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Labour Economics > Unit 1 (Labour supply and Demand) > Flashcards

Unit 1 (Labour supply and Demand) Flashcards

1
Q

Labour force (LF)

A

LF = employed (E) + unemployed (U)

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2
Q

Labor Force Participation Rate

A

LFPR = LF/P

  • P = civilian adult population 16 years or older not in institutions
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3
Q

Employment Population Ratio (also called Employment Rate )

A

EPR = E/P

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4
Q

Unemployment Rate

A

UR = U/LF

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5
Q

Budget constraint

A

C =W(t-L)+V
C =Wh+V
- Consumption equals labor earning (wages × hours of work) plus
nonlabor income (V)

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6
Q

Optimal consumption

A
  • (MRS) between
    consumption and leisure equals the wage
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7
Q

The Effect of a Change in Nonlabor Income on Hours of Work

A
  • An increase in nonlabor income leads to a parallel, upward shift in
    the budget line, moving the worker
  • If leisure is a normal good, hours of work fall
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8
Q

The Effect of a Change in Nonlabor Income on Hours of Work

A

An increase in nonlabor income leads to a parallel, upward shift in
the budget line
- If leisure is inferior, hours of work increase.

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9
Q

More Work at a Higher Wage

A
  • When the substitution effect dominates the income effect, the
    worker decreases hours of leisure in response to an increase in the
    wage.
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10
Q

Reservation wage

A

The lowest wage rate that would make the
person indifferent between working and not working

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11
Q

Reservation Wage rules

A
  • Rule 1: If the market wage is less than the reservation wage,
    then the person will not work.
  • Rule 2: The reservation wage increases as non-labor income
    increases.
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12
Q

Labour supply Curve

A
  • Relationship between hours worked and the wage rate.
  • At wages above the reservation wage, the labor supply
    curve is positively sloped (the substitution effect dominates the
    income effect).
  • If the income effect begins to dominate the substitution, hours
    of work decline as the wage rate increases (a negatively sloped
    labor supply curve).
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13
Q

Labor Supply Elasticity

A
  • The labor supply elasticity (σ) measures responsiveness in hours
    worked to changes in the wage rate.
  • < 1 = inelastic
  • > 1 = elastic
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14
Q

σ

A
  • Percent change in hours worked divided by the percent
    change in wage rate
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15
Q

Policy Application: Welfare Programs and Work Incentives

A
  • Cash grants reduce wage incentives.
  • Welfare programs create work disincentives.
  • Welfare reduces supply of labor by increasing non-labor income,
    which raises the reservation wage
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16
Q

Policy Application: The Earned-Income Tax Credit (EITC)

A
  • Tax credit of up to 40 percent of the earnings as long as the
    worker earns less than $14,040 per year;
  • The EITC encourages some nonworkers to start working and
    never encourages a worker to quit working
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17
Q

Labor Supply Over the Life Cycle

A
  • Wages are low when young.
  • Wages rise with time and peak around age 50.
  • Wages decline or remain stable after age 50
18
Q

Added worker effect

A
  • When non worker joins the workforce due to bread winners unemployment, to stabilise household income
  • e.g. house wife picks up part time work
  • added worker effect is countercyclical
19
Q

Discouraged worker effect

A
  • Unemployed workers find it very difficult to find jobs during a
    recession, so they give up searching.
  • Discouraged workers exit the labor force during bad times.
  • The labor force participation rate of discouraged workers is pro-
    cyclical.
20
Q

Welfare programs

A

Welfare programs create work disincentives because they
provide cash grants to participants as well as tax those
recipients who enter the labor market. In contrast, credits on
earned income create work incentives and draw many
nonworkers into the labor force.

21
Q

Firm’s production function

A

q=f(E,K)

22
Q

profit function

A
  • Profits = pq − wE − rK
  • Total Revenue = pq
  • Total Costs = (wE + rk)
23
Q

Value of Marginal Product of Employment

A

VMP(E) is the
marginal product of labor times the dollar value of the output

24
Q

Maximizing Profits

A

-Profit Maximization: A firm should produce until the cost of one more unit (marginal cost) equals the revenue from that unit (marginal revenue).
- Marginal Productivity Condition: Hire workers until the value of their output matches their wage.

25
Q

The cost of producing an extra unit of output

A

MC = w x (1/MPe)

MC = Marginal cost
w = wage
MPe = marginal product of labour

26
Q

Critiques of Marginal Productivity Theory

A
  • bears little relation to the
    way that employers make hiring decisions.
  • assumptions of the theory are not
    very realistic.
  • However, employers act as if they know the implications of
    marginal productivity theory
27
Q

Isoquant curves

A

-describe the possible combinations of labor
and capital that produce the same level of output

28
Q

Isocost Lines

A

The isocost line indicates all labor–capital bundles that exhaust
a specified budget for the firm

29
Q

Costs

A

C= wE +rK

30
Q

Slope of isocost

A

equals the ratio of input
prices (−w/r)

31
Q

Firm cost minimisation

A
  • firms costs are minimised where the isoquant is
    tangent to the isocost
  • MRS = w/r
  • MPE / MPK = w/r
  • MPE/w = MPK/r
32
Q

Long-Run Demand for Labor (wage drop)

A
  • Scale effect
  • Substitution effect
33
Q

Scale effect

A
  • The firm takes advantage of the lower price of labor by
    expanding production
34
Q

Substitution effect

A
  • The firm takes advantage of the wage change by rearranging its
    mix of inputs, by employing more labor and less of other inputs,
    even if holding output constant
35
Q

Elasticity of Substitution

A
  • percentage change in
    the capital-to-labor ratio given a percentage change in
    the price ratio
  • %∆(K/L) ÷ %∆(w/r)
36
Q

Marshall’s Rules

A

Labor Demand is more elastic when:
- The elasticity of substitution is greater.
- The elasticity of demand for the firm’s output is greater.
- Labor’s share in total costs of production is greater.
- The elasticity of supply of other factors of production such as
capital is greater.

37
Q

Cross-elasticity of factor demand

A
  • Percent change in Qx/ percent change in Py
  • Qx is the original quantity of factor x
  • Py is the original price of factor y
  • If cross-elasticity is positive, the two inputs are said to be
    substitutes in production
38
Q

The Demand Curve for a Factor of Production (input i) Affected by the
Prices of Other Inputs

A
  • price of substitutable input rises, the demand curve for
    input i shifts up
  • price of a complement rises, the demand curve for
    input i shifts down.
39
Q

The Employment Effects of Minimum Wages

A
  • The unemployment rate is higher the higher the minimum wage the more elastic the labor supply and demand curves are.
  • The benefits of the minimum wage accrue mostly to workers
    who are not at the bottom of the distribution of permanent
    income
40
Q

Market types

A
  • Monopsony: one buyer of labor
  • Monopoly: one seller of labor

Labour Economics (11 decks)

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