same social pressures that natives often feel not to abuse welfare programs. In many countries with generous welfare programs, there are strong social pressures from family and friends not to take advantage of these programs, for instance by pretending to be sick when you are not, or by pretending to look for work when you are not. Immigrants may not feel the same social pressures from their communities, nor from natives in the receiving country, and may be more likely to abuse generous welfare programs. This behavior also undermines political support for government spending and taxes among native voters.

Why has the black/white wage gap narrowed over the past 50 years?

• Less difference in quantity and quality of education • Discrimination now illegal, 50 years ago not illegal • Discrimination now socially unacceptable • Higher percentage of low skill black men are not working (in jail or just not working) and therefore aren't included in wage calculations than low skill white men