ECON 301 (18 points)
Labour Economics
COURSE OUTLINE
Semester One, 2014
Contents
Paper Description and Aims .............................................................................................................. 1
Learning Outcomes .......................................................................................................................... 1
Teaching Staff .................................................................................................................................. 1
Course Delivery ................................................................................................................................. 1
Expectations and Workload .............................................................................................................. 3
Course Learning Resources ............................................................................................................... 3
Blackboard .................................................................................................................................... 3
Student Webmail .......................................................................................................................... 3
Assessment....................................................................................................................................... 4
Course Requirements .................................................................................................................... 4
Quality Assurance ......................................................................................................................... 4
Grading System ............................................................................................................................ 5
Dishonest Practice and Plagiarism ................................................................................................ 5
Course Calendar................................................................................................................................ 6
Student Learning Support and Information ...................................................................................... 9
Student Charter ............................................................................................................................ 9
Guidelines for Learning at Otago .................................................................................................. 9
Student Learning Centre ............................................................................................................... 9
Library Support ............................................................................................................................. 9
Māori Student Support ............................................................................................................... 10
Pacific Islands’ Student Academic Advisor .................................................................................. 10
Disability Information and Support ............................................................................................. 10
Student Feedback ........................................................................................................................... 10
Class Representatives ................................................................................................................. 10
Concerns about the Course ..........................................................................................................11
Disclaimer ........................................................................................................................................11
Tutorial questions ............................................................................................................................13
Assignment ..................................................................................................................................... 25
Supplementary Readings ................................................................................................................ 29
Paper Description and Aims
Labour economics studies how labour markets work. The labour market is undoubtedly the most
important market that impacts directly on almost all of us for a significant period of our lives. This
course aims to introduce students to key theories, issues and problems in the analysis of labour
markets. It uses some elementary microeconomic and macroeconomic theory to increase
understanding of labour demand, labour supply and labour market outcomes. It addresses issues
associated with changes in participation rates, the effect of minimum wage rates, the impact of
unions, income inequality, labour market discrimination, unemployment (its causes and
consequences) and also looks at an historical analysis of New Zealand’s labour market legislation.
The internal assessments and final exam will test whether or not the student can analyse issues in
labour economics critically using relevant economic principles and theory.
Learning Outcomes
Upon successful completion of this paper, students should have a general understanding of how
labour markets operate. Students should develop both knowledge and appreciation of applying
general economic principles and theory in evaluating behaviour and interactions in the labour
market. Related to this, students should be able to use quantitative data and develop qualitative
analysis to explain how labour market outcomes change over time. Students should learn to analyse
current issues and policy debates in this area and be able to assess and critique labour market
policies from a more knowledgeable perspective.
Teaching Staff
Paper Coordinator and Lecturer
Name:
Dr Arlene Ozanne
Office:
Rm 7.28 Commerce Bldg.
Email:
[email protected]
Office Hours: to be advised
Course Delivery
Lecture Day/Time: Tuesdays and Thursdays @ 11:00 – 11:50
Room: Check PIMS
Tutorials and/or Labs Day/Time: Check PIMS
Lectures present the key conceptual material through discussion and interaction between teaching
staff and students. Lectures are supported by readings.
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Tutorials are interactive, collaborative sessions in which students attempt to cement concepts
presented at lectures with their peers in a supportive environment.
Tutorials will be held every second week (adjusted for the mid-semester break week), starting in the
third week of the semester. That is, tutorials will be held on the weeks beginning:
March 10th
March 24th
April 14th
April 28th
May 12th
May 26th
You will be allocated to a tutorial and this will be available in your PIMS. Tutorial times and
locations will be posted on Blackboard during the first week of lectures.
Tutorials offer you the opportunity to work in groups on a series of tasks designed to apply the
concepts that you have been exposed to in class and from your reading, and to stimulate your
interest in the course as it applies to “everyday” issues. The key feature of tutorials, as opposed to
lectures and individual study, is participation of all members of the tutorial group. Please prepare
for tutorials before going to them.
What to do if you miss a lecture or tutorial
If you miss a lecture, you can obtain a copy of the lecture slides from Blackboard. Note however,
that the slides only provide an outline of what was covered in lectures. You should fill these out by
doing the relevant reading, considered to be an essential part of the training you gain from a
university education.
If you miss a tutorial, try to attend another tutorial group for that week. If that is not possible, have
a go at doing the questions and come and discuss them with the lecturer. Note that model answers
to tutorials will not be made available. One reason for this is that providing model answers would
create a disincentive to participate fully in tutorials.
Course Calendar The course calendar (in this outline) details scheduling information. Note that this
calendar may change as the course proceeds. Any changes will be announced at lectures and be
detailed on Blackboard.
Students are expected to prepare for and attend all classes to gain full benefit from the course
These activities should be prepared for by reviewing information detailed on Blackboard and
completing any assigned readings. Students unable to attend a lecture are expected to catch up on
missed material. Unless stated otherwise, all aspects of the course are examinable.
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Expectations and Workload
ECON 301 is a first semester 18-point paper. Note that under the University’s point conventions, an
18-point paper corresponds approximately to 12 hours per week, or roughly 180 hours of total
workload (including classes and private study time) over a 15-week period (including the end-ofsemester exam period).
Course Learning Resources
The text for this course is Labor Economics, 2013, 6th edition, by George J. Borjas, McGraw-Hill Irwin.
Two copies of this book will be on the Reserve Desk. This text will cover most aspects of the course,
however, when supplementary reading is needed, you will be given photocopies of the material
(free of charge!).
The references in the course will be based on the latest, i.e. 6th edition of the text, but students may
also use the Labor Economics, 2010, 5th edition, by George J. Borjas, McGraw-Hill Irwin. However, it
is the students’ responsibility to confirm the corresponding page numbers in the earlier edition of
the text.
Blackboard
Blackboard https://blackboard.otago.ac.nz/ provides you with access to course materials, class
notices, and resources. Blackboard is used to email the whole class so it is important that you check
your student email and Blackboard regularly.
Student Webmail
IMPORTANT - DO THIS NOW:
Forward your University email address to an email address that you use regularly as follows:
1. Log into your StudentMail account using your student username and password
2. Click Cog button (top right corner) > Options
3. Under Account, select the Forward your email shortcut under the Short Cuts menu on the
right side of the screen.
4. At the bottom of the screen, type in the email address you want your email to be forwarded to.
You can also choose to have a copy of these emails kept on your StudentMail account, so
please check the box if you would like this.
5. Click the Start forwarding link at the bottom of the page.
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Assessment
All material presented is examinable (except where stated otherwise) by assignments, tests and the
final examination. All important assessment information such as due dates and times, content,
guidelines and so on will be discussed at lectures and, where appropriate, detailed on Blackboard.
Students are responsible for ensuring that they are aware of this information, keeping track of their
own progress, and catching up on any missed classes.
Course Requirements
The final exam will make up 70% of your final mark, with the remaining 30% being made up of
internal assessment from a test and an assignment. There will be two internal assessment tests,
made up of multiple-choice and short-answer type questions. The tests will be held during lecture
time. Further details on the tests will be provided closer to the time. Some plussage will operate
but only on the tests; that is, only your highest mark from the two tests, worth 20%, will be
counted towards your final mark. The other 10% of your final mark will be made up of your
assignment mark.
Internal assessment tests (20%) – only your highest mark out of the two tests will count towards
your final mark.
Test 1 will be held on Tuesday, March 25th during lecture time.
Test 2 will be held on Thursday, May 1st during lecture time.
Assignment (10%)
Details on the assignment can be found at the end of this course outline.
There will be three assignment questions to choose from, but you are required to submit an answer
to ONLY ONE of the following questions by the due date specified. Place your answer in the mail
box marked “301 assignments” in the Economics Department (7th floor, Commerce Building).
Final exam (70%)
The final exam will be three hours long, and made up of a combination of multi-choice, and writtenanswer questions. The final exam will cover the whole course. The University will report the exam
timetable later in the semester.
Quality Assurance
At the Otago Business School we monitor the quality of student learning and your learning
experience. Your assessed work may be used for assurance of learning processes, such as
evaluating the level of achievement of learning outcomes, with the aim of improving the quality of
our programmes. All material used for quality assurance purposes will be treated as confidential
and the outcome will not affect your grades.
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Grading System
The grading scheme used at Otago is:
A+
A
AB+
B
B-
90-100
85-89
80-84
75-79
70-74
65-69
C+
C
CD
E
60-64
55-59
50-54
40-49
<40
Dishonest Practice and Plagiarism
Students should ensure that all submitted work is their own. Plagiarism is a form of dishonest
practice (cheating). It is defined as copying or paraphrasing another’s work and presenting it as
one’s own. Any student found responsible for dishonest practice in any piece of work submitted for
assessment shall be subject to the University’s dishonest practice regulations, which may result in
serious penalties, including forfeiture of marks for the piece of work submitted, a zero grade for the
paper, or in extreme cases, exclusion from the University. The University of Otago reserves the
right to use plagiarism detection tools.
Students are advised to inform themselves about University policies concerning dishonest practice
and take up opportunities to improve their academic and information literacy. If necessary, seek
advice from academic staff, or the Student Learning Centre. The guideline for students is available
at this link: http://www.otago.ac.nz/study/plagiarism/
The Library resource on ethical
http://oil.otago.ac.nz/oil/module8.html
use
of
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information
is
available
via
this
link:
Course Calendar
Week 1 – February 25th and 27th
Introduction and the Labour Supply
Course outline, objectives, etc.
An Economic Story of the Labour Market; Measuring the Labour Force; Basic Facts about Labour
Supply; The Worker’s Preferences; The Budget Constraint; The Hours-of-Work Decision; To
Work or Not to Work?; The Labour Supply Curve; Estimates of the Labour Supply Elasticity;
Labour Supply of Women; Policy Applications
Reading: Borjas (2013), chapters 1 and 2
Other readings relevant to this topic:
The Economist (2006) “Tough love works”, 29 July 2006, pp.13-14. [supplementary reading #1]
The Economist (2006) “From welfare to workfare”, 29 July 2006, pp.34-36. [supplementary
reading #2]
Week 2 – March 4th and 6th
Labour Supply continued
Labour Supply over the Life Cycle; Labour Supply over the Business Cycle; Retirement; Policy
Application: The Decline in Work Attachment among Older Workers; Fertility
Reading: Borjas (2013) chapter 2
Labour Demand
The Production Function; Employment Decision in the Short Run.
Reading: Borjas (2013), chapter 3 pp. 84-94.
Week 3 – March 11th and 13th
Labour Demand continued
Employment Decision in the Long Run; The Long-Run Demand Curve for Labour; The
Elasticity of Substitution; Marshall’s Rules of Derived Demand; Factor Demand with Many
Inputs; Overview of Labour Market Equilibrium; Policy Application: The Employment Effects
of Minimum Wages; Adjustment Costs and Labour Demand
Reading: Borjas (2013), chapter 3 pp. 94-106, 109-133, 139-143.
Week 4 – March18th and 20th
Labour Market Equilibrium
Equilibrium in a Single Competitive Labour Market; Competitive Equilibrium across Labour
Markets; Policy Applications; Immigration; The Cobweb Model; Noncompetitive Labour
Markets: Monopsony and Monopoly
Reading: Borjas (2013) chapter 4
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Week 5 – March 25th and 27th
Test 1: Tuesday, March 25th at 11am (during lecture time)
The test may examine all material covered in lectures or tutorials, and associated readings for
the first 4 weeks of the course.
Compensating Wage Differentials
The Market for Risky Jobs; The Hedonic Wage Function; Policy Applications; Compensating
Differentials and Job Amenities
Reading: Borjas (2013) chapter 5
Week 6 – April 1st and 3rd
Human Capital
Education in the Labour Market; the Schooling Model; Education and Earnings; Rates of
Return to Schooling;
Reading: Borjas (2013) chapter 6 pp. 235-262.
Week 7 – April 8th and 10th
Human Capital continued
Schooling as a Signal; On-the-Job Training and Age-Earnings Profiles.
Reading: Borjas (2010) chapter 6 pp. 262-287.
Other readings relevant to this topic:
Heady, B. and Warren, D. (2008). Families, Incomes and Jobs, Volume 3: A Statistical Report on Waves
1 to 5 of the HILDA Survey, Melbourne Institute of Applied Economic and Social Research, The
University of Melbourne, pp. 89-92. [supplementary reading #3]
The Wage Structure
The Earnings Distribution; Measuring Inequality; The Wage Structure; Why has Wage
Inequality Increased; Inequality Across Generations
Reading: Borjas (2013) chapter 7
Recommended Reading: Maré, David C. and Steven Stillman. 2010. "Passing it on: The
intergenerational transmission of human capital in New Zealand families," Families Commission
Research Fund report, Families Commissions, Wellington. [available from Blackboard]
Week 8 – April 15th and 17th
Labour Mobility
Types of Labour Mobility; The Determinants of Migration; The Decision to Migrate; The
Economic Benefits from Migration.
Reading: Borjas (2013) chapter 8
Week 9 Mid-semester break (April 18th to 25th)
Week 10 – April 29th and May 1st
Note: No lecture on Tuesday, April 29th.
Test 2: Thursday, May 1st at 11am (during lecture time)
The test may examine all material covered in lectures or tutorials, and associated readings
from weeks 4 to 8 of the course.
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Week 11 – May 6th and 8th
Labour Market Discrimination
Race and Gender in the Labour Market; The Discrimination Coefficient; Different Theories of
Discrimination; Measuring Discrimination; The Oaxaca Decomposition; Policy Applications;
Discrimination Against Other Groups
Reading: Borjas (2013) chapter 9
Other readings relevant to topic 6 include:
Alexander, W.R.J. and Williams, J.R. (2001) “A Critique of ‘Maori Socio-Economic Disparity’”,
New Zealand Population Review, 27, pp. 27-35. [supplementary reading #4]
Alexander, W.R.J., Genc, M and Jaforullah, M. (2001) “Maori Disadvantage in the Labour
Market”, University of Otago, Department of Economics Discussion Paper No. 0108, 22pp.
[supplementary reading #5]
Alexander, W.R.J. (2001) “Ethnic Gaps and Ethnic Ratios”, Political Science, 53, pp. 29-32.
[supplementary reading #6]
Week 12 – May 13th and 15th
Labour Market Discrimination (continued)
Reading: Borjas (2013) chapter 9
Other readings relevant to this topic:
Alexander, W.R.J. and Williams, J.R. (2001). [supplementary reading #4]
Alexander, W.R.J., Genc, M and Jaforullah, M. (2001). [supplementary reading #5]
Alexander, W.R.J. (2001). [supplementary reading #6]
Week 13 – May 20th and 22nd
Labour Unions
Unions: a Brief History; Determinants of Union Membership; Monopoly Unions; The Effects of
Unions; Public-Sector Unions.
Reading: Borjas (2013) chapter 10
Other readings relevant to this topic:
Dalziel. P. and Lattimore, R. (2004) [supplementary reading #7]
Week 14 – May 27th and 29th
Revision/Catch-up
Lectures end Friday 30 May 2014
University Exam Period First Semester Begins Saturday 31 May
End 18 June 2014
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Student Learning Support and Information
Student Charter
http://www.otago.ac.nz/about/otago005275.html
Guidelines for Learning at Otago
http://hedc.otago.ac.nz/hedc/wp-content/uploads/2012/12/Guidelines-for-Learning.pdf
http://hedc.otago.ac.nz/hedc/learning/
Student Learning Centre
The Student Learning Centre, which is part of the Higher Education Development Centre, provides
learning support, free of charge, to ALL enrolled students. Their services include:
 a workshop programme designed to help students to improve their learning strategies and their
generic skills;
 individual assistance with learning issues;
 on-line study skills advice;
 a student leadership programme
 a student-led peer support programme for students of all ages and backgrounds.
 conversational English groups for students from a non-English speaking background
The Centre also provides two very helpful study guides, “Guidelines for Writing and Editing” and
“Writing University Assignments” and these are available on the SLC website.
http://hedc.otago.ac.nz/hedc/learning/
Library Support
The University Library provides online resources for students. These include subject guides, and
other research resources, and citation styles. Check it out at:
http://www.otago.ac.nz/library/for/undergraduates/index.html
The Library website http://www.library.otago.ac.nz/index.php provides online access to resources
and services, including group room bookings, library hours and locations, past exam papers,
subjects guides and more.
From your mobile: http://m.otago.ac.nz/library/
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Māori Student Support
Tënā koutou katoa,
Ko Corey Bragg töku ingoa
Ko Ngāi Tahu, Kāti Mamoe, Waitaha me Ngāti Kahungunu öku iwi
Kia ora, my name is Corey Bragg and I am the Māori student support person in the Business
School. My role is to help link Māori students with the various support networks throughout the
university and the community. Kaua e whakamā, don't be shy - come in for a chat. Mauri ora mai.
Tel 479 5342 Email [email protected] Room CO 3.21
Pacific Islands’ Student Academic Advisor
Warm Pacific Greetings
Talofa lava, my name is Esmay Eteuati and my role is to liaise with Academic Departments and
Student Services relating to Pacific students’ and their course of study. I support both staff and
students in the Business School and have a network of Pacific contacts in other Divisions around the
University.
Tel +64 3 479 4756 Email: [email protected]
Disability Information and Support
Students are encouraged to seek support if they are having difficulty with their studies due to
disability, temporary or permanent impairment, injury or chronic illness. It is important to seek help
early, through one of the contacts below:
Janet Bryant
Rm 7.06 Commerce Bldg.
479-8656
[email protected]
Student Feedback
We encourage your feedback. This can be in the form of contacting staff, participating in course
evaluation surveys and communicating with class representatives. Continual improvements will be
made to this course based in part on student feedback. Recent changes to this course as a result of
constructive feedback include (insert summary of improvements)
Class Representatives
The class (or student) representative system is an avenue for encouraging communication and
consultation between staff and students. It provides you with a vehicle for communicating your
views on the teaching and delivery of the paper and provides staff with an opportunity to
communicate information and gain constructive feedback from students. It contributes to the
development of a sense of community within a department and it adds a further dimension to the
range of support services offered to students.
Volunteers for the role of class representatives will be called early in the semester. The OUSA
invites all class representatives to a training session, conducted by OUSA, about what it means to
be a class representative and some of the possible procedures for dealing with issues that arise.
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They also provide information on the services that OUSA offers and the role OUSA can play in
solving problems that may occur. The OUSA provides support to class representatives during the
semester. Departmental staff will also meet with class representatives during the semester to
discuss general issues or matters they wish to have considered.
Your class representative’s name and contact details will be posted on Blackboard early in the
semester.
Concerns about the Course
We hope you will feel comfortable coming to talk to us if you have a concern about the course. The
Course Co-ordinator will be happy to discuss any concerns you may have. Alternatively, you can
report your concerns to the Class Representative who will follow up with departmental staff. If,
after making approaches via these channels, you do not feel that your concerns have been
addressed, there are University channels that may aid resolution. For further advice or more
information on these, contact the departmental administrator or head of department.
Disclaimer
While every effort is made to ensure that the information contained in this document is accurate, it
is subject to change. Changes will be notified in class and via Blackboard. Students are encouraged
to check Blackboard regularly. It is the student’s responsibility to be informed.
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Tutorial questions
Tutorial #1
(week beginning March 10th)
... concerning labour supply
Part A: Multi-choice questions. Choose the “most correct” answer.
1. The minimum increase in income that would make a person indifferent between
working and not working is known as the
a. endowment wage.
b. reservation wage.
c. minimum wage.
d. equilibrium wage.
e. bribe.
2. Suppose Ben's wage (W) is $18 an hour, consumption (C) is measured in dollars, nonlabour income (V) is $25 a day, and he has 16 hours in the day to work (H) or leisure
(L). The slope of the budget constraint is
a. 2
b. 8
c. 16
d. 18
e. 25
3. If the market wage decreases from above Tina's reservation wage to below Tina’s
reservation wage, we know that
a. Tina will leisure more.
b. Tina will work less.
c. Tina will enter the labour force.
d. Tina will leave the labour force.
e. Tina couldn’t care less.
Part B: Short-answer questions
1. Assume an individual has T hours for work h or leisure l. The individual has a utility
function defined over consumption (c) and leisure (l). The price of the consumption
good is p, the wage rate is w, and the individual has V in non-labour income.
a. Write a utility function where the individual would optimally choose to work all
the time h = T.
b. Write a utility function where the individual would optimally never work h = 0.
Briefly explain both cases.
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2. How many hours of work will an individual supply given his/her utility function U =
C¼ L¾, a wage rate of $15 per hour, a time constraint of 90 hours per week, and nonlabour income of $150? Assume utility maximisation. Show all your working and
illustrate this situation using an indifference curve-budget constraint diagram.
3. Tammy earns $20 per hour for up to 40 hours of work each week. She is paid $25 per
hour for every hour in excess of 40. Tammy faces a 19 percent flat tax rate and pays
$4 per hour in child care expenses for each hour she works. Tammy receives $100 in
child support payments each week. There are 168 hours in the week. Graph
Tammy’s weekly budget line.
4. Based on The Economist articles, “Tough love works” and “From welfare to
workfare”, what are the implicit effects of laws that limit social welfare claims on a
worker’s reservation wage and the probability of entering the labour force? Do you
think New Zealand should adopt similar laws? Give reasons for your answer.
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Tutorial #2
(week beginning March 24th)
... concerning labour demand
and labour market equilibrium
Part A: Multi-choice questions. Choose the “most correct” answer.
1. When is a firm’s labour demand curve most likely to be backward bending?
a. At low wage rates, when income effects are sufficiently small.
b. At low wage rates, when substitution effects are sufficiently small.
c. At either high or low wage rates, when income and substitution effects are
sufficiently large
d. All of the above.
e. None of the above.
2. The elasticity of labour demand measures the
a. change in wages divided by change in the quantity of labour demanded.
b. change in the quantity of labour demanded divided by change in wages.
c. percentage change in wages divided by percentage change in the quantity of
labour demanded.
d. percentage change in the quantity of labour demanded divided by percentage
change in wages.
e. change in the quantity of labour demanded divided by percentage change in
wages.
3. When immigrants and native workers are perfect substitutes in production, an increase
in the number of immigrants could result in
a. higher wages because the two groups are competing in the same labour market.
b. lower wages because the two groups are competing in the same labour market.
c. no change in wages because the two groups complement each other in the same
labour market.
d. higher wages because the two groups complement each other in the same labour
market.
e. lower wages because the two groups complement each other in the same labour
market.
Part B: Short-answer questions
1. Suppose that there are two inputs in the production function, labour and capital, and
these two inputs are perfect substitutes. The existing technology permits 1 machine to
do the work of 3 persons. The firm wants to produce 100 units of output. Suppose
the price of capital is $750 per machine per week. Using isoquant-isocost analysis,
what combination of inputs will the firm use if the weekly salary of each worker is
$300? What combination of inputs will the firm use if the weekly salary of each
worker is $225? How elastic is of labour demand as the wage falls from $300 to
$225? Explain and make sure you illustrate your answers in appropriate and welllabelled diagrams.
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2. Assume that there are two sectors in the economy: the private sector and the
government sector and that initially, there exists a single equilibrium wage in both
sectors. The government then introduces a minimum wage law that applies only to
workers in the private sector. Explain and illustrate using well-labelled diagrams
what happens to wages and employment in the private and government sectors.
3. Suppose a firm is a perfectly discriminating monopsonist. The government imposes a
minimum wage on this market that is higher than the wage of the last worker hired.
What happens to wages and employment?
4. The Key West Kiwi Shop has a monopoly on the sale of kiwi souvenir caps in Key
West. The inverse demand curve for caps is:
P = 30 – 0.4Q
where P is the price of a cap and Q is the number of caps sold per hour. Thus, the
marginal revenue for the Kiwi Shop is:
MR = 30 – 0.8Q
The Kiwi Shop is the only employer in town, and faces an hourly supply of labour
given by:
w = 0.9E + 5
where w is the hourly wage rate and E is the number of workers hired each hour. The
marginal cost associated with hiring E workers, therefore, is:
MCE = 1.8E + 5
Each worker produces two caps per hour. How many workers should the Kiwi Shop
hire each hour to maximise its profit? What wage will it pay? How much will it
charge for each cap?
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Tutorial #3
(week beginning April 14th)
... concerning compensating wage differentials
and human capital
Part A: Multi-choice questions. Choose the “most correct” answer.
1. If a job pays a higher wage because it requires the worker to work in unpleasant
working conditions, the worker is receiving
a. what he/she deserves.
b. a reservation wage.
c. a fringe benefit.
d. a compensating wage differential.
e. an endowment wage.
2. The wage-schooling locus
a.
b.
c.
d.
e.
has a positive slope because older workers get higher wages.
has a positive slope because those with more education get higher wages.
is concave because older workers find it harder to learn new skills
All of the above.
None of the above.
3. When different workers have different levels of innate ability
a.
b.
c.
d.
e.
observed data will overestimate the returns to schooling.
observed data will underestimate the returns to schooling.
discount rates will not equal the marginal rates of return to schooling.
Both (a) and (c) above.
Both (b) and (c) above.
Part B: Short-answer questions
1. Suppose that all persons feel the same about working in a job that offers a polluted
working environment. In particular, the utility function for all workers is given by:
U  w  2x
where w is the wage rate offered by the job and x is the fraction of the firm’s “air” that
is composed of toxic pollutants. There are only two types of jobs in the economy, a
clean job (x = 0) and a dirty job (x = 1). Let w0 be the wage paid by the clean job and
w1 be the wage paid by the polluted job. If the clean job pays $16 per hour, what is
the market compensating wage differential?
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2. Suppose wages and risk of injury are the only two job characteristics that Ken cares
about and that he does not particularly like taking on risks. Ken has two job offers
that give him the same level of utility:
Job 1: wage = $80,000; probability of being seriously injured in the job = 5%
Job 2: wage = $120,000; probability of being seriously injured in the job = 75%
Under what conditions will Ken choose Job 1? Job 2?
4. Debbie is about to decide which career path to pursue. She has narrowed her options
to two alternatives. She can either become a marine biologist or a concert pianist.
Debbie lives two periods. In the first, she gets an education. In the second, she works
in the labour market. If Debbie becomes a marine biologist, she will spend $15,000 on
education in the first period and earn $472,000 in the second period. If she becomes a
concert pianist, she will spend $40,000 on education in the first period and then earn
$500,000 in the second period.
a. Suppose Debbie can lend and borrow money at a 5 percent annual rate. Which
career will she pursue? What if she can lend and borrow money at a 15 percent rate
of interest? Will she choose a different option? Why?
b. Suppose musical conservatories raise their tuition so that it now costs Debbie
$60,000 to become a concert pianist. What career will Debbie pursue if the
discount rate is 5 percent?
5. Suppose Scott’s wage-schooling locus is given by:
Years of Schooling
6
7
8
9
10
11
12
13
14
Earnings
$10,000
$12,800
$16,000
$18,500
$20,350
$22,000
$23,100
$23,900
$24,000
Derive the marginal rate of return schedule. When will Scott quit school if his
discount rate is 4 percent? What if the discount rate is 12 percent? Explain your
answer briefly.
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Tutorial #4
(week beginning April 28th)
... more on human capital;
wage structure and labour mobility
Part A: Multi-choice questions. Choose the “most correct” answer.
1. The intergenerational correlation measures the relationship between the income of
a.
b.
c.
d.
e.
brothers and sisters.
fathers and mothers.
identical (monozygotic) and non-identical (dizygotic) twins.
children and parents.
None of the above.
2. Which of the following is a prediction of the human capital model?
a. An improvement in the economic opportunities available in the destination raises
the likelihood that the worker will move.
b. An improvement in the employment opportunities at the current region of
residence lowers the likelihood that the worker will move.
c. An increase in migration costs reduces the likelihood of a move.
d. All of the above.
e. None of the above.
3. The human capital model predicts that a family, comprised of a working husband and
wife, only moves if
a. the sum of the private gains and losses to the husband and wife are positive.
b. the private gains to the husband are positive.
c. the private gains to the wife are positive.
d. Both (a) and (b).
e. Both (a) and (c).
Part B: Short-answer questions
1. Suppose Lenny is a high-ability worker and Carl is a low-ability worker. A diploma in
nuclear safety costs Lenny $8,000 and costs Carl $20,000 to obtain. Mr. Burn’s
nuclear plant uses education as a screening device where they intend to pay $25,000 to
workers without a nuclear safety diploma and $X to those with a diploma. In what
range must X be to make this an effective screening device? Show all your working.
2. What effect will each of the following proposed changes have on wage inequality?
a. Indexing the minimum wage to inflation.
b. Increasing the benefit level paid to welfare recipients.
c. Increasing wage subsidies paid to firms that hire low-skill workers.
3. Suppose the 10th and 50th percentile wages are $23,500 and $37,600 respectively.
Further, the 90-50 wage ratio is 1.75. What is the 90th percentile wage, and what are
the 90-10 and 50-10 wage ratios?
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4. Mickey and Minnie live in Wellington. Mickey’s net present value of lifetime earnings
in Wellington is $125,000. Minnie’s net present value of lifetime earnings in
Wellington is $500,000. The cost of moving to Auckland is $25,000 per person. In
Auckland, Mickey’s net present value of lifetime earnings would be $155,000, and
Minnie’s net present value of lifetime earnings would be $510,000. If Mickey and
Minnie choose where to live based on their joint well-being, will they move to
Auckland? Is Mickey a tied-mover or a tied-stayer or neither? Is Minnie a tied-mover
or a tied-stayer or neither?
5. Labour demand for low-skilled workers in the United States is w = 24 – 0.1E where E
is the number of workers (in millions) and w is the hourly wage. There are 120 million
domestic U.S. low-skilled workers who supply labour inelastically. If the U.S. opened
its borders to immigration, 20 million low-skill immigrants would enter the U.S. and
supply labour inelastically. What is the market-clearing wage if immigration is not
allowed? What is the market-clearing wage with open borders? How much is the
immigration surplus when the U.S. opens its borders? How much surplus is transferred
from domestic workers to domestic firms?
6. Suppose Alpineland has been a closed economy (meaning there is no immigration
from foreign countries and no international trade). The current labour force has 4
million skilled workers and 8 million unskilled workers. Both types of labour have
perfectly inelastic supply curves, and the current skilled-unskilled wage ratio is 2.5.
The elasticity of demand of skilled labour is -0.4, while the elasticity of demand of
unskilled labour is -0.1. Suppose Alpineland allows a brief period of immigration,
during which time 50,000 skilled workers and 200,000 unskilled workers migrate to
Alpineland. Suppose there are no other changes to the economy. Approximately what
is the new skilled-unskilled wage ratio? (Hint: the percent change in the wage ratio is
approximately equal to the percent change in the skilled wage minus the percent
change in the unskilled wage; and that the percentage change in the wage rate for each
type of labour will be determined by the percentage change in the supply of this type
of labour and by the elasticity of labour demand.)
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Tutorial #5
(week beginning May 12th)
... concerning labour market discrimination
Part A: Multi-choice questions. Choose the “most correct” answer.
1. In Gary Becker's model of discrimination, a taste for discrimination on the part of an
employer against black workers means that the employer perceives that
a. black and white workers are equally productive.
b. black workers are more productive than white workers.
c. white workers are less productive than black workers.
d. the wage of white worker is lower than their true wage.
e. the wage of black workers is higher than their true wage.
2. The employee discrimination model predicts that if male employees have a taste for
discrimination against female employees
a. female employees will earn more than male employees.
b. male employees will always earn more than female employees.
c. firms may be segregated by gender.
d. All of the above.
e. None of the above.
3. Customer discrimination may not matter much as long as firms
a. ignore their customers’ preferences.
b. offer huge discounts on their product prices regularly.
c. refuse to allocate a particular worker to one of many different positions within the
firm.
d. can allocate a particular worker to one of many different positions within the firm.
e. hire only the most good-looking applicants.
Part B: Short-answer questions
1. Suppose that MRP = 20 – 0.5E for left-handed workers, where E = the number of lefthanded workers and MRP is measured in dollars per hour. The going wage for lefthanded workers is $10 per hour, but Homer, the employer, discriminates against these
workers and has a discrimination coefficient d of 0.2 per hour. Graph the MRP curve
and show how many left-handed workers Homer hires. How much profit has Homer
lost by discriminating?
2. Suppose blacks and whites are not perfect substitutes in production. The firm would
like to minimise the costs of producing 100 units of output. Show that employers who
discriminate against blacks earn lower profits. Does your conclusion depend on
whether the market-determined black wage is lower than the white wage?
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3. Suppose black and white workers are complements in the sense that the marginal
product of whites increases when more blacks are hired. Suppose also that white
workers do not like working alongside black workers. Does employee discrimination
lead to complete segregation? Does it create a wage differential between black and
white workers?
4. Each employer faces competitive weekly wages of $2,000 for whites and $1,400 for
blacks. Suppose employers under-value the efforts/skills of blacks in the production
process. In particular, every firm is associated with a discrimination coefficient, d
where 0 ≤ d ≤ 1. In particular, although a firm’s actual production function is Q =
10(EW + EB), the firm manager acts as if its production function is Q = 10EW + 10(1 –
d)EB. Every firm sells its output at a constant price of $240 per unit up to a weekly
total of 150 units of output. No firm can sell more than 150 units of output without
reducing its price to $0.
a. What is the value of the marginal product of each white worker?
b. What is the value of the marginal product of each black worker?
c. Describe the employment decision made by firms for which d = 0.2 and d =
0.8 respectively.
Extra question, time-permitting:
d. For what value(s) of d is a firm willing to hire blacks and whites?
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Tutorial #6
(week beginning May 26th)
... more on labour market discrimination
and labour unions
Part A: Multi-choice questions. Choose the “most correct” answer.
1. A worker is more likely to
a. join a union if the union bargained wage-employment package raises his or her
utility.
b. benefit from joining a union if the demand for labour is relatively inelastic.
c. benefit from joining a union if the demand for labour is relatively elastic.
d. both (a) and (b).
e. both (a) and (c).
2. A union would be more effective at bargaining for a wage increase
a. the greater the substitutability between labour and capital.
b. the less elastic the demand for the product.
c. the greater the share of labour costs in total costs.
d. the more elastic the supply of capital.
e. None of the above.
3. An efficient contract occurs at
a. tangency between the unions indifference curve and the isoprofit line.
b. tangency between the unions indifference curve and the labour demand.
c. tangency between the firm's isoprofit line and the labour demand curve.
d. intersection between the firm's isoprofit line and the labour demand curve.
e. left-hand side of the demand curve.
Part B: Short-answer questions
1. Suppose years of schooling, s, is the only variable that affects earnings.
equations for the weekly salaries of male and female workers are given by:
The
wm = 500 + 100s and wf = 300 + 75s
On average, men have 14 years of schooling and women have 12 years of schooling.
a. What is the male-female wage differential in the labour market?
b. Using the Oaxaca decomposition, calculate how much of this wage differential
is due to discrimination.
c. Explain and illustrate your answer in a well-labelled diagram.
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23
2. Read: Alexander, Genc and Jaforullah (2001) "Maori disadvantage in the labour
market" [supplementary reading #5]. Using Tables 1 to 3 on page 12,
a. Calculate how much the average male Maori worker with no qualifications
(Qualification group 1) earns for every 1 dollar earned by the average male
Pakeha worker with the same qualification (or lack of) for the years 1997, 1998
and 1999.
b. Calculate how much the average male Maori worker with “other school
qualification” (Qualification group 5) earns for every 1 dollar earned by the
average male Pakeha worker with the same qualification for the years 1997,
1998 and 1999.
c. Calculate how much the average male Maori worker with “other post-school
qualification (Qualification group 8) earns for every 1 dollar earned by the
average male Pakeha worker with the same qualification for the years 1997,
1998 and 1999.
d. What do the results of your calculations suggest? Can you make any firm
conclusion regarding discrimination based on your results? What further
evidence would you seek before drawing firm conclusions?
3. Suppose the firm’s labour demand curve is given by
w = 20 – 0.01 E,
where w is the hourly wage and E is the level of employment. Suppose also that the
union’s utility function is given by
U = w × E.
It is easy to show that the marginal utility of the wage for the union is E and the
marginal utility of employment is w. What wage would a monopoly union demand?
How many workers will be employed under the union contract?
4. Suppose the union only cares about the wage and not about the level of employment.
Derive the contract curve and discuss the implications of this contract curve.
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24
Assignment
Instructions:
1. Page 1 of your assignment (the cover page) should have your FULL NAME, STUDENT
ID NUMBER and COURSE NAME. Start your essay answer on Page 2.
2. Submit an answer to ONLY ONE of the following questions by the due date specified.
Each question is worth 15 marks. No extra credit will be given for submitting more than
one assignment. If more than one assignment is submitted, only the first assignment
handed in will be marked.
3. For questions that require an essay answer, there is a prescribed word limit that you
should adhere to. Unreasonably long answers will be penalised. Neatness and
organisation counts. Please follow the “Notes on Essay Writing” available from the
Course Information folder in Blackboard, when preparing your essay.
4. Each question will have a prescribed due date that you should adhere to. If you have a
genuine reason for not being able to submit your assignment by the due date, contact
Arlene Ozanne as soon as possible (email: [email protected]; phone: 479 9079;
office: Commerce 7.28). Extensions will only be given in extreme cases. Assignments
handed in within two days after the specified deadline, shall incur a penalty of 1 mark for
each working day (or part day) late. Assignments submitted more than 2 days after the
specified deadline will not be marked.
5. Place your assignment in the mail box marked “301 assignments” in the Economics
Department (7th floor, Commerce Building).
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25
QUESTION 1:
Wednesday, April 9th at 12noon. Extensions will only be given in extreme
cases. Question 1 assignments handed in after this deadline, up noon of April
12th, shall incur a penalty of 1 mark for each working day (or part day) late.
Question 1 assignments submitted after April12th will not be marked.
Due date:
This question relates to labour supply, labour demand and labour market equilibrium.
Answer all parts of the question.
a. Mike’s utility for consumption and leisure is U(C,L) = C × L so that his marginal rate
of substitution between leisure and consumption is C/L. There are 168 hours in the
week and he earns $22 per hour.
i.
What is Mike’s optimal amount of consumption and leisure? Explain your
answer and show all your working.
[3 marks]
ii.
If the government starts a welfare policy that pays B to all non-workers and
pays $0 to all workers, at what value of B will Mike opt out of the labour force
in order to go on welfare? Assume Mike’s utility when on welfare is U(B,L)
= B × L. Explain your answer and show all your working.
[2 marks]
b. Consider a firm for which production depends on two normal inputs, labour and
capital, with prices w and r, respectively. Initially the firm faces market prices of w =
12 and r = 8. These prices then shift to w = 8 and r = 4.
i.
In which direction will the substitution effect change the firm’s employment
and capital stock? Explain why.
[1 mark]
ii.
In which direction will the scale effect change the firm’s employment and
capital stock? Explain why.
[1 mark]
iii.
Can we say conclusively whether the firm will use more or less labour? More
or less capital? Give reasons for your answers.
[3 marks]
c. In 300 words or less, discuss in your own words (using economic reasoning) under
what circumstances immigrants may reduce the wage of native workers and under
what circumstances immigrants may “take jobs away” from native workers. Make
sure you define key terms where appropriate. You may use appropriate diagrams to
help explain your answer more fully.
[5 marks]
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QUESTION 2:
Wednesday, April 30th at 12noon. Extensions will only be given in extreme
cases. Question 2 assignments handed in after this deadline, up until noon of
May 2nd, shall incur a penalty of 1 mark for each working day (or part day)
late. Question 2 assignments submitted after May 2nd will not be marked.
Due date:
This question relates to compensating wage differentials, human capital and the wage
structure. Answer all parts of the question.
a. Workers choose to work a risky or a safe job. Suppose there are 100 workers in the
economy. Worker 1’s reservation price (for accepting the risky job) is $2; worker 2’s
reservation price is $4, worker 3’s reservation price is $6, and so on. Because of
technological reasons, there are only 10 risky jobs.
i.
With the aid of a well-labelled diagram, illustrate the equilibrium wage
differential between safe and risky jobs. Which workers will be employed at
the risky firm? Explain your answer briefly.
[2 marks]
ii.
Suppose now that an advertising campaign paid for by the employers who
offer risky jobs stresses the excitement associated with “the thrill of injury,”
and this campaign changes the attitudes of the work force toward being
employed in a risky job. Worker 1 now has a reservation price of –$20 (that
is, she is willing to pay $20 for the right to work in the risky job); worker 2’s
reservation price is –$18; worker 3’s reservation price is –$16, and so on.
There are still only 10 risky jobs. Illustrate this change in attitude in your
diagram. What is the new equilibrium wage differential? Explain your
answer briefly
[ 2 marks]
b. Kane is thinking about doing a postgraduate course. It costs $3,000 a year for tuition
and books. Room and board is $6,000 a year. If Kane completes four years of
postgrad schooling, his yearly earnings will be $65,000 as a manager; and his salary
will increase at a rate of 10% per year until he retires. If he chooses not to do the
postgrad course, his yearly earnings will be $43,500 as an assistant manager; and his
salary will increase at a rate of 5% per year until he retires. The annual interest rate is
5%, and his working life is 20 years.
i.
What should be included in Kane’s calculation of the opportunity costs of the
postgrad course and why?
[2 marks]
ii.
Show and explain the equations Kane would need to use to calculate the
present value streams for the two occupations (Note: you do not have to do the
calculations, just explain the method).
[2 marks]
iii.
What other considerations, besides yearly earnings, might enter into Kane’s
occupational choice?
[2 marks]
c. In 300 words or less, describe in your own words what the superstar phenomenon is.
What factors create superstars in certain occupations and not in others? Give two
examples of New Zealand superstars and state briefly why they may be considered
superstars. Make sure you explain key terms where appropriate.
[5 marks]
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QUESTION 3:
Wednesday, May 21st at 12noon. Extensions will only be given in extreme
cases. Question 3 assignments handed in after this deadline, up until noon of
May 23rd, shall incur a penalty of 1 mark for each working day (or part day)
late. Question 3 assignments submitted after May 23rd will not be marked.
Due date:
This question relates to labour mobility, labour market discrimination and labour unions.
Answer all parts of the question.
a. A country has two regions, the North and the South, which are identical in all respects
except the hourly wage and the number of workers. The demand for labour in each
region is:
wN = $20 – 0.5EN and wS = $20 – 0.5ES,
where EN and ES are millions of workers. Currently there are 6 million workers in the
North and 18 million workers in the South.
i.
What is the wage in each region, assuming all workers in each region are
employed? Show all your working.
[2 marks]
ii.
If there were no shocks to the economy, what will happen to wages and
employment over time? Why? What would be the long-run wage and
employment level in each region?
[2 marks]
b. The following equations describe male and female workers’ weekly earnings:
Wmale = 2.5 + 0.8YrsSchool + 0.3Experience + 3.8Union
Wfemale = 2.5 + 0.7YrsSchool + 0.2Experience + 4.6Union
The average years of schooling (YrsSchool) of male workers is 14, and that of female
workers is 16. The average work experience (Experience) of the two groups are 14
and 9 years, respectively. The proportion of male and female workers belonging to
unions (Unions) are 0.32 and 0.28, respectively.
i.
What is the difference in earnings between the two groups of workers? Show
all your working.
[1 mark]
ii.
Assuming that female workers have the same years of schooling, experience
and unionization rates as male workers, what is the difference in earnings
between the two groups? Show all your working.
[2 marks]
iii.
Comparing your answers in parts (i) and (ii), what do you infer about the
source of earnings differences between male and female workers, and what
can you conclude about the extent of labour market discrimination against
female workers?
[3 marks]
c. In 300 words or less, discuss in your own words how both unions and firms can be
better off if they move off the demand curve. Derive the contract curve. Make sure
you define key terms where appropriate. Feel free to use appropriate diagrams to
illustrate your answer.
[5 marks]
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28
Supplementary Readings
[1]
The Economist (2006) “Tough love works”, 29 July 2006, pp.13-14.
[2]
The Economist (2006) “From welfare to workfare”, 29 July 2006, pp.34-36.
[3]
Heady, B. and Warren, D. (2008). Families, Incomes and Jobs, Volume 3: A Statistical Report
on Waves 1 to 5 of the HILDA Survey, Melbourne Institute of Applied Economic and Social
Research, The University of Melbourne, pp. 89-92.
[4]
Alexander, W.R.J. and Williams, J.R. (2001) “A Critique of ‘Maori Socio-Economic
Disparity’”, New Zealand Population Review, 27, pp. 27-35.
[5]
Alexander, W.R.J., Genc, M and Jaforullah, M. (2001) “Maori Disadvantage in the Labour
Market”, University of Otago, Department of Economics Discussion Paper No. 0108, 22pp.
[6]
Alexander, W.R.J. (2001) “Ethnic Gaps and Ethnic Ratios”, Political Science, 53, pp. 29-32.
[7]
Dalziel, P. And Lattimore, R. (2004) The New Zealand Macroeconomy, Chapter 8 (Labour
Policy) pp. 99-112, Oxford University Press.
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