Final Exam Open Questions Flashcards
What are the potential effects of a recession on the labor supply decision of a primary
earner? secondary earner?
In a recession, wages are likely to go down (in real terms).
Added worker effect: worker enters the labor market if the income effect dominates.
Discouraged worker effect: worker leaves the labor market or reduces hours is substi-
tution effect dominates. Primary earners are more likely to experience the discouraged
worker effect whereas secondary earners are more likely to be added workers
What is the impact of an increase in the minimum wage on employment and unemploy-
ment?
An increase in minimum wage cannot decrease unemployment. In a compet-
itive market an increase in minimum wage can lead to an increase to unemployment
if minimum wage is binding and this would correspond to a decrease in employment.
In some non-competitive setting things could be different. if the firm is a monopsonist,
minimum wage could lead to increase in employment, although this would happen only
if unemployment is zero, i.e. the firm hires on the labor supply curve
If children are a normal good why has fertility (per family) decreased in the last decades?
Individuals are wealthier: positive income effect. Female wages are higher and chil-
dren require time : negative substitution effect. The substitution effect dominated and
households have fewer children now. Partial credit to those talking about quantity qual-
ity trade-off and decreased child mortality
Is the EITC (Earned Income Tax Credit) likely to achieve the goal of an increased
participation rate in the labor market among those to benefit from it?
The EITC will
encourage people to work because it increases the wage rate for those with low levels
of earnings. For those not working, if the higher per hour pay rate is higher than
reservation wage, it moves them into working.
What happens to total employment if the minimum wage goes up and the market is
competitive?
If the minimum wage is above the equilibrium wage, an increase would
decrease employment level and increase unemployment
What happens to total employment if the minimum wage goes up and there is only one
firm in a particular labor market (monopsonist)?
If the minimum wage is above equi-
librium wage but below what would be competitive market employment will increase. If
the minimum wage is high enough (aka above the equilibrium wage), MW will still lead
to unemployment.
What is the effect of EITC on single-earner versus dual-earner household members
?
Because EITC eligibility is determined based on household not individual earnings,
single earners are more likely to be on the phase-in segment of the EITC, where the
substitution effect of EITC outweights income effect and increases labor supply. Dual-
earners are more likely to be on phase out, meaning the EITC will actually incentivize
them to work less (similar to TANF)
A certain number of immigrants enters in the UK labor market. Assume these immi-
grants are perfect substitutes to native workers. What happens to wages in the short
run? And in the long run? Why?
In the short run, the labor supply curve shifts to
the right implying that the total number of workers increases and the wage decreases
(but the number of employed natives goes down). Because the ratio capital/labor goes
down, the marginal product of capital is likely to increase, making it optimal to increase
the investment level in the economy. The increase in capital will increase the demand
for labor as well, shifting the labor demand to the right as well. Assuming constant re-
turns to scale, In the long run this shift will perfectly offset the increase in labor supply,
so that the wage goes back to the pre-immigration level
Suppose that natives and immigrants are substitutes in the production of goods. If we
are hit by a large wave of immigrants, what will happen to the wages of natives in the
long run?
Assuming a CES utility function as described in class, wages will remain
constant because the scale of the production and the amount of capital would adjust
in such a way that the whole economy will just increase by the same percentage of the
increase of the labor supply
If natives and immigrants are complements in the production of goods, what will hap-
pen to the wage of natives in the short run?
More immigrants will boost the productivity
of natives and therefore the demand for them will go up. There will be more employ-
ment and higher wages for natives
Why are wages and (good) job amenities normally positively correlated in the data?Give
an example of a research study that dealt with this spurious correlation to find the
true causal relationship between amenities and wage.
Compensating differentials are
masked by strong ability biases. More able workers have larger wages and with their
larger income they also buy job amenities, creating a spurious correlation in the data.
One example of a study that addressed ability bias was the study that used the expan-
sion of the ACA where it allowed people to stay on their parents’ health insurance until
age 26. They compared outcomes for workers who were just under and over 26 pre-
and post- ACA expansion and showed that people selected into jobs and education
that didn’t have health insurance, but were beneficial in other ways (e.g., more likely to
become entrepreneurs)
Suppose that the average worker dislike dangerous jobs and suppose that the average
wage for a dangerous job is lower than the average wage for a safe job. What might
explain this ‘inconsistency’?
The wage paid in the risky job is determined by the valuation of risk of the marginal
worker (i.e., the last person hired into the risky job), not the average worker in the
population. If only a small number of workers are needed in the risky job and there
are some workers who are risk lovers, the group of workers hired will take a wage cut
to accept the job even though the typical worker in the economy would need a wage
premium.
Bad job characteristics should be associated with high wage rates, yet the data does
not support this statement frequently. Can you explain why?
Ability bias and hetero-
geneity of preferences could explain this. In particular the first as more productive
workers tend to elect into better jobs with better job characteristics.
True or False and explain why: The risk premium is the average price workers are
willing to accept the risk for.
In general this is not true. the risk premium is the marginal
price workers are willing to accept the risk for, i.e. the premium that the marginal
worker, the last worker to be hired, needs to receive in order to accept the job. In
general therefore the average price workers are willing to accept would be lower as the
most risk adverse worker is the last one to enter in the market.
