Labour Economics

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QUESTION
1. (10 marks) Indicate in each of the following instances whether the specified circumstances will cause a worker to want to work more or fewer hours:
a. The wage rate increases and the substitution effect is greater than the income effect.
b. The wage rate decreases and the income effect is greater than the substitution effect.
c. The wage rate decreases and the substitution effect is greater than the income effect.
d. The wage rate increases and the income effect is greater than the substitution effect.
2. (15 marks) In the accompanying diagram, WH is the budget line resulting from labor market work. Describe the characteristics of the income maintenance programs implicit in budget lines HBW′, HBYW, and HBW. Given an individual’s work–leisure preferences, which program will entail the strongest disincentives to work? Why? Which entails the weakest disincentives to work? Why? “The higher the basic benefit and the higher the benefit reduction rate, the weaker the work incentive.” Do you agree?
(Chapter 2)
3. (10 marks) Briefly discuss the major components of the aggregate labor supply
4. (15 marks) In 2014 the United States had a population of 319 million, of which 71 million were either under 16 years of age or institutionalized. Approximately 156 million people were either employed or unemployed but actively seeking work. What was the participation rate in 2014?
5. (30 marks) Why is the internal rate of return from human capital investment subject to diminishing returns? Explain the rationale for identifying the “diminishing rate of returns to education curve” as the “demand for human capital curve.” Combine the demand for human capital curve with a “supply of investment funds curve” to explain why various individuals find it rational to invest in different amounts of human capital. What are the implications of your answer for the personal distribution of income? Do you think that the educational system in the United States contributes to more or less equality in the distribution of earnings? Explain. If you wanted to reduce inequality in the distribution of earnings, what policy recommendations would you make?
6. (50 marks) Answer the following questions on the basis of the table shown here. QB is type B labor, and VMPBx and VMPBy are the industry values of the marginal products of this labor in producing x and y, the only two goods in the economy.
a. Explain why the VMPs in the table decline as more units of labor are employed.
b. If the supply price or opportunity cost of labor PL is $9, how many units of type B labor need to be used in producing x and y to achieve an efficient allocation of labor? What will be the combined total value of the two outputs?
c. Suppose PL is $15 and that presently five units of labor are being allocated to producing x while two units are being allocated to y. Is this an efficient allocation of labor? Why or why not? If not, what is the efficient allocation of type B labor?
d. Suppose PL is $25 and three units of labor are being allocated to producing x, while six units are being allocated to producing y. Explain why this is not an efficient allocation of labor. What is the efficient allocation of this type of labor? What gain in the total value of leisure, alternative outputs, or home production results from this reallocation of labor?
e. Suppose product x is sold in a perfectly competitive product market. Also ignore the VMPBy column and assume that the VMPBx schedule is representative of each firm hiring workers in a perfectly competitive labor market. If the market wage rate is $12, what will be each firm’s MWC? What will be their MRPs at their profit-maximizing level of employment? Explain why an efficient allocation of labor will occur in this industry.:
QB VMPBx VMPBy QB VMPBx VMPBy QB VMPBx VMPBy
1 $18 $23 1 $18 $23 1 $18 $23
2 15 19 2 15 19 2 15 19
3 12 15 3 12 15 3 12 15
4 9 11 4 9 11 4 9 11
5 6 9 5 6 9 5 6 9
6 3 5 6 3 5 6 3 5
7. (30 marks) How might payment of an efficiency wage (a) reduce shirking by employees and (b) reduce employee turnover? What is the implication of the efficiency wage theory for unemployment? In what way are piece rates, commissions, royalties, profit sharing, and stock options substitutes for efficiency wages?

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