4. Labour Market Equilibrium

Question 1

Where is the producer surplus on the labour market graph?

Answer 1

Above the consumer surplus

Question 2

Where is the consumer (worker) surplus on the labour market graph?

Answer 2

Below the producer surplus

Question 3

Do payroll taxes affect supply or demand?

Answer 3

Both

Question 4

What determines how much the wage of someone falls when a payroll tax is applied to it?

Answer 4

The elasticity of supply of labour

Question 5

What happens to producer and consumer surplus when a tax is applied?

Answer 5

Both fall, there is also a deadweight loss

Question 6

Non binding minimum wage

Answer 6

It is a minimum wage which is below the current equilibrium so has no effect

Question 7

Binding minimum wage

Answer 7

An enforced minimum wage which is above the current equilibrium and causes a fall in employment

Question 8

What determines how many workers lose their job when a minimum wage is enforced?

Answer 8

• how high the minimum wage is
• the elasticity of demand- the higher the elasticity the more responsive firms are to changes in wage Bd so more workers lose their jobs

Question 9

When will the loss in employment from introducing a minimum wage outweigh the gain in wages

Answer 9

When the elasticity of demand is greater than 1

Question 10

Why is it difficult to estimate the effect of the minimum wage on employment?

Answer 10

• difficult to provide experimental evidence
• we can only use the observed outcomes of the labour market
• ”what would have happened in the absence of the minimum wage?” Is hard to answer

Question 11

What results did Card and Krueger 1994 find about the minimum wage?

Answer 11

An increase in minimum wage in New Jersey actually saw an increase in employment

Question 12

What are the results found by the simplest model on the effects of immigration on the labour market?

Answer 12

• assumes a single type of worker
• assumes a fixed capital stock
• the outcome is immigration reduces the wages of native workers since labour supply has increased

Question 13

What does the model predict when migrants are substitutes for unskilled workers and complements for skilled workers

Answer 13

• unskilled labour wages fall because of increased supply

* skilled labour wages rose because of increased demand

Question 14

What is the long run effect on wages if migrants and natives are identical?

Answer 14

No effect

Question 15

Since we can’t do experiments what can we do to find the effect of immigration on wages?

Answer 15

Spatial correlations: compare native wages from cities with high and low levels of immigrants

Question 16

What are the limitations of spatial correlations?

Answer 16

Cities might vary in wages for other reasons which are correlated with number of migrants. E.g migrants choose to live in richer cities

Question 17

What is a better approach than spatial correlations?

Answer 17

• within city method
• we include a dummy variable for each city to control for pre existing differences in cities
• it is called the fixed effects model and is a generalisation of the difference in difference method

Question 18

What are the limitations of the fixed effects model?

Answer 18

•even after controlling for city fixed effects, we might still not get a good estimate because migrants can choose where to live so migrants isn’t an exogenous variable

Question 19

What is the Mariel Boatlift and what were the results of it?

Answer 19

• a sudden surge of Cubans entered Miami causing a 7% increase in the labour force
• Miami wages actually increased whilst other US cities wages declined over the same period

Question 20

How do our min wage and migration results contradict each other?

Answer 20

• min wage study suggests forcing wages up has no effect on employment so the demand curve must be vertical
• migration study suggests increasing labour supply has no effect on wages so demand curve is horizontal