labor econ questions

Question 1 (25 points)

Consider the market for risky labor. Answer the following questions, and add a graph for each of the two subquestions.

(A) (10 points) We discussed in class that in the labor market for window washers in the U.S., the hourly wage for washing “safe” buildings is around $12, whereas the hourly wage for washing “risky” skyscrapers is around $16. Explain what would happen to the compensating wage differential and employment in the risky sector under each of the following two (independent) events:

1. After seeing the movie “Skyscraper” (featuring Dwayne Johnson as the risk-loving hero), all workers suddenly become somewhat less afraid of heights.

2. Due to overpopulation, many cities across the U.S. start building a lot more skyscrapers.

(B) (15 points) Read the Wall Street Journal article “Higher Wage Bills Will Eat Into Grocers’ Gains” from April 1, 2020. (You can find it in the Articles folder on Canvas, or through this link). Using the model we saw in class, explain in detail how the recent Coronavirus has prompted some employers (such as Whole Foods, Walmart, Target and Amazon) to offer “hazard pay”, i.e. a (temporary) wage increase for employees doing certain jobs that used to be considered “safe”, but are now suddenly considered more “risky” due to the possible exposure to the virus. In particular, describe the effects that COVID-19 may have on each of the following:

1. the workers’ perceived risk of doing their jobs, their reservation prices, and the resulting labor supply curve in this labor market,

2. the demand for the products and services offered by supermarkets and e-commerce retailers during the pandemic, and the resulting labor demand curve in their labor market,

3. the effects on the equilibrium wages and employment in “risky” sectors, and

4. the effects on supermarkets’ revenues, costs and profits in the short run.

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Question 2 (30 points)

Suppose there are 100 workers in the economy, indexed by i = 1, 2, ..., 100. Worker i has preferences given by

Ui = w − aix

where w is the wage, x is the proportion of the firm’s air that is composed of toxic pollutants, and ai is a preference parameter. Suppose that preferences are heterogeneous, such that a1 = 1, a2 = 2, ..., a100 = 100. Suppose there are only two types of jobs in the economy: clean jobs (x = 0) and dirty jobs (x = 1). Let w0 be the wage paid by the clean job and w1 be the wage paid for doing the dirty job.

(A) (10 points) What is the reservation price for each worker i? Make a graph of the labor supply curve in the market for dirty jobs, with employment on the horizontal axis and the wage differential (w1 − w0) on the vertical axis.

(B) (10 points) Suppose that there are only 30 available jobs in the dirty sector. Assume that labor demand is fully inelastic. If the clean job pays $10 per hour, then what is the equilib- rium compensating wage differential? Who is the “marginal worker” here? Show that the “marginal worker” gets the same utility irrespective of whether he accepts a clean or a dirty job.

(C) (10 points) Make a graph that depicts the workers’ total welfare surplus from accepting dirty jobs. How large is it, and how do you interpret it in words?

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Question 3 (30 points)

Consider a competitive labor market. Assume the labor supply curve is given by w = 2 3 E + 2

and the labor demand curve by w = −1 3 E + 8, where E stands for employee-hours (or number of

workers) and w is the wage rate.

(A) (10 points) Calculate the competitive equilibrium (E∗, w∗), the worker surplus and the pro- ducer surplus.

(B) (10 points) Now assume the government assesses a $3 payroll tax on firms for every employee- hour. Calculate the new equilibrium wage and employment level, the worker surplus, the producer surplus, and the government’s tax revenue. How large is the deadweight loss caused by the tax? Make a graph.

(C) (10 points) Now assume that there is no payroll tax, but assume instead that the govern- ment makes all firms provide mandated health insurance and paid sick leave to its workers. Although this costs firms $3 per employee-hour, workers value it at $6. What is the resulting equilibrium wage and employment level? What is the worker’s total compensation? What is the firm’s total cost per worker? How does this compare to what you found in part (A)?

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Question 4 (15 points)

Consider the Mariel boatlift natural experiment discussed by David Card (1990), which we studied in class. For each for the following statements, write down whether you think the statement is “Correct” or “Wrong”. Motivate each of your answers in 1-2 sentences and/or by adding a graph.

(A) (5 points) Under the assumptions underlying the diff-in-diff methodology, Card concluded that, relative to cities in the control group, the unemployment rate among native Miami workers went down after the Mariel immigration shock happened.

(B) (5 points) Using the simple model of labor supply and demand we saw in class, we would expect that the Mariel boatlift shock, by causing a sudden increase in labor supply in Miami in the short run, should cause (1) wages to decrease, (2) native workers’ employment to decrease, and (3) total employment (natives + immigrants) to increase in the short run. In the longer run, we would expect wages in Miami to increase again, because workers and/or firms would move to better locations, and because firms in Miami might expand their size.

(C) (5 points) The subsequent ”Mariel-Boatlift-that-did-not-happen” studied by Angrist and Krueger (1999) offers convincing evidence that the “parallel trends” assumption underlying diff-in-diff studies is a reasonable one to make when comparing the evolution of (un)employment rates in Miami to similar cities.

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