Labor Market Flashcards
Describe Four Properties of Indifference Curves.
(i) Convex to the origin, bowed inward towards to origin, reflects the concept of diminishing marginal utility.
(ii) Slope, the slope is downward sloping and represents the rate at which a consumer is willing to trade one good over another.
(iii) Non- Intersecting, indifference curves do not cross, it would imply indifference between two bundles of goods.
(iv) Transitivity, bundles are arranged consistently, consumer prefers a to b to c.
What happens to hours worked if wage rate increases.
The Income Effect will cause hours worked to decrease. The Substitution Effect will cause hours worked to increase.
Factors that affect the demand for labour.
(i) Level of economic activity, (ii) technology, (iii) wage rates
Can the minimum wage be seen as a price floor?
Yes because it is the minimum price a firm has to pay for labour.
Define Human Capital.
Human Capital is the knowledge, skills and capabilities held by the workforce which contribute to productivity levels. Examples include formal education and training or cognitive and social skills.
Converging Cobweb Model.
Assumes markets have adapted to expectations regarding prices.
Utility Function.
Measures how desirable combinations between work and leisure are. U=f(C,L)
The Budget Constraint.
= (hourly Wages) (Hours worked) + (non labour hours worked (V))
At the optimal level of consumption and leisure …
The slope matches the slope of the indifference curve.
What happens when wages are reduced.
The income effect will cause workers to increase their hours at work. The substitution effect will cause workers to decrease their hours worked because the reward is reduced.
Lower income
Usually the substitution effect is stronger, studies show that a percentage of people will find in more beneficial to stay on the dole rather than work.
Increase in wages
Income effect starts to become stronger.
MRS
MRS refers to the rate one is willing to substitute one good over another in order to keep satisfaction consistent, this will depend on individual preferences.
Outline how a back bending labor supply curve may arise.
The substitution effect initially effects the demand curve but it begins to backbend when the income effect comes into play.
Participation Tax Rate.
as an individual begins to have additional earning they experience a loss in government benefits as their income increases, which reduced incentive to work (losses/increased income)
E
Income tax in competitive labor market
Falls mainly on the worker, as they are being payed a competitive wage, as a result they may demand higher wages.
Income tax in a non competitive labor market
If employers are already paying minimum wage they are forced to absorb most of the tax burden in the form of losing profits.
Four reasons why labor market fail to allocate labor efficiently
imperfect competition, government intervention, market power, externalities.
Replacement Rates.
Net income unemployed / net income employed, used to measure unemployment traps, an unemployment trap occurs when someone earns more money being unemployed vs employed. This disincentives work.
Firms utility function
q=f(employees hired, capital)
Signaling theory of education and policy implications.
Signaling theory suggests that education serves as a signal to employers about an employees productivity. This can lead to higher paying jobs and better job opportunities. In terms of policy, this theory can suggests that by making education more accessible, the government can improve labor market conditions.
How did human capital contribute to Ireland economic growth during the Celtic tiger years.
(i) Investment into education (ii) brain gain (iii) openness to trade - increased multinationals - agglomeration effect.
Leisure and consumption decisions will have an indifference curve that is convex.
The indifference curve for a consumer who is choosing a combination of leisure and consumption will have an indifference curve convex to the origin because of the increasing opportunity cost and diminishing marginal utility of leisure. As a consumer opts for more leisure time they spend less time working which increases the opportunity cost. As the opportunity cost rises it leads to diminishing marginal utility and consumers will need to be compensated with additional consumption to make up for loss of leisure time.
What is meant by the marginal product of capital
The additional output that is produced by an additional unit of capital while holding all else constant.
What is meant by the marginal product of capital
The additional output that is produced by an additional unit of capital while holding all else constant.
Elasticity of labour
hours worked/ wage
Marginal Rate of Technical Substitution
Marginal Product of Labor / Marginal Product of Capital, high mrt means one more worker would make a bigger difference but a lower mrt means that another worker would make a lower difference
Scale Effect in terms of Wage Increase
The scale effect states that in result of one commodity (capital or labor) becoming more expensive the firm will respond by lowering output due to increase in MC. If wages increase, according to the scale effect, output would drop, making labor and capital gross compliments.
Substitution Effect in terms of Wage Increase
The substitution effect states that if one commodity becomes more expensive then the firm will invest more into the cheaper commodity. If wages increased this would mean the firm would employ more capital, making labour and capital gross substitutes.
1 Marshalls Theory of Derived Demand
Labor Demand elasticity is greater the more elastic substitution is, it is easier to change the mix of labour / capital the more firms are responsive to labour
