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Reykjavik University Labor Economics Worksheet

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International and Labor Economics Final exam 2022 Associate Professor Katrín Ólafsdóttir The exam should be turned in through Canvas before 20:00 on March 2. You are responsible for any possible technical problems. You are allowed to use the textbook and other written sources to assist in answering the exam. If you use sources other than the textbook, you need to cite them and include a list of references. You are not allowed to refer to other persons (whether fellow students or others). If a question is unclear, feel free to send me an email with your question (katrino@ru.is). If you include a phone number, I will call you back. All the answers have to be in your own words. Any copying word for word, or copying graphs (without proper referencing) amounts to cheating and cheating results in a grade of 0 for the exam and hence for the course as a whole. When returning the exam on Canvas, it will be run through Turnitin which will pick up any text copied directly from other sources. Note that you can only submit the exam once. Make sure you answer the questions asked, be clear and concise. Use graphs where appropriate and remember to label and explain your graphs. It is acceptable to draw the graphs by hand, take a picture and paste it in with the answers. Just make sure it is legible. V-733-ILEC Final 2022 Part I: Answer the following questions (25%) 1. (5%) Last week Russia invaded Ukraine. As a result, many sanctions have been imposed on Russia. Suppose the sanctions involve a ban on all trade with Russia. In purely economic terms, what are the likely effects of such a ban? Who wins? Who loses? 2. (8%) James can work up to 16 hours per day at his job. His wage rate is 2500 per hour for the first 8 hours. If he works more than 8 hours, his employer pays double the hourly rate for the first 8 hours. Draw James’s daily budget constraint. 3. (12%) The company JaFeMa is a profit-maximizing company that produces fancy TVs, each of which costs 400. The company can hire as many workers as it wants for 3200. JaFeMa has the following production function: a) b) c) d) Number of workers Production 0 0 1 14 2 25 3 36 4 44 5 50 6 54 Find the marginal production and marginal revenue product for the company. Draw the demand and supply curves for labor in this company. How many people will the company hire? What if the wage was 1600? Then how many would the company hire? V-733-ILEC Final 2022 Part II: Answer 3 of the following 5 questions. Each is worth 25% of the grade (75%). If you answer 4 or 5 questions, only the first 3 questions answered will be graded. 1. (25%) You are hired as a special adviser to the Minister of Finance to give advice on income tax issues. You know that increasing income tax rates is equivalent to reducing the wage rate. The Minister tells you that he believes that if he reduces the income tax rate, everyone will work more and there will be a net increase in tax revenue. What is your response as a responsible labor economist? Explain carefully. Do you agree with the Minister? 2. (25%) Many studies have shown that wages in the public sector in Iceland tend to be lower than wages in the private sector. What could be possible explanations for this? Please approach this question from at least three directions. 3. (25%) The unemployment rate in Iceland was 3.3% in January 2022. From the middle of 2020 to the middle of 2021, the unemployment rate measured 7.2% on average. a) Discuss and explain the different types of unemployment. b) Which type of unemployment is falling during this period? Explain carefully. c) Is there a reason for policy makers to intervene in the market now that unemployment is back to the same level as before the covid-crisis? Explain. 4. (25%) What does the human capital theory predict about migration. Who moves and why? Who is likely to gain from moving and who is likely to lose? What do we need to keep in mind when looking at the advantages of migration? 5. (25%) Define elasticity of demand for labor, both own-wage elasticity of demand for labor and cross-wage elasticity of demand for labor. Discuss the significance of elasticity and whether, and if so, it is possible to affect the elasticity of demand for labor. Bjarki Pétursson Lokapróf 2019 Part I: Answer the following 4 questions (40%): 1. (10%) Comment on the following statements and analyze from an economic standpoint. Do you agree or disagree? a) „Rising productivity means that it takes fewer workers to produce a given level of output. Productivity increases are therefore a source of unemployment“. b) „It is impossible that you can be worse off with a wage increase than you were before it“. A ) This is partly true and agreeable, that is the first part of the sentence. However, the unemployment will not necessarily increase, it will differ between job markets. Jobs are becoming more obsolete, meaning that machines are taking over jobs that humans were working. Therefore, the IT business and technical advancement are taking over some jobs (e.g. automatic cashiers machinery). The demand for skilled workers has increased due to the technological advancement because now you need more people with skills to work on the machines and know how to fix them. Productivity increases due to machines and some people will lose their jobs, most of them are unskilled workers. However, other people with other skills will come in and take over their jobs and therefore, the unemployment is not increasing. B) True, you cannot be worse off after you get a wage increase, as long as you are able to work the same amount of hours as you did before and now you get higher wages for them. The demand for leisure might increase due to the wage increase and that does not mean you are worse off. The thing about wage increase and if it applies to many workers getting wage increase, there is a risk of higher inflation rate (goods get costlier). Therefore, it is important to measure wage increase as real wages (Purchasins power after a wage increase) of all people. As long as inflation rate does not get above the wage increase, you are better off after the wage increase. For example, if I get a 10% increase in wages and the goods I must buy have increased for 20% due to higher inflation, then my real wages/purchasing power have decreased. 2. (10%) Assume that disability benefits for individuals with disabilities that prevent them from working full time, is 10000 krónur per day. The disability benefit is only paid to those who do not work at all. Suppose that the benefit rules are changed so disabled workers are guaranteed income of 10000 krónur per day. Hence, if their wages are less than 10000 krónur, they receive a benefit that brings their total daily income (wages plus the benefit) up to 10000 krónur. When the wages of a disabled individual rises above 10000 krónur per day, their disability benefits end. Draw the old and the new budget constraints (label each clearly) associated with the disability benefit program, and analyze the work incentive effects of the change in benefits. There will be no money incentives to add a few hours of work in your day as a disabled person as your wages+benefits never go above 10.000 kr. However, the social incentive is the major factor for them. To be able to participate in the society is the major incentive for them. 3. (10%) An empirical study by Daniel Hamermesh found that for every 100 teenagers who might be employed if a youth minimum wage was introduced (lower than that of adults), between11 and 33 adult workers would be displaced. a) According to this finding, are teenagers and adults gross complements or gross substitutes? Would the cross-wage elasticity between teenagers and adults have a positive or negative sign? Gross substitutes. You pay the young adults lower wage than the older adults. Therefore, it would have a positive sign to hire 100 young adults on lower wage and negative sign to get rid off between 11 and 33 adult workers. Employment of adults is falling and the employment of teenagers rises. b) Would the substitution effect associated with a decrease in the teenage wage dominate the scale effect or would the scale effect dominate the substitution effect? The scale effect will dominate the substitution effect. When the production cost gets cheaper (lower wages being paid), we want to produce more and that will make us hire new people (teenagers over adults) and then we have a Scale Effect. c) How would the demand curve for adult workers change if the wage paid to teenagers falls? Demand for adult laber falls after the wage paid to teenagers falls as companies are trying to maximize productivity and profits. 4. (10%) Consider an individual who currently earns $20,000 per year as an unskilled laborer. Suppose that by taking courses full-time at a university for one year, the person can qualify for a more skilled job paying $23,000 per year that is guaranteed to last for 10 years (after which the person would retire). Assume the cost of tuition and books at the community college for one year is $2,000 and that the current interest rate is 6%. Is this a good investment? Show your calculations. Explain. It pays off to start in school. The present value ends up being 157.813 dollars whereas the present value for only working ends up being 147.202 dollars. I give myself that the individual starts in school for the first year and then works for 10 years. The individual that is only working works for 10 years. Therefore, the school individual starts in minus and then works for 10 years. The results are: It pays off to start in school eventually. Part II: Answer 3 of the following 5 questions. Each is worth 20% of the final grade (60%). If you answer more than 3 questions, the first 3 questions answered will be graded. 5. (20%) You are hired by the Ministry of Finance to advice the Minister on income tax issues. You know that raising income tax rates is equivalent to reducing the wage rate. The Minister tells you that he believes that if he reduces the income tax rate, everyone will work more, get more income, and there will be a net increase in tax revenue. What is your response as a responsible labor economist?
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