Labor Economics: The Factors That Contribute To The Minimum Wage - Assignment Example

Labor Economics Question one: Minimum Wage and Monopsony 2. Becker Explain Beckers concept of taste based discrimination. According to Becker there exists discrimination in employment of minorities in many instances. Discrimination in this sense would mean the employing of workers based on characteristics and traits that do not contribute to the productivity of a firm. Such characteristics could be physical such as genders and color of the skin. Other forms of discrimination also could include basis on religious view or personal ideologies. According to Becker firms that tend to specialize in employing minorities who bear much of the cost of discrimination in that they will accept lower pays and be more productive as compared to firms doing the contrary. Becker’s concept of taste based discrimination states that firms that do not employ minorities do bear the cost of discrimination together with the minorities themselves. Why is the discriminating firm "higher cost"? Discriminating firms usually have a higher cost of operation since they bear the cost of discrimination. Becker’s concept shows that minorities in such an environment usually work harder and are more productive hence would accept a lower wage. This means that the cost of production is lower hence the firms become more profitable. The discriminating firms however are at a higher cost as majority employees tend to demand relatively higher wages and their productivity is average. As a result more employees would be required to achieve acceptable productivity. What is the effect if entry of non discriminating firm under CRTS? (Draw the graph) Entry of a non discriminating firm under a constant return to scale means increase in number of employee is directly proportional to productivity. A non discriminating firm that has a high specialization of minorities would ideally have higher productivity per employees and therefore an increase in number of more productive employees would mean a subsequence increase in productivity and thus more profitability. This is because the wage bill is also lower than that of a discriminating firm. What is the effect if entry of non discriminating firm under DRTS? (Draw the graph) Entry of non discriminating firm under decreasing return of scale DRTS would lead to constant production and decreased overhead cost. Also since increase in work force does not adequately increase the production. The cost of having more employees is drastically reduced and since the minority workers produce maximally the cost of the wage bill remains relatively low and hence the firm becomes more profitable. In such a firm it would lead to more efficiency as the production process require less man power for efficiency and use of minority who are efficient and extremely productive would lead to the most desired state of profitability. 3. Suppose that men earn on average $50,000 per year and women earn only $40,000 per year. On average, men have 12 years of education and women have 13 years of education. Men have 20 years of experience and women have 15 years of experience. Men earn a $1000 return to each additional year of education, and a $500 return to each additional year of experience. a) Write out the general form of the Oaxaca decomposition. Wm = am + bm EDm + cmEXPm + fm UNIONm Wf= af + bf EDf + cfEXPf + ff UNIONf where: Edm, EXPm, UNIONm measures years of education, experience and share unionized for men bm, cm, fm the amount by which an extra year of education, experience or being unionized raises male wages. a) How much of the difference in average earnings here can be attributed to differences in education? Difference in annual income = $ 10,000 annual Difference in return per additional year of education =$ 500 Difference in return of investment per year of education = ~$ 650 b) How much of the difference in average earnings here can be attributed to differences in experience? Around 5 years as men work longer this is $50,000 *5 = $250,000 c) How much of the difference in average earnings here can be attributed to discrimination? 15/20 can be attributing purely to discrimination this is 75% d) What is this discrimination based difference in log points? This is about 0.75 log points e) If mens labor elasticity of supply to the firm is 2, how low would womens have The women elasticity would be 75% of 2= 1.5 f) to be in order for the monopsony based story to explain the difference? This means this assumption is based on a homogenous single employer that controls a particular market segment. g) How have economists studied impacts of the minimum wage? What have they found? Economists have studied impacts of minimum wage to be able to understand the minimum threshold for the carrying out of production activities. Minimal wage affects job supply and job mobility of a labor market as labor is a major element in commerce and economics. 4. Monopsony and Wages a) Using calculus, derive the profit maximizing wage for a firm to pay workers when they have monopsony power (assume that they are hiring only one type of labor and use a generic production function f(L). Output price is fixed. F(L) = ∫đ(cost of production/ wages) Since wage is the only motivator and there is only one source of employment production would be a factor of wages and time b) Explain in the context of Ransom and Oaxaca why men and women might be paid differently. According to the context of Ransom and Oaxaca the wages of men and women might be paid differently due to the fact that men and women have different working durations. Also women takelonger to study and work for lesser years thus gain lesser experience.Based on that fact its inevitable that men would be compensated more wages that the female counterparts. 5. Monopsony and CES a) Write out the CES estimation problem when there is Monopsony power over the two groups. The constant elasticity of substitution is a function of the ability of labor to move about and develop. In circumstances where Monopsony power is over two groups’ means that wages over the two groups would be relative lower. This is because due this power market forces do not come into play at all. b) Explain how these contributions to our discussion about why low skilled wages may have declined over the last 30 years. Low skilled wages may have declined over the last 30 years mainly due to the liberalization of the labor markets. Also labor mobility has led to increased pressure by monopolistic firms to provide favorable terms and better wages to its employee. The labor union may also have paid a huge role in ensuring better wages are paid to low skilled worker and constantly improved where possible. With the reduction of Monopsony in many economies where private sector companies are have been cause by completion and inevitable interplay of labor market forces. When there are many consumers of labor the wages are increase to attract as many employees as they would have. c) Explain how this affects our attempts to estimate a CES production function. Monopsony affect the attempts to estimate CES of production as having only one power player in a market there is no choice and control is not based on market forces. 6. Labor supply a) Explain in words the competing substitution and income effects that occur when wages increase. When wages increase it affects the labor supply this is because as wages increase the workers are willing to work more to earn more. At this they increase their working hours to be able to earn more incomes. This is when the income effect is positive that is increase in wages influences the time spent working. After a certain level when the workers attain certain levels of income any subsequent increase in wages has a negative income effect. This is because the individual have just enough to sustain themselves and increase in wages would cause them to substitute working time with luxuries and leisure. Its been proven that after some level of income individual would prefer to spend more time on leisure rather than working and increase in wages would not be a motivation for substitution. In wage increase substitution occurs when individual substitute working time with leisure time as their income increase. Income effect however is the increase in labor hours in relation to wages. This is usually positive in the lower level before a certain threshold is arrived at. b) Graphically, show this utility maximization problem. Optimum Wage Labor hours In the above graph of labor hours verse wages show that that an eclipse shaped curve is the resultant where initially increase in wage would motivate workers to put in more time in their jobs upto a certain level where their needs would be fully met and any increase in wages would lead them to substitute working hours with leisure time. It is therefore important for firms to know the threshold wages for optimizing of their employees productivity at all levels. c) Suppose that there is a large income maintenance program that people who do not work are eligible for. Show on a graph how this will affect labor supply. If there was a large income maintenance program for people who do not work it would affect the supply of labor in that lesser individual would be less willing to work for lower wages and people earning higher wages would spend less time working and more on leisure. The normal labor verses wage curve would be more skewed. The low wage labor would be greatly in low supply and more focus on middle and higher range wage employment. Labor supply would be greatly influence by wage level and it is would be more costly for firms to acquire labor as such incentives tend to reduce the labor supply both in terms of numbers and hours of supply. d) Show the EITC on a graph e) Explain the different ways in which the EITC can affect labor supply. Earned income tax credit is ideally designed by governments to increase the labor supply in an economy first introduced by the American government during President Nixon’s term. This incentive helps to increase the amount of labor available in that it becomes cheaper to employ people and hence more individual can be absorbed into industry and commerce. Conversely due to the lower cost of labor it also pushes the wage levels lower and as a result workers are forced to work longer hours to achieve similar standards they would have without the earned income tax credit. 7. Unemployment a) Derive the natural rate of unemployment as we did in class. The natural rate of unemployment is the number of healthy population in an economy who do not have employment. Unemployment rate on the other hand represents the number of individuals not in military divided by the number of individuals in meaningful employment. Thus Labor force= population x participation rate Unemployment rate = (labor force/ employed) + 1 b) Give the natural rate of unemployment for an economy with a job destruction rate of 1% and a job finding rate of 25%. c) For an economy that starts off with an unemployment rate of 12%, show the unemployment rates for the next 5 periods. If job destruction rate is = 1% and job finding rate = 25% For the first year unemployment rate = 12% = (labor force / employed) + 1 = labor force/ employed = 11% The ratio is 11: 100 Reate of change is *25:100*0.1 Thus in five years it will be 11*25^5: !00*0.01^5 = 33.5:95 33.5/95.5 = 35 % 8. Briefly explain the two podcasts on Denmark in the context of the last two problems that you have answered here From the two podcast on Denmark we see how the labor market is developed differently from the American market. Firstly we see that the country has large income maintenance program finance by heavy taxation but anyway it is effective. This has not really hindered the supply of labor but accelerated the labor market and helped the economy to sustain itself. Moreover it can be observed that the labor cost is also quite high compared to other regions. The Denmark has embraced a social welfare system in which the laborers maintain through the tax in their wages. Comparison of America and Denmark’s system we look at the question of government paying larger wages to workers or using the money for social medical care. Both systems have their merits and demerits. The Cadillac plan is about taxing is good or not and its effect on the labor supply. Tax relief encourages creation of more jobs and consequently the economy. Unemployment is a huge concern for any government and such strategies are usually looked into though politicians are in charge, sound economic principles need to be taken into consideration. 9. Explain the following concepts in a sentence or two: a) Compensating wage differential There exist differences in wages from place to place and from industry to industry depending of jobs. Labor supply is influence by wage and compensating wage differential is the wage that employers would give to have less desirable jobs done that would otherwise not find any labor. This differential is used as a strategy to attract and retain labor in less desirable job roles or to retain specialists b) Efficiency wage Efficiency wage is the amount of wage that just meets the threshold of a labors need of which further increase in wage would lead to a decrease in working time. At this wage it will enable a worker to be maintained at a particular job and be optimally productive in the firm. c) Statistical value of a life Statistical value of life is of an employee over the duration of employment at a particular firm within the working life time. This is a measure of how much production an individual can give to a firm during that duration of time. It is useful in determining adequate compensation and plan for the further development of skills and competencies that would increase one’s productivity 10. Using a graph and words, show how a decrease in the average skills of immigrants may lead to an over estimation of assimilation of immigrants Decrease in the average skills of immigrants may lead to over estimation of assimilation of immigration. In assimilation immigrants are absorbed into an economy of a different foreign host country. For immigrants to contribute to the labor market they need to have some essential average skill. Immigrants with average skills would easily be absorbed into the labor market and it would be easier to be assimilated. However if there is a decrease in average skills either due to lower education then more immigrant become unemployment or underemployed. Reduction in average skill leads only to larger number of population who are under employment this makes it quite difficult to estimate the actual number of immigrants who are actually assimilated. On paper they might seem employed but the reality would be different on the actual growth. From the curve below we see it tips at the end meaning that increase in immigrants does not affect the levels of productivity in the long run Work cited Gary, Fields S. "The Unemployment Effects of Minimum Wages", International Journal of Manpower, 1994, 15 (2), 74 - 81 Read More