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Chap008Solutions - CHAPTER 8 8-1 Evaluate the validity of...

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50 CHAPTER 8 8-1. Evaluate the validity of the following claim: The increasing wage gap between highly educated and less educated workers will itself generate shifts in the U.S. labor market over the next decade. As a result of these responses, much of the “excess” gain currently accruing to highly educated workers will soon disappear. The incentives for young workers to stay in school rose as a result of the increasing wage differential across schooling groups. The widening wage inequality, therefore, would be expected to increase the number of young persons who obtain a college education. This increase in the supply of highly educated workers will eventually narrow the wage gap between the highly educated and the less educated. The extent to which the supply response narrows the “excess gain” depends on two parameters: (1) the elasticity of supply measuring how college enrollments respond to the increasing relative wage of college graduates; and (2) the elasticity of demand measuring the responsiveness of the relative wage of college graduates to an increase in their supply. The greater these elasticities are, the greater role the “self- correcting” mechanism will play in reducing wage inequality in the future. 8-2. What effect will each of the following proposed changes have on wage inequality? (a) Indexing the minimum wage to inflation. Indexing the minimum wage to inflation should reduce wage inequality because the minimum wage helps prop up the wages of less skilled workers. Note that an increase in the minimum wage may have negative employment effects, but the proposed policy is not to increase the minimum wage but rather simply to prevent it from falling in real terms. (b) Increasing the benefit level paid to welfare recipients. Wage inequality measures the dispersion of wages in the working population. An increase in welfare benefits would likely induce less-skilled workers out of the labor force, and would reduce measured wage inequality by effectively eliminating the bottom of the wage distribution. (c) Increasing wage subsidies paid to firms that hire low-skill workers. Wage subsidies would increase the demand for less skilled workers, reducing wage inequality. (d) An increase in border enforcement, reducing the number of illegal aliens entering the country. If illegal aliens tend to be relatively less-skilled, the decrease in supply of illegal aliens would raise the relative wage of less skilled workers. In addition, if the less-skilled illegal aliens complement the skills of skilled natives, the reduction in the number of illegal aliens would decrease the wages of skilled natives. In sum, reducing the number of illegal aliens should reduce wage inequality.
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51 8-3. From 1970 to 2000, the supply of college graduates to the labor market increased dramatically, while the supply of high school (no college) graduates shrunk. At the same time, the average real wage of college graduates stayed relatively stable, while the average real wage of high school graduates fell. How can these wage patterns be explained?
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