UNC ECON 480 Final

LFPR

labor force/potential labor force

Unemployment rate

unemployment level/labor force

Equation for leisure time

leisure = 24 - work

Features of ICs in 480

1. ICs can't cross

2. Utility inc northeast

3. Negative slope

4 Convex (taste for variety)

5. leisure lovers = steeper slopes

Labor supply budget constraint

Y = w * Hours worked

Y = w * Hours of forgone leisure

Y = w (24-L)

Y + wL = 24w

With non-wage income: Y + wL = 24w + V

Labor supply graph

y-axis = wage

x-axis = leisure

upward sloping because a wage inc causes new workers to start supplying their labor

Added worker effect

(bc of income effect) secondary workers enter labor force to try and supplement family income when primary earner loses their job or experiences a drop in income

Discouraged worker effect

(bc of substitution effect) secondary workers exit labor force because lower expected wage

Reservation wage

lowest wage at which a person would be willing to work

Welfare: BC with a spike

only qualify if income =0

disincentivizes a return to work

what govt can do: verify eligibility over time, limit amount of time benefits can be claimed, pay only a % of prior wages

like unemployment insurance

Welfare: income maintenance programs

if income = 0, they get B

for every $ earned, the benefit B is reduced by t hours

S = B -tI

ex. SNAP

Welfare: income maintenance programs break-even income level

I = B/t

the amount of wage income at which a person no longer earns money from the welfare program

ex. EITC

Intertemporal substitution hypothesis

people allocate their time between work and leisure OVER their life cycle, taking advantage of the changing price of leisure

Labor demand: profit

Profit = revenue - labor costs - capital costs

Golden rule of profit maximization

p*f_L = w

marginal revenue of labor = marginal cost of labor

Marginal product of labor (MP_L)

more labor input changes input

Marginal revenue (MR)

each new unit of output can be sold for more revenue

Marginal revenue product of labor (MRP_L)

MP * MR

Value of marginal product of labor (VMP_L)

the dollar value of good created when the firm employs their marginal unit of labor (when MR = p for perfect competition)

Law of diminishing marginal returns

adding another unit of labor increases output by less than the previous unit

Profit maximizing rule

w/p=MP_L

Long run labor demand

firm can now also choose level of labor

MRP_L = pMP_L = MC_L

and

MRP_K = pMP_K = MC_K

so....

p = w/MP_L

p = w/MP_K

cost minimization: w/MP_L = r/MP_K

How to derive long run labor demand

Find FOCs, set equal, K SHOULD NOT BE IN THE EQUATION

Scale effect

as wages rise, production act every level is more expensive. firms produces less and hires less labor

Substitution effect

as wages rise, relative cost of capital falls. firms switches to suing more capital

Shifts labor demand

Product demand, productivity of labor, # of employers, price of other inputs

Capital vs labor compliments or substitutes??

If scale effect >: gross compliments

If substitution effect >: gross substitutes

Why market demand is less elastic than firm demand

the fact that every firm tries to take advantage of lower wage results in push back

wage lowers -> everyone hires more -> supply rises/price falls -< MRP_L falls -> use less labor

Own-wage elasticity of labor demand

how sensitive a firm's demand for a certain type of labor i is to changes in wage

% change in labor demanded / % change in wage rate

(w/L) * (dL/dw)

Hicks-Marshall laws of derived demand

elasticity of the product, substitutability of other factors of production, supply of other factors, share of total firm costs that are labor

Unions and elasticity

unions win bigger when inelastic labor demand

Quasi-fixed

can change them quickly, but only at a high cost

MC_H = marginal cost of increasing HOURS

MC_L = marginal cost of increasing WOREKRS

How to optimize workers and hours worked

p*MP_H = MC_H

p*MP_W = MC_W

MC_H/MP_H = MC_L/MP_L

Monopoly optimization

MRP_L = MR*MP_L

VMP_L explanation

firm uses labor up until the point where MR = VMP_L

perfect comp means the firm's incentive to use labor aligns with society's values

Efficient allocation

when all the VMP_Ls equal each other and = w

Monopsonist optimization

MR*MP_L = MC_L

Wage differentials

differences in wages that do not cause movement of labor

Fringe benefits

good or service given as compensation

can be worth more than 1$ of pay bc: tax incentives, locking in adequate benefits

for firms: tax advantages, economies of scale, efficiency considerations

Human capital

skills and abilities that workers develop now

Present value

the value today of something received in the future

Decision rule to attend college

Net benefit of college > net benefit of no college

Predictions about going to college

1. Young bc investing early means returns are larger

2. Attendance decreases as cost rises

3. Attendance inc as gap between earnings of college vs high school grads widens

Internal rate of return

the rate of discounting which makes the net present value of an investment 0

If we had to pay for college by borrowing, how high can the interest rate be before we can't pay back the loan using the gains from human capital?

Wage-school locus

Relationship between years of schooling and salary provided

y-axis: dollars

x-axis: years of schooling

diminishing marginal returns of education

falling benefits and rising costs

College wage premium

Ratio of earnings of college graduates to the earnings of high school grads

Capital market imperfection

A bias/imperfection causing one type of investment to be disfavored by lenders

Defaulting on a student loan, it's not like they can take ur degree away so instead they lend you money on less favorable terms

Implication of capital market imperfections for college decision

Econ disadvantaged families find it harder to invest

Private individuals may under-invest in human capital

Ability problem

since more people are likely to get human capital, it is hard to tell how much human capital is actually making you better

Signal

a visible sign which can be acquired at a cost by an individual to show quality

Signaling hypothesis

Education contributes nothing to productivity but acts as a signal to show quality

Pooling equilibrium

when everyone is mixed in together (find average productivity)

Separating equilibrium

gets LP and HP workers to reveal themselves

Separating equilibrium requirement for LP workers

give up and reveal as LP > pretending to be HP

LP wage > Pretend wage - cost of education

Separating equilibrium requirement for HP workers

Give up and let them thing ur LP < Be HP

LP wage < HP wage - cost of education

Sheepskin effects

Signals causes wage gains, not the education itself

On-the-job training

human capital gain while/because of working

Firm will give a worker training (T) if...

PV Cost of training < PV Benefit of training

Cost to hire and train marginal worker in PV

w_0 + w_1/(1+r) + Z(

Z = training

Firm profit maximization problem

pMP_L,0 + pMP_L,1 = w_0 + w_1/(1_r) + Z

General training

increases worker's productivity to many employers equally

trainee pays for it through lower wages

General training story

1. Firm pays cost to train employee and takes it out of their wage

2. Training done -> employee paid a wage that equals their higher MRP

3. Employee indifferent to staying or leaving

Specific training

increases worker's productivity only at the firm where trained

firm must pay

raises productivity of workers and extra revenue (still risky for firm though)

Specific training story

1. employee paid less than MRP

2. employee has higher MRP after trainings and gets paid back for costs w/ higher wages

3. if employee leaves, MRP goes back to w*

1. training firm will pay

2. employee's productivity will rise but they cant leave

3. no comp pressure, so still w*

4. firm under-paying worker

Age-earning profile

earnings rise at diminishing rate

y-axis dollars

x-axis Age

Mincerian wage function

log (w) = as + bt + ct^2 + other stuff + e

s = years of schooling

t= years of labor market experience

Principle-agent problem

a situation where the agents incentives conflict with principal's goals

Principal

entity hiring someone to achieve a goal

Agent

person being tried to help achieve the principal's goal

Shirking

taking unauthorized breaks, not producing at agreed upon level, etc.

Piece rates

employees are paid based on # o units of output

pros: no supervision, produce as much as possible

cons: hard to identify personal output, collectively make job look harder, uncertainty in wages

Commissions

% of value of sales goes to employee

pros: no supervision, mins shirking

cons: only if directly related, uncertainty in wages

Tipping

customer paid directly to service provider

potench explanations: incentivize good performance, monitoring, filter out bad employees

why do we tip? social norm, customers prefer it

Salary

fixed level of wage income

cons; shirking

often include a lot of raises and promotions to discourage shirking

Quasi-fixed resources

necessary to the operation of a business but not tied to level of production

Bonuses

payments beyond agreed upon salary

personal performance: paid based on personal perforce of job (workers focus on bonus-related performance, not necessarily being the best worker)

team performance: bonus given to all team based on how they preform (shirking/free riding)

Profit sharing

pay system that allocates a specified portion of a firm's profits to employees

free riding

Equity compensation

pay scheme where part of worker's compensation is in firm's stock

free riding

Tournament pay

Basing monetary compensation on relative eperformance usually w/ large prize for winner and rapidly dimisnihign returns with lower rankings

1. winner uncertain

2. more effort = more likely to win

3. winner based on relative performance

3. rewards heavily concentrated for

All players exert high effort so they can try to win

Happens when we care about maxing effort and tough to determine productivity

Causes self selection problems

Peter principle

You are promoted up to your level of incompetence

Efficiency wages

the wage that minimizes an employer's wage cost per effective unit of labor service employed

How much efficiency wage to pay

1 = w/Q * de/dw

y-axis output (Q)

x-axis wages

< means firm gets less output and firm pays lower wage s

Nonsequential search

take N jobs and highest offer

not optimal

Sequential search

decide in advance which wage offers are worth accepting then keep searching until ur offered an acceptable wage

McCall search model

works when motivated buyers/sellers, don't find each other instantly, information imperfections

Value of accepting job

W = w/(1-B)

Value of rejecting job

U = z + B(Value of searching tmrw)

U = z + B SUM (pr(w) * value of getting offered w tmrw)

Labor union

Orgs of workers that want to improve monetary and non-monetary conditions

Sherman Anti-Trust Act

used to argue that unions were monopolies

National Labor Relations Act of 1935

Firms had to negotiate with unions, Ntl Labor Relations Board

Protected: talking about pay, circulating petitions, speaking collectively about safety issues

Labor-Management Relations Act 1947

Right to work, unions can vote to disband

Landrum-Griffin Act

Unions have to be more democratic and required transparency

JFK Exec Order 10988

federal employees can form unions

Civil Service Reform Act

Federal workers can union but can't strike

Union worker model

y-axis: income

x-axis: leisure

union wants to collective bargain to raise wage

only will join union if it doesn't mean losing a ton of hours

Union success?

Inelastic labor demand curves, if firm is monopoly (easily captured profits), costs of organizing union, legal enviornmet

Union model

y-axis: wages

x-axis: employment

monopoly union sees labor demand curve and chooses utility maxing point

trade some reduced employment for wage hike for remaining union members

leads to a loss of efficiency

Union firm model

y-axis: dollars

x-axis: employment

lower isoprofit = higher profits bc employment level wage lower

Contract curve

deals they agree to (efficient contract)

unions and firms should bargain over wages AND employment

Strongly efficient contracts

vertical contract curve

firm and union get a pareto optimal contract

employment and output at the firm are the same as in the comp market w/ no union

union bargaining just would distribute revenue between firm and workers