Labour Y2 Autumn Exam Flashcards
Factors determining individual supply of labour
preferences for leisure vs goods + services.- how much money person can earn in labour market.- how much wealth individual has.
Changes in wage rate effects
- Substitution effect. 2. Income effect.
Substitution effect
- change in wage rate => change in price of leisure.
- budget line rotates.
- reduced DEMAND for leisure => increase hours worked.
- increase wage = increase market productivity relative to home productivity = more hours of work.
Income effect
Change in income affects demand for products.
- wage increases wealth.
- increase in wealth => greater consumption of ‘normal goods’.
- budget line shifts - no change in slope.
- depends on preferences whether more home production or more leisure.
Elastic supply of labour
Wage increase.
- fewer barriers to entry: skill/ education/ training time req/ unions/ internal labour.
- lower preference for leisure.
- lower individuals wealth.
- most power in labour market.
Inelastic supply of labour
Wage decrease.
- more employment alternatives elsewhere in market.
- greater wealth = greater preference for leisure.
Labour demand
Q = F(L,K).
Q = quantity of output.
L = labour.
K = capital.
Short-run demand for labour
- firms can only vary labour to change output.
- technology is fixed.
- product price doesn’t change.
Marginal product of labour (MPL)
Additional output produced with 1 additional unit of labour.
Marginal revenue (MR)
Additional revenue generated by selling 1 additional unit (= product price in a competitive economy).
Marginal revenue product of labour (MRPl)
Extra revenue generated by selling 1 additional unit that can be attributed to labour.
MRPl = (MPl)*MR.
Marginal cost of labour
- cost of hiring 1 additional unit of labour (= wage in competitive economy).
Decision rule for employment level
firms hire up to point where MRP from hiring last worker = marginal cost of that worker.
If MRPl > MCl
Increase employment/ firm should hire.
Efficiency wage point
MCl = MRPl Or MCl = MRMPl.
In competitive economy - MCl = W and MR = P.
W = MPlP.
W/P = MPl.
Real wage must = marginal productivity.
Give the simplest budget constraint
C = wh + V which can also be written as C = w(T-L) + V
What does sigma represent?
the elasticity of labour supply
When will the substitution effect dominate?
if sigma is positive
Which way is the labour supply curve sloping if sigma is positive and the substitution effect dominates?
upward sloping
When will income effects dominate?
if sigma is negative so the labour supply curve would be downward sloping
Give an equation for profit
pi = pq - wE - rK
Give an equation for value marginal product of labour
VMPsubscriptE = p X MP subscriptE
Give an equation for the value average product of labour
VAPsubscriptE = p X AP subscriptE
Name four characteristics of isoquants
downward sloping, do not intersect, higher isoquants have a higher q and convex to the origin
What is the slope of the isoquant given as?
triangle K / triangle E = -MPsubscriptE/MPsubscriptK = Marginal Rate of Technical Substitution
What are the firm’s costs of production given as?
C = wE + rK
What does profit maximisation require?
w = p x MPsubscriptE and r = p x MPsubscriptK
Why is it difficult to estimate the effect of minimum wage on employment?
because it is difficult to provide experimental evidence
What 2 things does the simplest immigration model assume?
a single type of worker (so natives and migrants are perfect substitutes) and a fixed capital stock (so short run analysis)
What does Borjas argue about how we should look at the effects of migration?
not across locations but across skill-experience groups
What is the workers surplus given as?
w-w^r
What is the firm’s surplus given as?
y-w where y is the value marginal product
What is the total surplus in the labour market given as?
(y-w) + (w -w^r) = y - w^r
What is the present value of an amount y received in t years time?
y/(1+r )^t (where r is the interest rate/ discount rate)
What is the present value of an income stream of someone who has high school level qualifications given as?
PV subscriptHS = WsubscriptHS + WsubscriptHS/ (1+r)^2+……
Under what condition will someone chose to go to university?
PVsubscriptcol > PVhs
Name three characteristics of the wage schooling locus
upward sloping, the slope gives us the effect of an extra year of schooling on wage and concave
Name two reasons why people have different levels of education
because individuals differ in their discount rates,r, and because individuals differ in their marginal rate of return to education
How do we calculate the proportionate effect of another year of education and give an appropriate approximation
wsubscript(s)-wsubscript(s-1) / wsubscript(s-1) = (squiggly equals) logwsubscript(s)-logwsubscript(s-1)
What is ability bias?
the idea that individuals who would earn more anyway invest more in education
What is selection bias?
the idea that individuals who gain more from education invest more in schooling
What do Angrist and Krueger estimate?
that the returns to schooling are similar to the estimate of the log-linear regression
What is the signalling model?
education signals pre-existing differences in productivity and employers use the signal to infer the productivity of the worker because employers cannot tell whether a worker is high or low productivity
What did Spence say?
suppose that there are two types of worker, low productivity (L) and high productivity (H) and worker type is predetermined (nothing to do with education), the proportion of L is q so the proportion of H is 1-q, L has a productivity of Wsubscript(l) and H have a productivity of wsubscript(H), since there is not perfect information employers do not pay wages directly equal to productivity and instead pay Wsubscript(p) =qwsubscript(L)+(1-q)wsubscript(H) which means that Wsubscript(L) < Wsubscript(p) < Wsubscript(H)
Where does the separating equilibrium occur?
if H worker choses y>=y with a hat on (the threshold years of education for certain amount of pay) and L worker choses y < s with a hat
Under what condition does separating equilibrium occur?
if the cost of acquiring education is greater for L than H
What is a general training programme?
a programme which increases a worker’s marginal product by exactly the same amount in many firms
Who asserted that firms have no incentive to invest in general training because other firms could poach their employees?
Becker
What did Becker argue about the costs and benefits of training?
the costs and returns to investments of specific training should be shared between the firm and the worker since it incentivises the both parties to not terminate the relationship since a cost would be imposed on them
Why should investment into human capital happen in the earlier stages of life?
because the benefits are accrued over the rest of your life and as you get older the benefits fall, which is consistent with age-earnings having a concave graph
Discuss whether the less able benefit less from education than the more able
Herrnstein and Murray argued that school does not ‘‘raise intelligence’ or ‘‘reduce intellectual difference’’ but Ashenfelter and Rouse found there to be very little evidence for this, also use the graph with low, middle and high ability
What does the straight line on the Lorenz curve represent?
perfect equality
Name four types of inequality that have increased in almost all countries since the 1970s
between more and less educated workers, between older and younger workers, between managerial and production workers
Name four reasons that have been suggested as explanations for the increase in inequality
globalisation, skill-biased technological change, labour supply changes, labour market institutions
Explain the concept of skill-biased technological change
new technology increases the productivity of highly-skilled workers and/or tech reduces the need for low skilled workers
Explain labour supply change
lower high skilled supply because of a decline in the size of a cohort and a glut in low skilled labour due to increased immigration
Explain labour market institutions
erosion of institutions which protected wage/ employment of lower skilled workers such as trade unions, minimum wages, zero hour contracts
What is the Heckscher-Ohlin framework?
countries export goods which use intensively the factors of production with which they are relatively abundantly endowed, and import goods that use factors that are relatively scarce at home: developed countries export goods which use skilled labour intensively and import goods which use unskilled labour intensively so trade increases demands for skilled labour in developed countries- in the extreme case we would observe factor price equalisation (unskilled labour would be paid the same globally, as would high skilled)
By how much has merchandise trade grown per year between 1950 and 1973, as evidence of globalisation?
8.20%
Name four reasons why a significant amount of papers between the 1990s and 2000s concluded that international trade was unlikely to be the primary cause of increases in inequality
timing, increasing inequality in developing countries as well (despite Heckscher-Ohlin predicting that trade would reduce this), within-industry increases in demand for skilled workers and increases in inequality in the services sector
Who wrote about ‘The China Syndrome’ and what is it?
Autor Dorn and Hansen: measured the industrial structure of lots of different geographical regions of the US before China entered the WTO and found that areas which were more exposed to Chinese imports suffered larger employment and wage falls
Who found that in 1993 computer users earned 15-20% more?
Krueger
Are globalisation and technology linked?
yes, globalisation can improve technology through sharing of ideas and increase competition which improves innovation
What is the steady state unemployment rate?
U/L = I/I+h so is a function only of job loss and job finding rates
What factors does whether you reject W0 depend on?
the probability of getting a better offer (p(w>w0)), the expected value of a better offer compared to the current offer (E(w|w>w0)-w0, how long it takes to receive another offer (the offer arrival date), how heavily the future is discounted
Fill the gaps: a high offer arrival rate ……….. the benefit of search
increases
Name 2 things that having a higher reservation wage implies
longer unemployment duration and higher post-unemployment wages
What is meant by ‘‘negative duration dependence’?
the longer someone is unemployed, the less employable they become, so the longer they are unemployed (loss of skills, networks, motivations, employers may discriminate)
What were the 2 important unemployment policy developments in the 1990s?
Job seeker’s allowance and the new deal (targeted youth unemployment) were introduced with the intention of reducing reservation wage and increasing job search intensity
When was job seeker’s allowance introduced?
in October 1996 to replace UB and IS
What changes were made to the eligibility criteria for JSA?
the job-seeker’s agreement, fortnightly interviews and sanctions
Fill the gaps: JSA reduced the ….. …… by increasing the …… …….
claimant count, outflow rate
Who found, using a difference-in-differences approach, that the outflow rate to employment was not significantly increased by JSA suggesting that low search-intensity unemployed people may have just been removed from the claimant count?
Manning
What did the New Deal offer young people in some areas?
the option to get subsidised jobs, education and training, enter the voluntary sector or the environmental task force
unemployment insurance payment in reservation wages
Unemployment insurance reduces the incentive for individuals to seek a job. Many individuals will not want to work as they are able to earn income from the employment insurance policy. As a result, reservation wages will increase when for an individual who obtains unemployment insurance payments
difference-in-difference comparison in labour market
used to determine the effect of a labour market policy on the level of employment and the profitbaility of firms by comparing the results before and after that policy has been introduced
dynamic model of job search
A model of job search in which individuals assess various factors over an extensive period, such as wage, job security, leisure time, etc., when deciding to apply for a job
accepting or rejecting a job offer using dynamic model of job search
an individual chooses to accept the job offer taht meets most of their main criteria when looking for a job. On the other hand, job offers are rejected if they preven the individual from fulfilling their expectations.
rate of return of education
improved ability if an individual to earn higher wages as opposed to a scenario without higher education
human capital
represents unique skills, knowledge, eductaion etc. tah tan individual possesses
wage differntial
wages of “older” workers are typically greater than teh wages of younger workers due to higher levels of experience, skills, and knowledge
Present value
PV=FV/(1+i)^t, where FV is the future value, i is teh discount rate, and t us tge number if years
discount rate
used to calculate the present value of investing in education; negative correlation between the level of earnings and the value of discount rate.
wage-schooling locus
depicts the relationship between the level of wages and the corresponding level of education in the market
value marginal product of labour
represents the additional revenue that is obtained by hring an additional unit of labour
profit maximization
when a company is maximising its profits, the company is not able to increase its profits by producing more quantity of output. fromula: pi= pq - wL - rK
production function
the function of various quantities of labour and capital a firm uses to produce goods and servicesformula: q=f(L,K)
value average product of labour
represnts the average value of output (revenue) a qworker is able to produce in a firm.
Isocost
every combination of inputs that generate the same costs.formula: C=wL +rK
Capital-skill complementarity hypothesis
unskilled labor and capital are gross substitutes, while skilled labor and capital are gross complements- even if not fully, empirical evidence makes strong case that unskilled workers and capital much easier to substitute than skilled workers and capital
technological change and labour demand
an increase in the level of technology reduces employment levels in the short run but does not affect the employment level in the long run
