Labor Econ Exam 2

substitution effect equation

(ΔH/ΔW)|Y>0 - bar over Y to show it is held constant - positive bc H and W move in same direction

income effect equation

(ΔH/ΔY)|W<0 - the W has a bar over it which indicates it is held constant - negative bc if income goes up, hours of work fall; or if income increases, hours of work decrease

labor supply

- all about what works do; trying to understand how workers would respond to changes wages, hours, benefits, etc - some may want to work less, others may want to work more - demand for leisure

wage increase with income effect dominating

- choosing to work less - new max point needs to be to R of old one (more leisure)

wage increase with substitution effect dominating

- choosing to work more - new max point needs to be to L of old one (less leisure)

marshall's law

- goal is to try to find out what makes a firm's labor demand curve more elastic, that is, what makes employment more responsive to changes in wages - there are 4 situations

income effect

- if income increases while wages and preferences are held constant, the number of leisure hours demanded will rise - Y increases, Dleisure increases - more income --> want to work less

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 - tries to isolate the impact of the change in wage rate on change on the amount of labor - occurs bc as the cost of leisure changes, income held constant, leisure and work hours are substituted for each other

4) The demand for labor, other things equal, will me more elastic: the greater is the share of labor cost as a percentage of the total cost of production

- importance of being unimportant - scale effect

leisure lover

- in order for them to give up a little leisure, they have to be compensated with a high amount of income - strong preferences for leisure - indifference curves look more inelastic (steeper)

budget constraint

- map of what workers can do; worker's possibilities - changes a lot bc what you can do changes - multiply wage by 16, put that point on Y and connect to 16 on X

indifference curves

- map of what workers would like to do - gives us an idea of their relative preferences between leisure and the money income they can earn when they work (tradeoff) - trying to understand how people's preferences relate to the amount of leisure they could have and the amount of money income they could have - all points on the curve being you the same level of utility (satisfaction) - relatively static (we assume people's preferences don't change much)

work tolerant

- more willing to give up their leisure time; willing to give up a lot of leisure time for a little additional income - indifference curves are more elastic (flatter)

corner solution

- no tangency pt between IC and BC - point in corner where IC and BC hit on X axis - worker doesn't want to work at all - really steep ICs (leisure lover)

When the BC shifts up, what do people want to do and where does the new maximum utility point need to be?

- people have more income so they want to work less - new max point needs to be to the right of the old one to show that they want to work less

when wages changes...

- people work more, less, or the same - income also changes

changes in the budget constraint

- pivots upward when money income per day increases (like higher wage) - pivots downward when money income per day decreases (like tax rate imposed) - shifts upward when get some source of non-labor income

2) The demand for labor, other things equal, will be more elastic: the greater the ease of substitution in production between labor and other factors inputs such as capital

- possibilities for substitution in production between labor and other inputs such as capital - example: farm workers vs airline pilots

the demand for labor, other things equal, will be more elastic

1) The larger the price elasticity of demand for the product being produced 2) The greater the ease of substitution in production between labor and other factors inputs such as capital 3) The greater is the elasticity of supply of other competing factors of production 4) The greater the share of labor cost as a percentage of the total cost of production

2 ideas related to demand for leisure

1) if you had more income, you'd want more leisure - leisure is a normal good - limits (may like their work) - positive relationship - Y increases, Demand for leisure increase 2) Relationship of wage to demand for leisure - if wage went up, makes leisure more expensive (opportunity cost of leisure) - making less so taking an hour off doesn't cost you much - inverse relationship - W increases, Demand for leisure decreases

Suppose a state legislature passed a law requiring that trains passing through the state have crews of a specified minimum size (several states did at one time have such laws). C. Will these effects be greater in the short run or in the long run? Why?

Almost any employment effect will be greater in the long-run. In this case, it might take the railroad some time to acquire additional (or more powerful) engines so as to lengthen trains effectively.

Prior to 1960, virtually all the steel sold in the U.S. was produced by U.S. producers, and very little was imported. As steel imports increased in the 1960s, 1970s, and 1980s, what happened to the price-elasticity of demand for domestically-produced steel? What happened, as a consequence, to the own-wage elasticity of demand for steel workers in the U.S.?

As import competition increased, steel customers had more alternative sources from which to purchase steel. This increased the price elasticity of demand for steel and the own-wage elasticity of demand for steel workers.

Suppose a state legislature passed a law requiring that trains passing through the state have crews of a specified minimum size (several states did at one time have such laws). A. What effect would this have on the own-wage elasticity of demand for railroad workers in that state? Why?

Because the crew size is mandated by law, firms have less flexibility in responding to wage changes. This reduces the own-wage elasticity of demand for labor.

Suppose a state legislature passed a law requiring that trains passing through the state have crews of a specified minimum size (several states did at one time have such laws). B. What effect would these laws be likely to have on the average length of a train? Why?

One response a railroad company has is to run fewer trains through the state; one way of doing this is to make each train longer. We might therefore expect the average length of trains to rise.

Both automobile manufacturers and accounting firms hire accountants. If both types of firms face product demand curves which have the same elasticities and if both types of firms find it equally easy to substitute other resources for accountants, which type of firm would we expect to have the largest own-wage elasticity of demand for accountants? Why?

Since accounting firms probably allocate a larger share of its total costs to accounting labor than does automobile firms, accounting firms' demand for accountants is likely to be more elastic (other things equal, and leaving aside the complications regarding the exception to the rule).

3) The demand for labor, other things equal, will be more elastic: the greater is the elasticity of supply of other competing factors of production

availability of substitutes

Dleisure=

f(W,Y)

1) The demand for labor, other things equal, will be more elastic: the larger is the price elasticity of demand for the product being produced

implications: - the labor demand curve for individual firms will be more elastic, the more competitive the product market it operates in - the labor demand curve for an entire industry should be less elastic than the labor demand curve for any individual firm - wage elasticities are higher in the long-run than the short-run

maximum utility point

where the indifference curve is just tangent to the budget constraint; best option/preferred point