Labor Economic

1. Explain the reasoning behind and give an example of the following three possible

explanations for unemployment:

(a) Efficiency wages

(b) structural unemployment

(c) frictional unemployment

2. Suppose that initially the Pennsylvania economy is in equilibrium with no

unemployment: L s = –1,000,000 +200w and L d = 19,000,000 – 300w, where w is

annual wages and E is employment. Then structural unemployment arises because

the demand for labor falls in Pennsylvania but the wage is inflexible downward and

no one migrates out-of-state. If labor demand falls to Ld’ = 18,000,000 – 300w, how

many workers will be unemployed in Pennsylvania? What is the unemployment

rate?

3. Suppose the supply curve for labor in a competitive industry is given by L s = 10 +

w and the demand curve for labor is L d = 40 – 4w. What is the equilibrium wage

and employment? What is the unemployment rate? Suppose now that all firms pay

an efficiency wage of $8/hr. How many workers lose their jobs? What is the

increase in the size of the labor force? What is the increase in the labor force

participation rate? What is the new unemployment rate?

4. Two individuals, Ms. S and Ms. T, just graduated from college and are looking for

jobs. Both individuals have only limited amounts of savings. As a result, their

reservation wages are identical. However, Ms. S had the opportunity to take this

class, so her skills are superior to those of Ms. T. Answer the following questions,

providing graphs to demonstrate what is occurring where appropriate. (a) How does

the expected duration of unemployment compare across the two individuals? (b)

How does the wage each individual expects to receive compare across the two

individuals? (c) Once each has begun working, we observe that Ms. T is at a

higher-paying job. How can you (or can you?) reconcile these facts with the job

search model from class?

5. If children increase the reservation wage of women (since it is only worthwhile to

work if wages exceed the cost of childcare), what is the predicted effect of children

on the duration of job search and expected wage once employed for women with

young children? If the government decides to subsidize child care, lowering the cost

of child care and thereby lowering the reservation wages of women with young

children, what effect would the subsidy have on the duration of job search and

expected wage once employed compared to the world with no subsidy?

6. If white workers in the US have access to better job search information (e.g., due to

greater internet access or access to other job networks) than minorities, does this

constitute one possible explanation of the racial earnings gap? Explain.

7. Is the following assertion true, false, or uncertain? “Increasing the level of

unemployment benefits will prolong the average length of unemployment spells.

Hence, a policy of raising UI benefits is not socially desirable." Explain.

8. Suppose that unemployment insurance system is structured such that Bmin = 200,

Bmax = 500, and B = 100 + 0.5w in between, where w is the previous weekly wage

and B is the level of weekly UI benefits. Graph this benefit formula and calculate the

benefits and replacement rates for workers who earned $100, $500, and $2000 in the

last week of working.

9. Spector (2015) discusses the theoretical predictions regarding partial unemployment

insurance for part-time workers seeking full-time employment on the number of

part-time employed. Explain.

10. Suppose that labor demand for burger flippers at fast food restaurants in a small city

is Ld = 300 –20w, where E is the number of workers and w is the hourly wage. The

equilibrium wage is $4/hr. The government, however, enacts a binding minimum

wage of $5/hr. (a) How does the minimum wage affect employment in these fast

food restaurants? Show graphically, as well as estimate the effects on employment

in the fast food sector. (b) Suppose that in the city above there is a sector to which

the minimum wage law does not apply. In this sector, Ls = –100 + 80w and Ld =

300 – 20w before the passage of the minimum wage law. Suppose that all workers

who lose their job due to the minimum wage legislation seek work in the uncovered

sector. What happens to the wage and employment level in the uncovered sector?

Show graphically and explain.

11. In the reading by Kuhn (2013), he discusses one reason why the rise in

unemployment due to the Great Recession may understate the true decline in the

economy relative to prior recessions. What is the reason?