labor econ exam 2
present value formula
(benefits - costs)/(1 + discount rate)
marginal rate of return
(final - initial) / initial
social mobility formula
(income high, current / income low, current) = (income high, previous generation / income low, previous generation) ^ (B^ distance from current generation) - for parents of current, distance from current gen =1 - for grandparents of current, distance from current gen = 2 - for great grandparents of current, distance from current gen =3 B is called the intergenerational income elasticity
reasons for inequality in bottom 99% (stagnation) (5 reasons)
1 it revolution, 2 trade, 3 immigration, 4 decline of private sector unions, 5 erosion of minimum wage
reasons for inequality in top 1% (growth) (5 reasons)
1 superstars, 2 corporate governance, 3 rise of finance, 4 IT revolution, 5 decrease in labor share of GDP
why NAIRU changes
1. Changes in number of young people entering labor market for first time 2. Changes in number of women dropping out and re-entering labor market 3. Changes in government policies like minimum wage, unemployment insurance 4. Changes in labor market institutions like lifetime employment (Japan) or apprenticeship programs (Germany) that reduce unemployment among young entrants.
why has black/white wage gap narrowed
1. Discrimination now illegal 2. discrimination no longer socially acceptable, change in social norms. 3. Smaller difference between whites and blacks in quantity and quality of education 4. Faster increase in low skill blacks without jobs (in prison, unemployed, or out of the labor force) than for whites. This increases the average wage of blacks with jobs, since blacks with no wage are not included in the calculation.
why has male/female wage gap narrowed
1. Discrimination now illegal 2. discrimination no longer socially acceptable, change in social norms. 3. Women now have more education than men, 50 years ago had less 4. Women study subjects that lead to better jobs than 50 years ago (economics not literature) 5. Custom and social barriers are less obstacle to women entering well paying occupations 6. Women now less likely to stop work to raise kids, earn more with more experience
effects of immigrants on receiving countries
1. decline in unions 2. Immigrants are usually less educated and earn less than natives and may increase government spending on education, health care, and income transfers, especially in European welfare states like Scandinavia. 3. Young immigrants pay taxes that pay for government programs that benefit natives. US estimates show immigrants pay more in taxes than they consume in government services (even including illegal immigrants). 4. weakens political support among natives for government spending b/c voters more willing to finance services for people like themselves so with increased immigration voters (US and Europe) are less generous. Even more true when the immigrants become more likely to abuse generous welfare systems b/c they don't feel the same social pressures as natives.
whitehall study - consequence of rising inequality
Done with British civil servants and showed link between hierarchical status in the workplace and health. People with the highest ranking jobs had the lowest relative mortality rate and heart attack rate even after controlling for risk factors (hypertension, smoking, diabetes). They suspected this was because people in lower ranking jobs had more chronic stress and thus higher cortisol levels, which means worse health outcomes like heart attacks and death. Sapolsky monkey studies confirm link between cortisol and mortality.
NAIRU estimation
Estimate a regression with the change in the inflation rate r as the dependent variable and the unemployment rate U and other variables X as the independent variables. Then calculate U* at which r = 0. r = a + bU + cX. Estimate a, b, and c. Then find U* from a + bU + cX = 0
NLRB
National Labor Relations Board conducts elections to see if workers want a union to represent them, also reviews complaints of unfair employee treatment
NAIRU definition
Non Accelerating Inflation Rate of Unemployment, ie, the unemployment rate at which the rate of inflation does not change. considered to be the unemployment rate at full employment (only type of unemployment is fricitonal)
Network effect
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.
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.
effect of international trade on unions
before trade increase: product demand is inelastic (low price elasticity) and steep because domestic product was the only one available so an increase in the wage rate that shifts supply inward and increases price, only decreases demand a little. Since domestic output would fall very little, the demand for labor in the industry would also fall very little. The labor demand curve was also steep and inelastic. A wage increase negotiated by the union will only decrease the number of jobs by a small amount, thus the unions had more power. after trade increase: product demand is more elastic (high price elasticity) and flat because consumers can choose between domestic and foreign product so an increase in the wage that shifts supply inward and increases price results in a larger decrease in demand. Since domestic output falls more, labor demand also falls more. The labor demand curve is also flatter and more elastic. A wage increase negotiated by the union will now decrease the number of jobs by a lot so they have less power.
consequences of rising inequality
consumption - less equal consumption of market goods (less saving by poor more saving by rich) health - whitehall study (lower job status means higher mortality rate) family life - more inequal countries have higher infant morality rates and higher divorce rates
estate tax
contributes to low social mobility (high B) because each parent can leave up to 5.5 million in untaxed income to their kids. essentially there is no estate tax except on the super wealthy.
lorenz curve
cumulative percent of the population along the horizontal axis and cumulative percent of income (or wealth or education) along the vertical axis, limit is 100 on both axes. traces percent of income received by bottom % that is indicated on horizontal axis. If everyone receives the same income, the Lorenz curve is the line of perfect equality which is the 45° line.
Brain drain
emigration of highly skilled workers, usually from developing countries to rich countries.
Audit study
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.
hecksher-olin theory
explanation for how trade will lead to increased inequality in bottom 99%. 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.
trade effect on inequality
for bottom 99% - hecksher-olin theory. basically we import more stuff using low skilled labor and export stuff using capital and high skill labor so there is an increased demand for high skill labor and decreased demand for low skilled labor in the us. draw graph, same illustration as for it rev. inward shift of demand for low skill labor and outward shift of demand for high skill labor. return to physical and human capital goes up when trade increases and the return to unskilled labor falls
immigration effect on inequality
for bottom 99%: 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.
unions effect on inequality
for bottom 99%: decline in private sector 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.
minimum wage effect on inequality
for bottom 99%: 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.
superstars effect on inequality
for top 1%: Audiences for professional entertainers and athletes are now global (and larger) than the regional audiences 35 years ago so they now earn higher incomes. Also the loss of monopsony power of their employers means they're less able to pay low wages to these athletes/actors/musicians.
rise of finance effect on inequality
for top 1%: 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.
corporate governance effect on inequality
for top 1%: Corporate boards are willing to pay CEOs more now or businesses have gotten larger and more complicated and require more skilled top executives.
family sources of high intergenerational income elasticity (less social mobility)
genetics, culture, income/status
Remittances
gifts from immigrants to their friends and family back home. In some source countries, they can be 5 or even 10% of GDP
Vesting (pension plan)
gives an employee the right, on retirement, to the assets in a pension account. Partial vesting often occurs over several years, with full vesting not occurring until 5 or 6 years of employment.
societal sources of high intergenerational income elasticity (less social mobility)
government spending on education, class background (discrimination), rewards to education
facts about inequality in the us
has been rising since 70's, more inequality than most rich countries, small increases in income of bottom 60%, huge increases at top, some regional differences ie Mississippi is one of the poorest states and CT and MASS and NY are some of the richest, income is higher in metropolitan areas. wealth is much more unequally distributed than income (true everywhere)
General human capital
includes skills that are useful at many companies. If a company trains its employees in such skills, they become more productive not only at the company making the investment but also at other companies, who will then be willing to pay them higher wages. The current employer will then have to raise the wages of newly trained employees in order to keep them. Therefore it won't receive any return for the cost of investing in these skills, and will only do so if the employees pay for the investment by accepting lower wages than other workers, for instance as interns or apprentices.
group (individual or society) that receives higher rate of return to education
individual because there is a huge cost to society to provide education but the opportunity cost (indirect) and direct costs to the individual aren't that big. also the benefit to the individual is much larger than the positive externality to society.
B in social mobility formula
intergenerational income elasticity, between 0 and 1 generally. less than 0 means there is a cultural revolution happening where higher status of previous generation leads to lower status for the future generation. 0 means perfect social mobility. 1 means caste system with no social mobility.
Firm-specific human capital
is only useful at the worker's current employer. The employer can make the investment in such skills without increasing the attractiveness of its employees at other companies. Therefore it may be willing to pay for the costs of giving such skills to its employees. But if firm doesn't raise the wages of employees who receive firm-specific training, these workers may occasionally leave to work at other firms, so the firm may raise the workers' wage a little to discourage quits but by less than the total increase in productivity.
labor share of GDP effect on inequality
labor share of GDP has decreased while capital share has increased. for top 1%: 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%.
gini coefficient
measure of inequality, 0 means perfect equality, 1 means perfect inequality, measured as ratio of area between lorenz curve and line of perfect equal (a) over the total area under the line of perfect equal (a+b)
social policies that would increase social mobility (lower B)
more education for people at the bottom (invest in early childhood education), lower income inequality (taxes, eitc, minimum wage), increase the estate tax
it effect on inequality
much more important for bottom 99 than for top 1. for bottom 99: has increased the demand for high skilled workers who can use computers and decreased the demand for low skilled workers who can't. 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. (draw graphs) for top 1: may have increased the importance of winner-take-all contests. When a product has network effects, the benefit of using it rises with more users and one firm comes to dominate the market, ie facebook in the social media market. Doesn't necessarily increase high skill worker demand but increases rewards for the founders of this technology (ie microsoft, google, fb, twitter)
capitation advantages and disadvantages
pro: Incentive to lower costs with more preventive care that keeps patients healthy pro: Incentive to lower costs by not ordering unnecessary tests and other services con: Perhaps incentive to provide too few services, lower quality care con: Incentive to refuse to accept very sick patients, who will need lots of care
fee for service advantages and disadvantages
pro: Incentive to provide a high level of service and high quality care. con: incentive to provide unnecessary care and drive up costs without improving health
80-20 ratio
ratio of income of someone in the 80th percentile to someone in the 20th percentile. has increased over past 30 years or so.
Okun's Law
says that the US economy loses 2% of GDP for each one percentage point that the unemployment rate (U) exceeds the rate at full employment (U*). Thus US GDP was (5.3 - 4.5)x2 = 1.6% below potential GDP in 2015.
facts about inequality in china
significantly larger regional differences especially urban vs rural, inequality has been increasing steadily over time, has more inequality than other developing countries (except South Africa and Latin America which have high GINI's)
Efficiency wages
wages paid by employers are higher than market clearing wage (S=D), done to attract better workers, increase productivity motivation, and decrease turnover.
