ECON 301 (18 points) Labour Economics COURSE OUTLINE Semester Two, 2014 Semester Two, 2016 Contents Paper Description and Aims .............................................................................................................. 1 Learning Outcomes .......................................................................................................................... 1 Teaching Staff .................................................................................................................................. 1 .......................................................................................................................................................... 1 Course Delivery ................................................................................................................................. 1 Expectations and Workload .............................................................................................................. 3 .......................................................................................................................................................... 3 Course Learning Resources ............................................................................................................... 3 Blackboard .................................................................................................................................... 3 Student Webmail .......................................................................................................................... 3 Assessment ....................................................................................................................................... 4 Course Requirements .................................................................................................................... 4 Quality Assurance ......................................................................................................................... 5 Grading System ............................................................................................................................ 5 Academic Integrity and Academic Misconduct (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 ................................................................................................................. 9 Pacific Islands’ Student Academic Advisor .................................................................................... 9 Disability Information and Support ............................................................................................. 10 Student Feedback ........................................................................................................................... 10 Class Representatives ................................................................................................................. 10 Concerns about the Course ......................................................................................................... 10 Disclaimer ........................................................................................................................................ 11 Tutorial questions ........................................................................................................................... 12 Assignment ..................................................................................................................................... 25 List of Supplementary Readings ..................................................................................................... 28 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, 11am Room: Check EVISION Tutorial Streams: check EVISION Rooms: check EVISION Students must attend two 50 minute lectures each week and one 50 minute tutorial each fortnight. Page1 Lectures present the key conceptual material through discussion and interaction between teaching staff and students. Lectures are supported by readings. 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: July 25 August 8 August 22 September 12 September 26 October 10 You will be notified of what tutorial stream you have been allocated to in the first week of lectures. This information will also be available on EVISION. The internal assessments (assignment and test) and the final exam will examine material covered in tutorials, as well as in lectures. Note that tutorials will extend the material covered in lectures, and will often be based on a reading. 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 Page2 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. Expectations and Workload ECON 301 is a second 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‐of‐ semester exam period). Course Learning Resources The text for this course is Labor Economics, 2016, 7th 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. 7th edition of the text, but students may also use the Labor Economics, 2013, 6th 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, or use EVISION to redirect your emails to your personal account. 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. Page3 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 There will be a test (worth 15% of your final mark) and an assignment (worth 15% of your final mark), and a 2‐hour final exam (worth 70% of your final mark). The internal assessments are on a plussage basis. This means either component counts only if you score higher on it than on the final exam – so that the final exam will be worth 70% or 85% or 100% (whichever is to your advantage). The aim of plussage is to enable students who perform poorly on an internal assessment covering a particular content or skill area, but who demonstrate substantial improvement in that area during the final exam, to obtain an overall grade that reflects their capabilities at the end of the paper. It should not be taken as an invitation to avoid doing the internal assessments (assignment and test). You should also be aware that – aside from providing feedback on how you are coping with the paper and some insurance against a poor performance on the final exam – your internal assessment grades are also an important factor in determining eligibility for ‘Final Exam Only’ (should you fail the paper) and the form of Special Consideration that might be offered (should you be ill or otherwise impaired during the final exam). The test is planned for Tuesday, August 23rd during lecture time, and will cover lecture and tutorial material from weeks 1 to 6 of the course. The test will be made up of multiple‐choice and short‐ answer type questions. Further details on the test will be provided closer to the time. Internal assessment test (15%) Tuesday, August 23rd during lecture time. Assignment (15%) Details on the assignment can be found at the end of this course outline. There will be two 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 for the specific assignment chosen. Place your answer in the mail box marked “301 assignments” in the Economics Department (7th floor, Commerce Building). Final exam (at least 70%) The final exam will be three hours long, and made up of a combination of multi‐choice, and written‐ answer questions. The final exam will cover the whole course. The University will report the exam timetable later in the semester. Page4 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. Grading System The grading scheme used at Otago is: A+ 90‐100 A 85‐89 A‐ 80‐84 B+ 75‐79 B 70‐74 B‐ 65‐69 C+ C C‐ D E 60‐64 55‐59 50‐54 40‐49 <40 Academic Integrity and Academic Misconduct (Plagiarism) Students should ensure that all submitted work is their own. Plagiarism is a form of academic misconduct (cheating). It is defined as copying or paraphrasing another’s work and presenting it as one’s own. Any student found responsible for academic misconduct 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/academicintegrity/index.html Page5 Course Calendar Week 1 – July 12th and 14th 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 (2016), 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 – July 19th and 21st 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 (2016) chapter 2 Labour Demand The Production Function; Employment Decision in the Short Run. Reading: Borjas (2016), chapter 3 pp. 84‐94. Week 3 – July 26th and 28th 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 (2016), chapter 3 pp. 94‐106, 109‐133, 139‐143. Week 4 – August 2nd and 4th 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 (2016) chapter 4 Page6 Week 5 – August 9th and 11th Compensating Wage Differentials The Market for Risky Jobs; The Hedonic Wage Function; Policy Applications; Compensating Differentials and Job Amenities Reading: Borjas (2016) chapter 5 Human Capital Education in the Labour Market; the Schooling Model; Education and Earnings; Rates of Return to Schooling; Reading: Borjas (2016) chapter 6 pp. 229‐256. Week 6 – August 16th and 18th Human Capital continued Education in the Labour Market; the Schooling Model; Education and Earnings; Rates of Return to Schooling; Schooling as a Signal; On‐the‐Job Training and Age‐Earnings Profiles. Reading: Borjas (2016) chapter 6 pp. 229‐281. 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] Week 7 – August 23rd and 25th Test: Tuesday, August 23rd at 11am (during lecture time) The test may examine all material covered in lectures or tutorials, and associated readings from weeks 1 to 6 of the course. Note: There will be no lectures on Thursday, August 25th. Week 8 Mid‐semester break (August 29th to September 2nd) Week 9 – September 6th and 8th The Wage Structure The Earnings Distribution; Measuring Inequality; The Wage Structure; Why has Wage Inequality Increased; Inequality Across Generations Reading: Borjas (2016) 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 10 – September 13th and 15th Labour Mobility Types of Labour Mobility; The Determinants of Migration; The Decision to Migrate; The Economic Benefits from Migration. Reading: Borjas (2016) chapter 8 Page7 Week 11 – September 20th and 22nd 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 (2016) 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 – September 27th and 29th Labour Market Discrimination (continued) Reading: Borjas (2016) 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 – October 4th and 6th Labour Unions Unions: a Brief History; Determinants of Union Membership; Monopoly Unions; The Effects of Unions; Public‐Sector Unions. Reading: Borjas (2016) chapter 10 Other readings relevant to this topic: Dalziel. P. and Lattimore, R. (2004) [supplementary reading #7] Week 14 – October 11th Revision/Catch‐up University Exam Period Second Semester Begins Wednesday 19 October and Ends Saturday 12 November Page8 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://slc.otago.ac.nz/ Library Support The Library website http://www.otago.ac.nz/library provides access to resources and services, including group room bookings, library hours and locations, past exam papers, subject guides, article databases and more. If you need assistance either check out the self‐help guides http://otago.libguides.com/selfhelp, or ask Library staff at the ground floor service desks, or email [email protected] 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 Page9 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. 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 Page 10 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. Page 11 Tutorial questions Tutorial #1 (week beginning July 25th) ... 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, non-labour 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. 4. An individual can maximise his/her utility by choosing a consumption-leisure combination a. on the highest indifference curve. b. where the slope of an indifference curve is equal to the MRS. c. where the wage rate is equal to the MRS. d. All of the above are correct. e. Only (b) and (c) are correct. Part B: Short-answer questions 1. 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 non-labour income of $150? Assume utility maximisation. Show all your working and illustrate this situation using an indifference curve-budget constraint diagram. Page 12 2. 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. 3. 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. 4. State whether the following statement is “true”, “false” or “uncertain”, and explain your answer briefly. A cut in the income tax rate will cause people to work more. Page 13 Tutorial #2 (week beginning August 8th) ... 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 well-labelled diagrams. Page 14 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? Page 15 Tutorial #3 (week beginning August 22nd) ... 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. has a positive slope because older workers get higher wages. b. has a positive slope because those with more education get higher wages. c. is concave because older workers find it harder to learn new skills d. All of the above. e. None of the above. 3. Lynette has 15 years of schooling, Bree has 12 and Susan has 9. Lynette earns $35 per hour, Bree, earns $25 and Susan earns $20. Assume that the difference in educational attainment is due completely to the three women having different discount rates. Which of the following statements is true? a) Lynette has the highest discount rate among the three. b) Bree has the highest discount rate among the three. c) Susan has the highest discount rate among the three. d) Susan and Bree’s discount rates are lower than Lynette’s. e) Bree and Lynette’s discount rates are higher than Susan’s. 4. When different workers have different levels of innate ability a. observed data will overestimate the returns to schooling. b. observed data will underestimate the returns to schooling. c. discount rates will not equal the marginal rates of return to schooling. d. Both (a) and (c) above. e. Both (b) and (c) above. Page 16 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? 2. Consider a competitive economy that has four different jobs that vary by their wage and risk level. The table below describes each of the four jobs. Job Risk (r) Wage (w) A 1/5 $3 B 1/4 $12 C 1/3 $23 D 1/2 $25 All workers are equally productive, but workers vary in their preferences. Consider a worker who values his wage and the risk level according to the following utility function: u w, r w 1 r2 Where does the worker choose to work? Suppose the government regulated the workplace and required all jobs to have a risk factor of 1/5 (that is, all jobs become A jobs). What wage would the worker now need to earn in the A job to be equally happy following the regulation? 3. 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. 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. Page 17 i. ii. iii. What should be included in Kane’s calculation of the opportunity costs of the postgrad course and why? 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). What other considerations, besides yearly earnings, might enter into Kane’s occupational choice? 4. 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. Page 18 Tutorial #4 (week beginning September 12th) ... 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. brothers and sisters. b. fathers and mothers. c. identical (monozygotic) and non-identical (dizygotic) twins. d. children and parents. e. 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. Page 19 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? 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? Page 20 Tutorial #5 (week beginning September 26th) ... 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. b. c. d. e. black and white workers are equally productive. black workers are more productive than white workers. white workers are less productive than black workers. the wage of white worker is lower than their true wage. 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 left-handed workers and MRP is measured in dollars per hour. The going wage for left-handed 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 lefthanded 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. Using isoquant-isocost analysis, 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? 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? Page 21 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. Page 22 Tutorial #6 (week beginning October 10th) ... 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. In the case of a vertical contract curve, union negotiations will result in the firm hiring a. more workers and at a higher wage than it would in the absence of the union. b. the same number of workers but at a higher wage than it would in the absence of the union. c. fewer workers but at a lower wage than it would in the absence of the union. d. fewer workers but at a higher wage than it would in the absence of the union. e. the same number of workers but at a lower wage than it would in the absence of the union. Part B: Short-answer questions 1. Suppose years of schooling, s, is the only variable that affects earnings. The equations for the weekly salaries of male and female workers are given by: 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. 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. Page 23 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. Page 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 two questions by the due date specified. 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 all your answers to essay-type questions, make sure that you use relevant theories/concepts discussed in this course. Your marks will depend largely on how well you make use of relevant labour economics theories/concepts in explaining your answers. 4. The “Short essay”, in each question has a prescribed word limit that you should adhere to. Unreasonably long answers will be penalised. Neatness and organisation counts. Although discussion between students is encouraged, all essays are accepted for assessment on the understanding that they are, in the end, the student’s own work. Copying passages from books and articles without putting the passages in quotation marks must be avoided, or at the very least, any citation should be properly referenced. Follow the “Notes on Essay Writing” available from the Course Information folder in Blackboard, when preparing your essay. 5. 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 submitted after the specified deadline will not be marked. 6. Place your assignment in the mail box marked “301 assignments” in the Economics Department (7th floor, Commerce Building). Page 25 QUESTION 1: Due date: Friday, August 12th at 3pm. This question relates to labour supply, labour demand and labour market equilibrium. Answer all parts of the question. a. b. In a perfectly competitive firm (in both the labour and capital markets), suppose that the marginal product of labour is 15 and the nominal wage is 10. i. If the firm is at the profit-maximising level of output, what is their output price? Show your working. [1 mark] ii. Suppose that the marginal product of capital is 100 and the nominal price of capital 50. In order to maximise profits in the short run, what adjustment should the firm make in employment – increase, decrease, or maintain the same? Explain your answer briefly and show your working. [2 marks] State whether you agree or disagree with the following statement, and explain why. Use welllabelled diagrams to help explain your answer. Suppose that a mobile phone company JNX use human workers and mechanical robots to produce its latest mobile phone “The Cosmos”. According to Marshall’s rules, the more elastic is the supply of mechanical robots, the more inelastic will be the demand for human workers. [4 marks] c. d. Assume that the labour market for nurses in the country of Tierra Nuevo is currently experiencing a nursing shortage. Further, suppose that the Tierra Nuevo parliament is considering a proposal, the TN Nursing Act (TNNA), that would create a new immigration category designed specifically to increase the number of immigrants with nursing qualifications. i. Using a well-labelled labour demand and supply diagram, illustrate the current wage and employment conditions in the labour market for nurses described above. That is, assuming no immigration of nurses is allowed, show and explain what happens to wage and employment of native nurses (i.e., the nurses that were in Tierra Nuevo before immigration of additional nurses in allowed) when there is a shortage. Make sure you label all relevant parts appropriately and refer to it in your explanation to receive full credit for your answer. [3 marks] ii. Suppose that there are two members of parliament debating the merits of the TNNA. Hon. Lock is against increased immigration of nurses because he believes it will “have devastating effects on the wages and employment of native nurses”. Hon. Big argues that it will have a minimal impact on the wages and employment of native nurses. Discuss in your own words (using economic reasoning) under what circumstances Hon. Lock’s viewpoint is likely to be true, and under what circumstances Hon. Big’s argument is likely to be true. Use appropriate diagrams to help explain your answer more fully and show how the passage of the NA will affect the wages and employment of native nurses. [5 marks] Short essay. In 300 words or less, discuss in your own words (using economic reasoning) the effectiveness of the minimum wage as a poverty reduction strategy. [5 marks] Page 26 QUESTION 2: Due date: Friday, September 23rd at 3pm. This question relates to compensating wage differentials, human capital, the wage structure and labour mobility. Answer all parts of the question. a. Joe Black is a 58-year-old construction worker who earns $32 per hour, and works on average 40 hours per week for 52 weeks. While driving his forklift, he hits a gas main that the gas company failed to inform him was present at the construction site. Joe is severely injured and cannot work again. Assume that Joe planned to retire at the age of 65 and has a discount rate of 10%. As a consulting economist to Joe’s lawyer, what is the present value of the lost earnings that you would recommend seeking from the gas company, assuming all payments accrue at the end of the year? Explain your answer and show all your working. [3 marks] b. Explain why individuals would choose to make all of their human capital investments when they are young. Discuss two reasons why some individuals would make new human capital investments even when they are older. [5 marks] c. Rod and Todd are brothers who never want to live apart from each other. They currently live in Springfield, and have a discount rate of 5%. Assume that there are three work periods left in the life cycle, and assuming period one is now. If they remain in Springfield, they will each earn $35,000 in each of the three periods. If they move to Capital city, they will each earn $50,000 each of the three periods. Todd however feels that he will be $5,000 worse off for each period they live in the city. As a household, what is the highest cost of migration that they will be willing to incur and still make the move? Explain your answer briefly and show all your working. [3 marks] d. Explain why the family’s incentives to migrate can differ from the private incentives of each family member, and how this difference can generate tied stayers and tied movers. Make sure you define the terms “tied stayers” and “tied movers” in your answer. [4 marks] e. Short essay. In 300 words or less, discuss in your own words (using economic reasoning) the main reasons why a gender pay gap (difference between women’s and men’s earnings) exists. [5 marks] Page 27 List of Supplementary Readings All these readings are available on Blackboard under the Course Documents folder. [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. Page 28
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