Arbetsmarknadsekonomi

Question 1

Labour market

Answer 1

Labour supply
Labor demand
Equilibrium price (wage), that is the intersection of labor supplied at a given wage rate and labor demanded at a given wage rate
Equilibrium quantity - the amount of work
Time (e.g., hours per week)
Skill (e.g., productivity)
Effort (e.g., efficiency)

Question 2

Actors in labor market

Answer 2

Individuals
Education, training, and work experience (human capital)
Type of occupation
When to enter
Number of hours to work
When to quit or retire
Effort level

Firms
When to open, expand, layoff, or close the firm of part of the firm
Number of workers to hire
Number of hours to work
Payment system for workers

Government
Education and training
Laws and regulations
Unemployment and sick insurance
Pension system

Question 3

Unemployment labor market

Answer 3

Unemployed
Individuals who are not in paid employment or self-employment
Individuals who are available for work
Individuals who are actively seeking work

Participation rate = Labour force / Population of working age

Unemployment rate = Unemployed / Labour force

Question 4

Labour supply in a country

Answer 4

Population
Birth rates (fertility decisions - child care and child allowance)
Immigration and emigration
Death rates

Labour force
Starting age
The decision to enter labor force
Retirement age

Time
Seasonal and non-seasonal
Hours per week

Skill and effort

Question 5

Neoclassical model of labour supply

Answer 5

Choices
Work
Leisure

Supply of labor
The decision whether or not to participate in the labor market (extensive margin)
How many hours to work given participation (intensive margin)

Policy questions
How does a welfare program affect the supply of labor?
How does a change in income tax affect the supply of labor?

Question 6

Work and leisure choice

Answer 6

How to allocate time between market (work) and non-market (leisure)
activities?

Time constraint
T = Total time available
h = Working time
l = Leisure time
T = h + l

Budget constraint
Labor income (y )
w = wage rate (after tax)
y = w ×(T −l ) = w ×T −w ×l = w ×h
Non-labor income (y bar)
Heritage, interest,…

Question 7

Budget constraint - with no non-labor income

Answer 7

Question 8

What happens if wage rate increases?

Answer 8

Question 9

What happens if non-labor income increases?

Answer 9

Question 10

Indifference curves

Answer 10

An indifference curve shows a combination of income and leisure that
yields the same level of utility.

Indifference curves are downward sloping and convex (due to diminishing marginal rates of substitution)

Slope - the amount of income an individual can gain from giving up an hour of leisure

Question 11

Indifference curves - slope

Answer 11

Question 12

Utility maximization (interior solution)

Answer 12

Question 13

Utility maximization - not working (corner solution)

Answer 13

Question 14

Utility maximization - entering the labor market (Reservation wage)

Answer 14

Question 15

Non-participation in the labor market

Answer 15

Increase in wages
For a non-participant, an increase in wage can make her participate
if market wage at least corresponds to her reservation wage
The size of reservation wage can depend on other interests (e.g. hobbies),
family and children

Increase in non-labor income
For a participant, an increase in non-labor income wage can make her not to participate
A non-labor income could be an inheritance, a lottery win, and universal basic income

Question 16

Two important effects of a change in wages

Answer 16

Assume a wage increase, and there are two effects:
Income effect - total earnings increases holding working hours fixed, that is an incentive to decrease the hours worked
Substitution effect - the opportunity cost of free time increases, that is
to increase hours worked

If the substitution effect is larger than the income effect then increased working time
If the substitution effect is less than the income effect then decreased working time

Question 17

Labor supply curve

Answer 17

Question 18

The backward bending labor supply curve

Answer 18

Question 19

Labour supply elasticity

Answer 19

Extensive margin - the decision of whether to or not to work

Intensive margin - number of working hours

In empirical studies, the elasticity at the intensive margin is around 0.2-0.4 for men, and lower at the extensive margin

In general, higher elasticity for women, low-income earners and single parents

Question 20

Fixed hours work contract

Answer 20

A worker is typically offered fixed hours to work, additional features might exist such as overtime, flex time, and part-time.

An individual maximizes her utility at b.
If she is offered contact a.
Although this does not maximize her utility, it gives higher utility than the option not to work at all.
She chooses this contract and works more than preferred.
If she is offered contact c. Although this does not maximize her utility, it gives higher utility than not working.
She chooses this contract and works less than preferred.

Question 21

Progressive taxation

Answer 21

An individual chooses a utility maximization choice between leisure and income given the solid income constraint.
A higher marginal tax is introduced on higher income and represents a kink at the income constraint, which follows the dashed line for higher income levels and she chooses b.

Question 22

Is this a good model?

Answer 22

People typically do not make these types of optimization calculations
in their heads
Over time, people learn what combination of working hours and free time that gives them higher and lower utility
The model helps the researcher to understand the effect of real-world changes on working hours decision

Question 23

Structure of a firm

Answer 23

Separation of ownership and control
Owners decide on long-term plans

Profit (residual) belongs to the owners (residual claimant) but depends on the actions of the managers creating a conflict of interest
Performance-based payments to managers
Monitor the performance of managers

The contract between a firm and its employees is incomplete since effort is typically not specified.
A certain individual might be attracted to apply for work with a time rate system (hourly wage) (adverse selection)
A key aspect here is hidden (in)action after signing a contract (moral hazard).
A worker can exploit the uninformed employee to achieve her own goals for example by putting less effort into the work.
Firm-specific assets
Network of colleagues
Acquisition of skills necessary for the job

Question 24

Workers

Answer 24

Workers’ effort
Work ethic
Feelings of responsibility
Gift exchange (reciprocate the working conditions, especially wage)
Performance-based wage
Promotion possibilities
Probability of being fired

Employment rent
Employment rent (per hour)= Wage - Reservation wage - Disutility of effort
The reservation wage is the lowest wage a worker would be willing to accept for the work.

Question 25

Wage payment system

Answer 25

Wages and effort
Difficult for an employer to directly measure a worker’s effort
Payment systems
Time Rate System
Piece Rate System
Incentive Wage System

In the past workers were often paid a piece rate. Since the service sector has increased and more work is done by a group/team, time wage the system is dominating today.

Question 26

Time rate system

Answer 26

The workers are paid by time spent

Pros
Easy to apply
A certain wage for workers
High Quality
Cooperation between the workers
Healthier for workers

Cons
Supervision
No incentives to work hard
More expensive products

Question 27

Piece rate system

Answer 27

The workers are paid by output (units produced)

Pros
Incentives to work
Higher production
Cheaper products
Less supervision

Cons
Uncertain wages
Negative impact on health
Less cooperation
Lower quality

Question 28

Piece rate system

Answer 28

The workers are paid by output (units produced)

Pros
Incentives to work
Higher production
Cheaper products
Less supervision

Cons
Uncertain wages
Negative impact on health
Less cooperation
Lower quality

Question 29

Incentive wage system

Answer 29

The workers are paid by time and output (e.g., bonus - at individual or group/team level)

Pros
Easy to measure output
Incentives to work

Cons
Lower quality
Group/team payment creates frustration among high performers
Less cooperation

Question 30

Wages and effort

Answer 30

Firms cannot directly observe worker’s effort

Employment situation
Firm: Profit=Output from workers-wage
Worker: Employment rent

Gift exchange
The “fair wage-effort” hypothesis coined by Akerlof (1982) states that thanks to reciprocity a higher wage than the market-clearing wages result in higher than minimal efforts in labor relationships with incomplete contracts (that is when output is not fixed in the contract).
The gift-exchange game developed by Fehr et al. (1993) has become the workhorse for the experimental investigation of Akerlof’s hypothesis.

Question 31

Does peers’ behavior affect effort?

Answer 31

Neoclassical theory predicts that other individuals’ behavior will not affect an individual’s effort
However, studies have shown that people are affected by observing and being observed by others
Difficult to use observational data to test if there is a causal effect between peers and an individual’s effort

Experimental design
A 4-hour job without a break and that was paid a fixed amount of 90 CHF.
The job was to stuff questionnaires into envelopes in preparation for a mail survey for the University of Zurich.

Question 32

Do more years of education cause higher income?

Answer 32

How to exogenously vary the length of education to investigate the effect of education on income?
Is it possible to use a natural experiment to investigate the effects of education (a situation that is similar to an experiment)?
Use a change in policy (e.g., a school reform)
Use naturally occurring random variation (e.g., birth dates and weather)

In the US, schooling is compulsory until the day an individual turned 16 or 17 years old depending on the state.
Since all children start school at the same time it means that children born early in a year are allowed to drop out of school earlier than those born later in the year.
Their results show a positive effect of schooling on earnings when comparing those born during the first and last quarter of the year
They highlight in their discussion on mandatory schooling, that there is necessary to consider both private and social costs (e.g., less crime, but may disturb other pupils in class)

Question 33

Do higher minimum wages increase unemployment?

Answer 33

Increasing minimum wages increase income among the poor, but might also increase unemployment
In 1992, the minimum wage per hour increased from 4.25 USD to 5.05 USD in New Jersey, but the minimum wage remained unchanged in neighboring Pennsylvania.
They compared New Jersey and eastern Pennsylvania (neighboring New Jersey), where the latter is similar to New Jersey.
They surveyed fast-food restaurants (typical low-income jobs)
Their results showed a significant increase in wages in New Jersey.
The employment rate decreased in Pennsylvania and increased in New Jersey
Potential explanations include a reduction in labor costs (e.g., other benefits), increased productivity, and/or increased price of the products

Question 34

Life satisfaction and working

Answer 34

Income and employment status (besides health) are typically key factors to explain life satisfaction

Question 35

Experience utility and working

Answer 35

Reported happiness is likely to be affected by the respondent’s attention
at the time of responding.

Experience sampling method
People are stopped at certain times to make notes of their experience
in real-time.
A rich description of moments in people’s lives without problems of recalling. However, it is expensive and involves a high burden on people as well as provides little information about uncommon or brief events.
Interruption of an ongoing experience.

Day reconstruction method
People are asked retrospectively about their experiences during the day.
Recall bias

Question 36

U-index

Answer 36

The net effect is calculated as the average of the positive categories (happy, warm, enjoying myself) less the average of the six negative categories

U-index stands for “unpleasant” or “undesirable”.

U-index shows the proportion of time (aggregated over respondents) where the highest indicated feeling/emotional state was negative.

“It does not matter if Tim uses the 2 to 4 portion of the 0 to 6 intensity scale and Jim uses the full range. As long as they both employ the same personal interpretation of scales to report the intensity of positive and negative emotions, the determination of which emotion was strongest is unaffected (ignoring ties).” p. 19