Education and Economic Growth - Assignment Example

Labour Economics xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Labour Economics Question 1 True, utility maximizing does not show positive predictions of the standard labour supply model. The standard labour supply predicts that individuals are forward-looking maximizers, and they capitalize on discounted life span utility subject to a lifespan budget constriction (Goette et al 2003). For instance, labour supply between t and t + Δ by et,,and let et = 0 if the person is not working during period t. If the utility is time separable across phases, intertemporal maximization on 1 means that the utility from working in period t can be symbolized as, Vt (et)= λ(wtet + zt) – g(et; λpt), where wt represent discounted wage per unit of effort e in period t, λ is the marginal utility of lifespan wealth, zt is income unconnected to effort in period t, and pt is discounted price of spending. The activity g(.) is the money-metric utility of effort, which enhances as well as convex in e. Question 2 False, the firm does not use more workers and capital as the price decreases. This is because labour and capital are surrogates (Isoquants) and the firm should choose either labour or capital depending on which is cheaper in producing. As Schefold (2008) explains, when the isoquants slow down, that means, if organization minimizes the amount of capital employed, more labour should be added in order to maintain the rate of output steady. Therefore, the two inputs can be surrogated for one another to keep a stable level of output. The substitution of one input with another is referred to as marginal rate of technical substitution (MRTS). Question 3 This is false; the elasticity of substitution between capital and labour is not zero. It evaluates the extent in which capital can be substituted by labour in firms for relative productivity. Arnberg & Bjørner (2007) explain that, substitution elasticity depends on amount of labour and capital employed. Though they are needed in this model, there cannot be zero substitution of capital and labour. There is improved productivity and as a result efficiency but still capital would be needed to some extent to assist labour by making it available. This means that capital cannot be zero substitution elasticity of capita; and labour. Question 4 True, jobs that demand physical strength are unpleasant and pay less. A research carried out indicates that there are subsistence of high earnings dispersion and a pattern of wage differentials. Employees in large firms always get higher salary than the employees in small firms. Employees with higher earnings abilities sort themselves into jobs that are more secure, while the employees with low earnings do jobs that are unpleasant and unsecured, needs physical strength and are lowly paid (Lalive et al 2006). Question 5 In human capital framework, education increases natural capabilities that are consequently sold in the labour market. People who attend additional years of schooling get higher wages (Fasih 2008. The rate of return to schooling should be almost the same to the rate of interest. In addition, individuals attends to schooling while they are young, and this is because spending in school are the same despite the age, but the benefits do not start to accumulate until it is concluded. On the other hand, signalling models argue that education acts as a vetting device for unobservable capability (Gandrud 2012). This is the reason as to why individuals spend time to get education and the employers pay higher wages to educated employees. More particularly, organizations gather ability from education, and the students select an education point to signal their capability to potential employees. Question 6 (a) Jessica’s budget constraint and graph There are consumption options available to Jessica with the limited income she is getting = 168 x 20 = 3360 = 0.2 x 3360 =$672 Net labour income =3360 – 672 =$ 2,688 Weekly non-labour income = $170 Total income = $2,688 + $170 = $2,858 MUL=1/2(C/L)1/2 Graphically (b) Jessica’s optimal amount of consumption and leisure Jessica’s optima amount of consumption and leisure is $2,688 + $170 = $2,858 - $50 = $2,808 (a) Suppose the market wage rate increases to $ 25 per hour before tax and all other variables remain as before. What will be the new optimal amount of consumption and leisure? New optimal amount of consumption, as Kornai & Roland (2003) puts down, $25 x 168 = $4,200 = $4,200 x 20% = $840 = ($4,200 + $170) – ($50 + $840) = $4,370 - $890 = $3,450 (b) Comparing the results found in (b) and (c) what can you conclude regarding income and substitution effects which might be caused by this wage rise from $20 to $25? The change in income is very positive and this will increase the disposable income available for Jessica. It would reduce the budget constrain. Question 7 If the weekly salary of each worker is $300 the best combination of input to use is to use one machine to produce 100 units of output per week. If the weekly salary of each worker is $225, the best combination of inputs is using three employees to produce 100 units of outputs. The elasticity of labour demand as the wage falls from $300 to $225, the decline of wages makes the labour less expensive and this will induce the firm to use human labour rather than the machine labour. This will as well reduce costs of production, as Slaughter (2001) maintains. Question 8 (a) The effects of this migration on wages on south region is that it will increase competitiveness and effectiveness of labour, there will be over supply of labour and this will push the wages downwards hence the wages will reduce in the short run. For north region, there would not be much effect on the short run as migration would not have started between the two regions, as such; the wages will remain relatively the same. (b) Ratio of wages in south 3999, 000:15 Ratio of wages in north 601,000:15 1,000 immigrants will only affect minimal change in wage level. It will increase in south while it will start to decrease in north a there would be over supply of labour (c) If labour demand does not change in both regions, wages will remain constant and employment will reduce. In essence, there will not be spill over effect of labour, since wages are directly affected by the demand for labour it may not change much if demand will not change. In north, as Görg & Hanley (2005) points, the hourly wages will reduce slightly to the difference in wage rate between the two regions would disappear. Hence the rate of wages will be the same in south and north. As a result, employment will stabilise and be equal between north and south. Question 9 One of the education concerns is the rise in living standard of individuals over the last millennium because of the education. Development experienced in countries where education was given a priority such as Europe was not observed in the uninformed societies that have steadily merged into the world economy over the last two centuries. Individuals with limited education find it hard to work at in advanced societies. Therefore, education is required, for persons to benefit from scientific progress and also to contribute to it. Secondly, at a specified stage, various econometric studies shows that the earnings people can command depend on their education level. If individuals with education are paid more than uneducated, the same should be true to the countries. If not the rate of variance of output per hour worked, at least the level of output per hour worked in a nation should depend on the accomplishment in education of the citizens. Spending in education brings returns of some sort, the same way as spending on fixed capital, and then it is reasonable to invest in human capital as the complement to investing in fixed capital. In regards to this, education procedure can be analysed as a savings resolution (Stevens & Weale 2003). Microeconomic theory establishes the effect of education on an individual’s wage. Individuals invest in education up to the level to where the marginal expense of further education equals its marginal benefit. As a saving in human capital, a schooling year creates financial revenue by rising an individual’s earning once entering in workforce. Mincerian wage equation analyzes how a person’s education as well as knowledge effect on the wage. The fundamental assumption of this model is that all years of education create an equal rate of return to student, for instant, kindergarten is just vital as a college year. The assumption entails a linear connection between the log of income and years spent in education. The model also assumes that the expense of additional year of learning equals the lost wages one may have earn in that time. Therefore, people decide how many years of schooling to practise with the aim of maximize the present value of lifetime income. Macroeconomic theory puts into consideration the rate of change per capita GDP. Human capital externalities effects that affect development uses aggregate data to evaluate the relationship between education and development. The externalities are not a proof in personal estimates of the wage equation; however, the net impact might be more obvious in the aggregate. The macro-mincer equation of the mincerian wage equation aggregates across personal on a yearly basis by using means of every variable (Dahlin 2003). By establishing the size of possible wedge between the collective as well as private rates of return to education, mincerian equation is modified to facilitate for human capital externalities from education. The modification is founded on the notion that “controlling for own schooling, a person employee may earn higher wages, the higher the level of schooling of other employees in the country (Dahlin 2003 p.19).” In earning education relationship, there are two aspects in the empirical research of the income return to human capital investments. First one is the difference between the homogenous returns and heterogeneous returns model. In the homogeneous returns model, the rate of return to gross income of a specific human saving is equivalent for all people. Developing statistical evidence as well as causal empiricism proposes that the homogenous returns restriction is superfluous. The second aspect is distinguishing between the one factor as well as multiple factor models of human capital. Schooling in one factor model can be considered as a saving in a sole homogenous construct named human capital (Blundell et al 2001).. Every added unit has a similar return. Popular linear regression equation is an example of one factor and homogenous returns where it shows the log earnings regressed on schooling years. Invariable parameter on the schooling variance is equals to homogenous returns as well as the use of years of studying as single gauge of schooling is the same to a single gauge of human capital. Earnings and education in homogeneous returns shows individuals hourly wage chances in work. An income of an individual who has completed formal education is followed through from education to employment as well as sampled at particular intervals regularly several years separately. It is possible to aggregate schooling into a lone measure in one factor human capital model (Blundell et al 2001). Some of the policy implications include; education increases natural capabilities that are consequently sold in the labour market. People who attend additional years of schooling get higher wages (Fasih 2008. The rate of return to schooling should be almost the same to the rate of interest. In addition, individuals attends to schooling while they are young, this is because spending of school are the same despite the age, but the benefits do not start to accrue until it is completed References Dahlin, B. G., 2003. The Impact of Education on Economic Growth. Durham: Duke University Press. Goette, L., Huffman, D., Fehr, E., 2003. Loss Aversion and Labour Supply, Germany: Forschungsinstitut zur Zukunft der Arbei Institute for the Study of Labor. Stevens, P., Weale, M., 2003. Education and Economic Growth. London: National Institute of Economic and Social Research Press. Lalive, R., Ruf Oliver., Zweim ulle, J ̈., 2006. Wages and Risks at the Workplace: Evidence from Linked Firm-Worker Data, switzerland: University of Zurich. Blundell, R., Dearden, L., Sianesi, B., 2001. Estimating the Returns to Education: Models,Methods and Results. London: Centre for the Economics of Education London School of Economics. Schefold, B.,2008. CES production functions in the light of the Cambridge critique. Journal of Macroeconomics, 30(2), 783-797. Fasih, T., 2008. Linking education policy to labor market outcomes. World Bank Publications. Gandrud, C., 2012. Knowing the unknowns: financial policymaking in uncertainty (Doctoral dissertation, The London School of Economics and Political Science (LSE)). Kornai, J., Maskin, E., & Roland, G. (2003). Understanding the soft budget constraint. Journal of economic literature, 41(4), 1095-1136. Slaughter, M. J. (2001). International trade and labor–demand elasticities. Journal of International Economics, 54(1), 27-56. Arnberg, S., & Bjørner, T. B. (2007). Substitution between energy, capital and labour within industrial companies: A micro panel data analysis. Resource and Energy Economics, 29(2), 122-136. Görg, H., & Hanley, A. (2005). Labour demand effects of international outsourcing: Evidence from plant-level data. International review of economics & finance, 14(3), 365-376. Read More