Econ 315 Exam 2

According to empirical research, the two best explanations for increased female participation in the work force

- Rise in real wage - Expansion of women's jobs - no longer have to be a teacher, nurse, or secretary

what have been two of the biggest factors to affect male LFPR?

-Baby boomers retiring -People going back to school full time

Why are workers at larger firms more productive and thus better paid?

-Better training -Better workers are attracted to them -More capital is available

What kind of forces lead to a flatter indifference curve?

-Buying new appliances (inventions allow for easier substitution) -Children grow up -Greater future wage penalties associated with staying at home -Growing value on purchased goods easily observed with others (Keeping up with the jonses)

What does a flat indifference curve represent?

-Indifferent between work and leisure -Time at home becomes less necessary or more easily replaced with good and services -Tangency with the budget constraint will be farther to the left -Examples: people whose children are older, easier to substitute -A steeper budget constraint or flatter indifference curve can increase the hours of market work

What does a steep indifference curve represent

-Reducing time at home has to be compensated by a large increase in income -Tangency with the budget constraint likely will be farther toward the right -Examples of people with it: gifted caregiver, work at home is hard to replace, enjoys working at home

What is implied when we say married women are only marginally attached to market work?

-it is rational for them to participate during good times and not participate when unemployment is high and wages low so their participation will decrease during a recession

Why has the LFPR for women risen over time?

1) Increased real wages has increased married women's participation and women have more education now 2) Changing preferences has lead more women to focus on careers in market work 3) New technology has allowed for greater household work productivity 4) Declining birthrates (higher wages have raised the OC of having kids) 5) Increased divorce rates 6) Expanded job opportunities 7) Inflation has grown and to keep the same standard of living women have had to work

Why has the participation rate of older males has declined?

1) Real earnings have risen since 1940 so income effect suggests you need to work less to earn the same utility 2) Social Security benefits and coverage have risen over time (nonlabor income) which encourages people to not work 3) Private pension coverage has expanded (nonlabor income) which encourages early retirement 4) Social Security disability program has become more generous encourages low-wage workers to exit the labor force (Baby Boomers were a large generation and government didn't expect that)

Sources of Compensating Differentials

1) Risk of injury or death on the job (higher wages) 2) fringe benefits like sick leave, health and dental insurance will pay lower wages 3) Job status (jobs with titles will pay less because prestige is a benefit) 4) Job location (better location, lower pay and vice versa) 5) Job Security (greater job security means lower wage) 6) Prospect of Wage Advancement (lower starting salaries) 7) Extent of control over the workplace (less control means higher pay)

Determinants of labor supply

1) wages of other occupations 2) nonwage income 3) preferences for work 4) nonwage aspects of the job 5) number of qualified jobs

how can policymakers attempt to address the work-incentive problems caused by welfare programs?

1) work requirements 2) lifetime limits 3) incentives for jobs

Which of the following is not true of a worker's indifference curves? A worker is indifferent among all his indifference curves. The curves are convex to the origin. Indifference curves do not cross. All indifference curves are negatively sloped.

A worker is indifferent among all his indifference curves.

Why does the discouraged worker effect tend to be empirically larger than the added worker effect

Added worker only applies to families where the primary worker is unemployed, discouraged worker applies to everyone

A person who receives time-and-a-half overtime for working more than 8 hours per day will have a ________ which is ________ beyond 8 hours of labor.

BC; steeper

Why might higher wages at bigger firms be a compensating differential?

Bigger firms are less pleasant and personal, more bureaucracy

What causes wage differentials in the model

Decreased Labor Supply for a job that has undesirable job characteristics and an increased labor supply for the alternative job

why do African American men face worse labor market conditions

Demand: -Lower education as a percentage of labor force -Discrimination -Unmatched job and residence Supply: -Non-labor income may be more appealing and reduces labor participation -Illegal activities may offer higher rates of compensation -Health of African American older men tends to be worse than white older men -Higher participation of African-American wives may lower the participation rate for African-American husbands

what causes steeper budget constraints?

Increase in the wage rate

In the context of the models presented in class, why are low-income workers more likely to take dangerous jobs?

Low-income workers are not willing to pay as much for more safety as high-income workers.

Who is more likely to acquire human capital?

People with low discount rates which is another cause of wage differentials

what information do we need to determine the optimal distribution of an individual's time between work and leisure

Subjective preferences of workers - do they like it? Objective market information - wage rates?

What is the significance of the slope of the worker's indifference curve?

The absolute value of the slope is equal to the MRS of consumption for leisure.

What is the significance of the slope of the worker's budget constraint?

The slope, multiplied by negative one, represents the worker's hourly wage rate.

Why are prostitutes paid so highly?

Unpleasant job, not a lot of control or job security, prestige isn't there = compensating differentials

Which of the following is not an assumption on which the theory of compensating differentials is based?

Workers always try to choose the highest paying job available to them.

An increase in nonlabor income due to a rise in the value of stocks and bonds will cause

a pure income effect

If child care costs are purely hourly and have no fixed component, the effects of a government subsidy for child care are the same as _________

a wage increase

Holding all else constant, workers who have a high tolerance for risk will tend to have jobs that pay

above average wages.

primary earner loses their job and other family members look for a job Increases LFPR

added worker effect

Present-oriented people discount future earnings _________ forward-looking people.

at a higher rate than

the partner with greater access to resources carries more influence

bargaining model

Indifference curves drawn with leisure and income on the axes have negative slopes

because people are willing to give up income to obtain more leisure and vice versa.

Holding all else constant, workers who are strongly averse to risk will tend to have jobs that pay

below average wage

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

budget contstraint

extra wage/pay that an employer must provide a worker for some undesirable job characteristics that does not exist in an alternative job

compensating differential

person stops looking for a job because they've become pessimistic about finding a job Decreases LFPR Tends to be larger

discouraged worker effect

child-care subsidies that reduce/remove the fixed cost of child care can:

encourage working among those previously not working

the gains from staying at home depend on:

enjoyment of, and skill, at child rearing

The labor force ______ during an economic expansion which means the official unemployment rate is _______

grows, overstated

workers with fewer nonwage amenities will get ________

higher wages

change in desired hours of work resulting from a change in income (holding the wage rate constant)

income effect

For those already working, removing the fixed cost of child care acts as a pure _______________ effect. This pushes the mother toward _________ hours of work. Spending time with child is a _________ good

income, fewer, normal

As wives' wages and labor-market opportunities rise, the share of household work done by husbands _______ and the share done by husbands _____

increases and decreases

An increase in the wage rate when the substitution effect dominates will ________ labor force participation and ________ hours of work.

increases; increases

An individual's reservation wage

is the value of the marginal hour of leisure time if the individual does no work.

unpaid activities including household work

leisure

a wife's increased hours of paid work could either:

make the husband's indifference curve steeper -Takes on more household duties makes the husband's indifference curve flatter -doesn't like to be home without his wife

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

marginal rate of substitution, the absolute value of the indifference curve

the losses from staying at home are related to:

market wage of each spouse

Part of the male-female differential may be a reflection of different preferences in _______

nonwage amenities

People who are present oriented (have a high discount rate) are not willing to sacrifice present consumption unless they get a ___________ increase in future income

relatively large

People who are future-oriented (have a low discount rate) are willing to sacrifice present consumption for a ____________ increase in future income

relatively smaller

Workers performing dangerous jobs in the economy are typically people that

see the jobs as paying well compared to alternative employment.

If Alice's wage increases from $6.00 per hour to $6.50 per hour, then

she may want to work more, fewer, or the same number of hours as before her raise.

firms will pay above market wages where it is costly to monitor employee performance or the employer's cost of poor performance is high

shirking model

The labor force ________ during recessions which means the official unemployment rate is _____

shrinks, understated

the difference in wage due to education or training that makes up for human capital investments

skill differential

What effect can skill differentials have on compensating differentials?

skill differentials can increase, decrease or reverse wage differences caused by compensating differentials Ex: nurses get paid more than ditch diggers

Why are most "good" jobs also high paying?

skill differentials offset compensating differentials

A person with ________ indifference curves is most likely to decide not to participate in the labor force.

steep

Which effect will cause the worker to decide to enjoy less leisure time and work more?

substitution effect

the change in desired hours of work resulting from a change in the wage rate (holding utility/income constant)

substitution effect

Suppose that the compensating differential associated with working in a noisy workplace is $500 per year. This $500 payment can be interpreted as

the amount that the marginal worker is willing to pay for a quiet environment.

A professor declared "with the recent drop in the value of my stock portfolio, I will have to put off retirement by another two years." This decision reflects

the income effect

On the portion of a worker's labor supply curve that is backward-bending,

the income effect outweighs the substitution effect

firms will pay above market wages when hiring and training costs are high

turnover model

one spouse makes all the decisions, they act as a "social planner" or two parties have the same preferences

unitary model

time spent on paying job

work

If all workers like nice working conditions and labor markets are competitive (such that workers are mobile and fully informed), then in equilibrium

workers will be indifferent between jobs with and without nice working conditions.