Labour Economics Assignment

Subject: Economics    / Accounting
Labour Econom ics I
Practice Questions
1. Use the standard one person, one period labour-leisure model from class. Let total hours
supplied be L = 9N1}, where 6 is the Participation rate, N is the (?xed) population and
1"w is the average work time of the participants Let N=10,000. Assume everyone faces the
same offered wage rate with a distribution of reservation wages (w‘) as follows: 20% have w*= $5, 20% have w*=$8, 10% have w*=$10, 10% have w“=$H, 5% have
w*=$14, 20% have w*=$15 and 15% have w"’=$20. Assume that the wage in the market is $10.50.
a. What is the participation rate? Assume that income effects and substitution effects of a wage change on the demand for Tc are
opposite in sign and exactly offset each other. b. Derive the supply curve for labour, L, as a function of the wage rate, to. c. What is the local approximate labour supply elasticity evaluated at the current market
wage for a 10% increase in the wage, i.e. the elasticity of L with respect to w if the wage
increases from $10.50 by 10%. Assume now that the uncompensated elasticity of Tw with respect to the wage rate is 0.2. d. What does this imply about income and substitution effects of a wage change on the
demand for Tc?

2. A researcher uses a regression analysis to estimate a labour supply equation for married
females using data for married couples, a wife and a husband. The dependent variable is
the log of the wife’s weekly hours of work. The independent variables are the log of the
wife’s wage, the log of the husband’ s wage and the log of the non-labour income of the
household. The estimated coefficient for the husband’s way in this equation was -0.9. a. Interpret this estimated value in terms of the elasticities, etc. that appear in the demand
for the wife’s consumption time in our analysis of labour supply based on the labour‘lleisure
model. A second researcher repeats this analysis, but uses a sample of older married couples compared
to the sample of the ?rst researcher that was mainly younger married muplw. In this analysis the
estimated coe?-ieient for the husband‘s wage was -0.2. b. How would you explain this difference using the labom‘lleisure model?

3. Derive the effect of an increase in the husband’s way on the wife’s labour supply in the
housekaidproduca- model. Explain all the effects. 4. What is the effect onL = 9N3"… of a tax on non-labour earnings, V? Explain using the
labourlleisure model. 5. Consider a competitive industry where all ?rms face the same Leontief production
function X=min{L/o;, Km”!
that uses two factors, labour (L) and capital (K); the ?rms are price takers in the input markets and the supplyr of inputs is perfectly elastic to the industry. The price of labour is w and the price
of K is pl. The price of the product is p. Assume that the demand function for X is such that the uncompensated price elasticity, 11“,, is minus 1.5. The share of L in total costs is 0.3.
a. What is the marginal cost of producing X? b. What is the (approximate) effect on the industry demand font. of a 10% increase in w?
Explain. c. What is the (approximate) effect on the industry demand for L of a 10% increase in px?
Explain. d. What is the effect of a 20% neutml technological improvement on the demand for L?