Labor Policy Final Exam

Utility function

measure of satisfaction individuals receive from consumption (C) of goods and leisure (L)

U= f(C,L)

Utility function, U is an index, the higher U is, the happier the person

Indifference curves

Downward sloping, indicating the tradeoff between consumption and leisure, higher curves = higher utility, do not intersect, convex to the origin, indicating that opportunity costs increase

The Budget Constraint

Defines the workers opportunity set, indicating all of the consumption- leisure combinations the worker can afford

C=wh + V

Consumption equals labor earnings (wages x hours of work) plus non labor income (v)

Hours of work decision

Individuals choose consumption and leisure to maximize utility. Optimal consumption is given by the point where the budget line is tangent to the indifference curve

More leisure at a higher wage

when the income effect dominates the substitution effect, the worker increases hours of leisure in response to an increase in the wage.

The effect of change in non labor income on hours of work

an increase in non labor income leads to a parallel, upward shift in the budget line, moving the worker from point Po to point P1. If leisure is a. normal good, hours of work fall.

Reservation wage

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

Labor supply curve

Relationship between hours worked and the wage rate. At wages slightly above the reservation wage, the labor supply curve is positively sloped. If the income effect begins to dominate the substitution, hours of work decline as the wage rate increases.

Labor supply elasticity

σ measures responsiveness in hours worked to changes in the wage rate.

σ

Percent change in hours worked divided by the percent change in wage rate

The firms production function:

Describes the technology that the firm uses to produce goods and services. The firms output can be produced by a variety of capital- labor combinations

Marginal product of labor

The change in output resulting from hiring an additional worker

Marginal product of capital

the change in output resulting from employing one additional unit of capital

Profit maximization

Objective of the firm is to maximize profits. Perfectly competitive firms cannot influence prices of output to inputs.

Value of marginal product of employment

The marginal product of labor times the dollar value of impute. Indicates the dollar benefit derived from hiring an additional worker, holding capital constant.

Value of average product of employment

the dollar value of output per worker

Firms hiring decision

A profit maximizing firm hires workers up to the point where the wage rate equals the value of marginal product of labor.

Labor demand curve

indicates how many workers the firm hires for each possible wage. Downward sloping.

Maximizing profit

the profit maximizing firm should product up to the point where the cost of producing an additional unit of output is equal to the revenue obtained from selling that output.

Marginal productivity condition

Hire labor up to the point where the value of marginal product equals the added cost of hiring the worker

Employment decision in the long run

firms maximize profits by choosing how many workers to hire and how much plant and equipment to invest in

Isoquant curves

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

Isocost line

indicates all labor capital bundles that exhaust a specified budget for the firm. Indicate costly combinations of inputs, Higher isocost lines indicate higher costs

when the wage drops:

the firm takes advantage of the lower price of labor by expanding production & the firm takes advantage of the wage change by rearranging its mix of inputs, by employing more labor and less of other inputs, even if holding output constant

Long run demand curve for labor

Gives the firms employment at a given wage and is downward sloping

Labor market equilibrium:

coordinates the desires of firms and workers, determines the wage and employment observed in the labor market

nondiscrimination monopsonist:

must pay all workers the same wage regardless of their reservation wage, must raise the wage of all workers when attempting to attract more workers

payroll taxes

payroll taxes assessed on employers lead to a downward, parallel shift, in the labor demand curve

job amenities

good job characteristics are associated with low wage rates. Bad job characteristics are associated with high wage rates

present value calculaitons

allows comparison of dollar amounts spent and received in different time periods. PV- y/ (1+r)^t

ability bias

The more that unobserved differences in ability exist, the more biased our estimates of the returns to schooling will be, because ability—not education—may actually explain the wage differences

schooling as a signal

education reveals a level of attainment which signals a workers qualifications or innate ability to potential employers.

signal

information that is used to allocate workers in the labor market

wage differentials exist due to

Human capital investments that vary from worker to worker & ag differences

wage gaps

provide wage ratios between different percentiles in the distribution

90-10 wage gap

w90-w10/w10

50-10 wage gap

w50-w10/ w10

why did wage inequality increase

Demand shifts & institutional changes in the US labor market

Labor mobility

the mechanism labor markets use to improve the allocation of workers to firms

Mobility decisions

are guided by comparing present value of lifetime earnings among alternative employment opportunities in different locations

There is a ______ correlation between improved employment conditions and the probability of migration

Positive

There is a _____ correlation between the probability of migration and distance

negative

why do workers decide to immigrate?

If US earnings exceed earnings in the source country

what is an immigrant surplus

a measure of the increase in national income that occurs as a result of immigration

Does immigration raise national income?

Yes, by more than it costs to employ immigrants

What is job match

aligning a job seekers skills, experience, and interests with an employers specific job requirements

what is efficient turnover

measures how effectively a company uses its resources

what is discrimination

a preference for members of one group relative to another, holding other observed characteristics constant

discrimination occurs when:

the marketplace takes into account factors like race/sex when making decisions

taste based discrimination

a preference for one group over another

statistical discrimination

when decisions about an individual (like hiring or wages) are based on average characteristics of a group they belong to, rather than their own personal qualities.

oaxaca decomposition

a technique that decomposes the raw wage differential into a portion related to a difference in skills and a portion attributable to labor market discrimination

why has union membership declined?

the sturcutre of the labor market has been changing since the 1960s, blue collar works are less prevalent, jobs have shifted to right o work states, workers demand for union jobs has declined.

Efficient contracts:

imply that unions and employers bargain over wages and employment

what is featherbedding?

when labor contracts require overstaffing

why do strikes occur:

because neither party is willing to give in when negotiating

Threat effects:

involve nonunion forms offering higher wages to reduce incentives of workers to unionize.

Spillover effects

result when workers unemployed in the union sector enter the nonunion sector, increasing the supply of labor and decreasing nonunion wages.