Labour Economics Seminar 3 PDF

Preview

Summary

Question 1. The cost of the apartment is the same either way if he is studying or not. I am taking into account that he does not need to lend money to pay for tuition and rent when he is studying. We can see that when discount rate is he is better of not getting an MBA, but if the discount rate is t...

Description

Question 1.

The cost of the apartment is the same either way if he is studying or not. I am taking into account that he does not need to lend money to pay for tuition and rent when he is studying. We can see that when discount rate is 5% he is better of by not getting an MBA, but if the discount rate is 4,5% then he should get the MBA I calculate the discount by taking the earnings/costs and dividing it by the discout rate+1 and square+ what year in the future it is. Example discounted earnings in year 3 is equal to (40000/1,05^2). Here I have taken into account that the first year is not discounted, here denoted as year one. So the same year he is 50 years old. Question 2. a) It might be false if the earnings are not discounted for and the costs of going to college is not being accounted for. Because you have to discount the future earnings that Ana is missing when she is studying in college. If the college degree takes 3 years then she is missing 20000 euros per year that she could have earned if she worked instead. These earnings must also be discounted to paint a clear picture of the gains to education. If Ana is perfectly rational and knows how much she will earn in the future and has a clear sense of her discount rate then she will go to college as long as the discounted future benefits minus costs from college is higher than the discounted future earnings of working with a high school degree. b) If Ana has a low discount rate for future earnings then it is likely that the annual earnings will be higher than 5000 euros. If Ana has a high discount rate for future earnings then it is likely that the annual earnings will be lower than 5000 euros. Also the cost of college in terms of tuition, books, accommodation factor in. If the costs to getting a degree is low then the annual earnings increase is likely to be higher than 5000 euros and vise versa.

Question 3 a) Then you value working in academia more than 10000 euros per year of working in a consulting firm. By looking at a indifference curve you would value more free time in terms of flexibility. You get higher utility from working with freely chosen research topics than working in a consulting firm with less flexibility and more strict tasks and topics. Inelastic supply curve between jobs, so a high wage increase is needed to work as a consultant instead of working as a professor and earning less.

b) Likely not. Because economics professors have a high utility from working as a professor and a wage increase might tempt some professors to change occupation, but definitely not all professors. The value of flexibility and working with something you enjoy is worth more for many professors than getting a high paycheck. Also if all economics professors would change occupations because of a wage increase then colleges would have no professors left. In order to attract professors they would need to increase the wages to the point where supply meets demand. Question 4.

a) Use a graph to describe the equilibrium in the labour market in this economy.

The supply of labour to risky jobs slopes up because as the wage gap between the construction job and the tourist job increases, more and more workers are willing to work in

the construction job. The demand curve slopes down because fewer firms will offer risky working conditions if risky firms have to offer high wages to attract workers. The market compensating differential equates supply and demand, and gives the “bribe” required to attract the last worker hired by risky firms. When some workers like to work in risky jobs. Then they are willing to pay for the right to be injured. If the demand for such workers is low the market compensating differential is negative. At point P, where supply equals demand, workers employed in risky jobs earn less than workers employed in safe jobs.

Different workers have different indifference curves as illustrated in the figure above. Here it is likely that tourism workers (group 2, very risk averse) are illustrated by Ua. Group 1, less risk averse are illustrated by Uc or Ub depending on how risk averse/risk loving they are. The government introduces a law that requires companies to invest in technology so that the risk for workers in any of the two sectors does not exceed the equilibrium risk in the tourism sector.

b) What would be the effect of this law on the well-being of group 2? It is likely that the technology is costly for the firms and now the cost of hiring a construction worker is higher with leads to less demand for construction worker. Group 2 who are not very risk averse will likely have been employed in construction as this gave them the highest utility. After the law they will have lower utility because firms demand less workers and their wage might be lower if the technology makes workers obsolete and creates lower demand for construction workers.

Question 5. a) Barcelona Indifference curves. Here shown with different workers with differences in how much they dislike smell. U0 is most representative for the real indifference curve in this task. And alternative wage is here W0. For both there are no isoprofit functions as the cost of reducing the smell is zero.

Sevilla Indifference curve

b) Level in Sevilla is less or equal to S Level in Barcelona is zero as it costs nothing to avoid the smell. c) In this problem it is likely that the wages is the same in both places and equal to W. I reality big cities have higher wages in general than smaller cities, so it is likely that workers in Barcelona earn more. Question 6. a) Interpret the coefficients on education, experience, US born, years of residence, and female. Use the third specification from the table. The coefficient education measures the returns to one more year of education for an individual. The coefficient to education is 0.06 so one more year of education contributes to a 6% increase in hourly wage

The coefficient experience measures the returns of experience for an individual. Experience is the number of years after education was completed. The coefficient to experience is 0.02 so one more year of experience contributes to a 2% increase in hourly wage The variable US born tells us if the individual was born in the US and is a dummy variable that takes the value 1 if the individual was born in US and 0 otherwise . The coefficient to US born is 0.01 so being born in the US contributes to a 1% increase in hourly wage. Years residence” is the number of years that an immigrant has been living in the US (0 if US born). The coefficient is 0,004. So living one more year in the US if immigrant contributes to a 0,4% increase in hourly wage. “Female” is a dummy that takes value 1 if the worker is a female. The coefficient is -0.23 so beeing female contributes to a 23% reduction in hourly wage. b) Yes spanish workers earn on average higher wages than mexians. Puerto Ricans make on average more than spanish workers. The coefficient for spanish is 0,07 while for Puerto Ricans it is 0,09. c) When adding other regressions the importance of speaking English is lower than without adding other regressors because it picked up other characteristics such as education, immigration and other factors. When the other factors are included then it contributes less to the wage. d) No, we can not conclude that if a worker speaks English its wage will increase with 13% because there are other factors such as ability that is difficult to measure and we have the problem of omitted variable bias in the regression.

Question 7. a)

b) Yes they find a relationship between returns to schooling and average years of schooling. They find that: “The returns to schooling have declined significantly since the 1980s, when they were above 13 percent, to just over 9 percent in recent years (Table 4). This is due, at least partly, to the

unprecedented expansion in schooling since the 1980s and, especially, since the late 1990s. Schooling has expanded by almost 50 percent since 1980. Over a 30 year period the returns to schooling have declined by 3.5 percentage points, or 0.1 percent a year. At the same time, schooling increased by more than 3 years, or 2 percent a year. On average, another year of schooling leads to a reduction of the returns to schooling by one percentage point.”

c) The returns from education is higher in Barro-Lee dataset compared to the United States and Mexico data. This might be because people in the US usually are higher educated on average and the gains from education are more present in poorer countries as we saw in a)....