Labor Econ Exam 1
Be able to compute the short run elasticity of labor demand and interpret the value (elastic/inelastic).
%change in employment/% change in wage ab val E > 1 = elastic (sensitive to changes in wage) ab val E < 1 = inelastic (not sensitive to changes in wage)
discouraged worker effect
* dominates over added worker effect* The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force. So LFPR falls during recessions and increases during expansions. during 2009 recession, unemployment rate underestimates the amount of economic hardships because many workers stopped looking for work and thus were not counted as unemployed. Also, a decrease in the employment rate could be due increases in fertility or school enrollment rates, which do not effect the unemployment rate.
why we do not treat labor demand like the demand for any other good - what makes it unique?
- workers differ from other inputs because determinants of demand and supply for labor are based on much more than the wage... workers care about social opportunities at the firms, and also firms have a lot to consider when hiring a person.
life-cycle wage pattern
-peaks at around 50 or a little before -Wages and hours move together over life cycle for individual worker because a person will work more hours when wages are higher (i.e., the substitution effect tends to dominate the income effect). -Wages are low when young, rise with time and peak around age 50 and then decline or remain stable after age 50. -The profile of hours of work over the life cycle will have the same shape as the age-earnings profile.
Be able to graph indifference curves and explain the four properties of indifference curves discussed in class and in your text.
1. Curves are downward sloping indicating the tradeoff between consumption and leisure. 2. Higher curves indicate higher levels of utility (farther from origin). 3. Curves do not intersect. 4. Curves are convex to origin - required if person is to share time between work and leisure (interior solution)
Know how to use them to find the profit maximizing level of employment for a firm in the short run.
A profit-maximizing firm hires workers up to the point where the wage rate equals the value of marginal product of labor, and VMPE is declining. At that point, the marginal gain from hiring an additional worker just covers the cost of that hire, and it does not pay to further expand the firm because the value of hiring more workers is falling. if you picked the point where w=VMPE but VMPE is rising, the next worker hired would contribute even more to the firms rev than the first worker, so it makes sense to keep expanding.
average product of labor (APE)
APE= q/E
If leisure is a normal good, how does a change in non-labor income impact the quantity of labor supplied for an individual? How does this change if leisure is an inferior good?
An increase in nonlabor income leads to a parallel, upward shift in the budget line, moving the worker from point P0 to point P1. If leisure is a normal good, hours of work fall. If leisure is inferior, hours of work increase and leisure decreases.
Know what shifts the labor demand curve (remember: VMP = P*MP) and be able to show these shifts and discuss the outcome from these shifts.
An increase in the price of the output shifts MP curve upward and increases employment Because marginal product eventually declines, the short-run demand curve for labor is downward sloping. A drop in the wage from $22 to $18 increases the firm's employment.
budget constraint
C = wh+V or... C = w(T-L) +V defines the worker's opportunity set, indicating all of the consumption - leisure combinations the worker can afford.
How have average weekly hours of work changes over the past one hundred years?
Decreasing hours in workweek - it has dropped to 34 hours because many employees today are salaried with benefits such as health insurance.
Elasticity
E = % change in hours of work/% change in wage rate
Labor Force
E+U all nonmilitary people who are employed or unemployed
Employment to Population Ratio
E/P the percentage of the working-age population that is actively employed
Suppose a firm purchases labor in a competitive labor market and sells its product in a competitive product market. The firm's elasticity of demand for labor is −0.4. Suppose the wage increases by 5 percent. What will happen to the amount of labor hired by the firm? What will happen to the marginal productivity of the last worker hired by the firm?
Given the estimates of the elasticity of labor demand and the change in the wage, we have that %E = −2% . Thus, the firm hires 2 percent fewer workers. Furthermore, because fewer workers are hired, under normal conditions the marginal productivity of the last worker hired will increase. (More formally, because the labor market is competitive, the marginal worker is paid the value of his marginal product. As the product market is competitive, we also know that the output price does not change so that the marginal productivity of the marginal worker increases by 5 percent.)
Who are the actors in the labor market and what are the goals/role of each actor?
Govt regulates and taxes to meet public policy goals, firms seek to maximize profits, consumers seek to maximize utility and usually seek jobs with the highest wages
What is the effect of an increase in the price of market goods on a worker's reservation wage, probability of entering the labor force, and hours of work?
If she chooses not to work, she can purchase V/p′ units of consumption after the price change, whereas she could have consumed V/p units of consumption prior to the price increase. Thus, her endowment point has moved from E to E′ in Figure A. As long as leisure is a normal good, the indifference curve is steeper as we move up a vertical line, indicating that the slope of the indifference curve is steeper at E than at E′. Thus, an increase in the price of goods lowers the reservation wage and makes the person more likely to work. The price increase in effect lowers the person's real wage rate, increasing the demand for leisure and leading to fewer hours of work. This substitution effect is illustrated by the move from point P to point Q in Figure B. The price increase also reduces the worker's wealth, lowering the demand for leisure and leading to more hours of work. This income effect is illustrated by the move from Q to R. As drawn the income effect dominates the substitution effect and the price increase lowers the demand for leisure and increases hours of work.
What does it mean if the labor supply curve is backward bending?
If the income effect begins to dominate the substitution, hours of work decline as the wage rate increases (a negatively sloped labor supply curve As the wage rises, the quantity of labor supplied may eventually decline; the income effect of a higher wage increases the demand for leisure, which reduces the quantity of labor supplied enough to more than offset the substitution effect of a higher wage
What has been happening to the LFPR of males/females over the past 40 years? What about for older workers?
In 1948, 84% of men and 31% of women 16+ worked. By 2012, the proportion of working men declined to 64%,proportion of women rose to 53% LFPR has decreased for men over the age of 65 from 63% in 1900 to 22.1% 2010.
Labor Force Participation Rate
LF/P = (E+U)/P (where P = civilian adult population 16+ years old and not institutionalized)
The marginal product of labor
MPE = change in Q/change E
optimal consumption bundle
MRS=w -- budget line is tangent to the indifference curve.
marginal rate of substitution
MUL - change in utility from one more hour of leisure, holding level of C constant. MUc - change in utility from one more hour of consumption, holding level of L constant. the slope of an indifference curve is equal to the ratio of the marginal utilities
Who computes labor force statistics and when are they reported?
On the first friday of every month, the Bureau of Labor Statistics releases its estimate of the UE rate for the previous month
How does an increase in your wage impact the quantity of labor supplied for an individual (assume V>0)?
One possible outcome is that workers may increase hours of leisure (work less) in response to an increase in the wage. Another possible outcome is that workers may decrease hours of leisure (work more) in response to an increase in the wage.
What does the R2 in a multiple regression model tell you?
Percentage of the dispersion in y explained by dispersion of x
Procyclical vs Countercyclical
Primary workers move in the same direction as the business cycle... their LFPR falls during recessions and rises during expansions. Secondary workers are the opposite.
Know the basics about regression analysis and be able to identify the independent/dependent variable(s) as well as the regression coefficients if given a model equation.
Regression is best line that fits data Use this type of model to assess the impact of an independent variable, holding all other variables (in the model) constant. (eg. What is the unique impact of immigration on the wage and employment opportunities of native born workers?) Regression coefficients tell the change in dependent variable from a change in the independent (the slope of the line)
How do changes in pension benefits impact retirement decisions of older workers?
Since WWII, drop in LFPR among older workers - not health and not falling wages An increase in pension benefits reduces the price of retirement, increasing the demand for leisure and encouraging the worker to retire earlier
What is the equation for a t statistic?
T-statistic = |B| / SE (absolute val of regression coefficient over the std. error of the regression coefficient)
EITC
The EITC was designed to increase labor force participation of nonworkers from targeted groups. It increases the LFPR, but it reduces the hours worked of some workers who were in the LF already. The EITC encourages some non-workers to start working and never encourages a worker to quit working - for ppl not in LF, it pulls them in (sub effect dominates) -for people already i the labor market, it reduces their hours of work (income effect)
Unemployment Rate
U/LF fraction of LF that is unemployed
VAPE
VAPE = p × APE
VMPE
VMPE = p × MPE indicates the dollar increase in revenue generated from an additional worker, holding capital constant.
income effect
When the income effect dominates the substitution effect, the worker increases hours of leisure in response to an increase in the wage.
Substution effect
When the substitution effect dominates the income effect, the worker decreases hours of leisure in response to an increase in the wage
How is the civilian labor force different from the total labor force?
civilian labor force does not include military
What types of empirical models are now used to estimate the Intertemporal Labor Supply Elasticity, or how hours of work evolve over the lifecycle? Just know the name of technique.
fixed effects
Positive Economics
focus on "What is" Addresses the facts. Questions can be answered with economic tools and without value judgments. What is the outcome of increasing minimum wages in competitive labor markets? Should government subsidize higher education?
Normative Economics
focus on "What should be" Addresses values. Requires judgments, not based on theory or facts alone. Should we increase minimum wages? Should we have tighter immigration policy?
What does it mean when labor supply is elastic? Inelastic?
if E>1: elastic as hours of work respond proportionally more than the change in wages. (labor hours sensitive to change in wage) if E<1: inelastic as hours of work respond proportionally less than the change in wages. (hours insensitive to change in wage)
How do you know that a parameter estimate (coefficient) in a regression model is statistically significant?
if the t-stat is greater than 2, the coefficient is significantly different from zero. Statistical significance of coefficient assessed by t- statistic - are standard errors so large that margin of error includes zero for coefficient?
substitution effect
illustrates what happens to a workers consumption bundle as the wage increases, holding utility constant. it isolates the impact on the increase in the price of leisure on hours of work, holding real income constant
firms demand for labor
is the downward sloping portion of the VMPE curve beyond where VMPE=VAPE.
Whose interests are represented by the labor supply curve? Labor demand curve?
labor supply curve represents the amount of people who choose to work at each wage, and the labor demand curve is the amount of workers demanded by firms at each wage Supply - workers desires to supply labor at various wages (upward sloping, b/c workers supply more time and effort for higher payoffs, causing an upward sloping labor supply.). Demand - firms desire to employ labor at various wages (downward sloping).
Unemployed
layoff, seeking job, actively looking for work last 30 days (not discouraged).
How did the 2000 removal of the Social Security Earnings Test impact hours of work for retirees? Be able to discuss and show on a graph.
low earning workers did not change their hours of work. -second retiree in the middle reduces hours if the substitution effect dominates when he effectively gets a wage increase by repealing the earnings test, -the highest earning retiree could either increase or reduce hours depending on which effect dominates. Conclusions: (1) Overall, the theory suggests that elimination of the Social Security earnings test is unlikely to substantially increase labor supply among retirees. (2) The empirical evidence confirms the theoretical explanations: the labor supply effects of the repeal tended to be small.
Impact of cash grant or welfare on labor supply
pure income effect. parallel shift of BC. simple cash grant causing you to leave the LF: if you have little to no non-labor income, a cash grant will make you leave the labor force bc you now have a "V" and can obtain a higher level of utility by choosing corner solution E. Cash grant with tax causes you to reduce work. Overall, we see: Cash grants reduce wage incentives. Welfare programs create work disincentives. Welfare reduces supply of labor by increasing nonlabor income, which raises the reservation wage.
added worker effect
relationship between business cycle and LFPR... if the primary earner becomes unemployed or faces a pay cut, the other family member may enter the workforce to maintain income.
derived demand for labor
the demand for labor is said to be dependent on, or derived from, the demand for the product being produced firms dont just want to hire workers because they want bodies to fill positions at their firm, they want workers because consumers demand goods and services.
What is the reservation wage?
the lowest wage rate that would make the person indifferent between working and not working. -- the slope of the IC at the endowment point mrs=C/L Rule 1: if the market wage is less than the reservation wage, then the person will not work. Rule 2: the reservation wage increases as nonlabor income increases At wages slightly above the reservation wage, the labor supply curve is positively sloped (the substitution effect dominates the income effect).
What results in the market at non equilibrium wages and how does the free labor market get back to equilibrium?
wage below equilibrium causes labor shortage. Not as many want to work as firms want to hire. Wages need to go up to entice workers to enter the labor force. Wages above equilibrium cause unemployment. More people want to work than firms are willing to hire.
LFPR in women
womens supply curve is upward sloping, but more elastic than mens. aka they are more responsive to wage changes via LFPR than hours of labor. in other words, female labor supply mainly respons to economic factors at the margin of deciding whether or not to work, rather than at the margin of deciding how many hours to work once in the LF. In the beginning of the 1900s, only 21% of women were in the LF. Due to Great D and WW1 and 2, only 29% of women were in the LF by 1950. But by 2010, that number had nearly doubled and almost 60% of women were in the LF. Married women generally have lower LFP than single women.
Employed
work for pay 1+ hour per week, sick/ill, 15+ hrs unpaid family business (not housewives, illegal, or volunteer).