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Econ 339 Winter 2007 Midterm Exam I - Solutions

# Econ 339 Winter 2007 Midterm Exam I - Solutions -...

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Northwestern University Department of Economics ECON 339 Labor Economics - Professor: Steffen Habermalz First Midterm Examination – February 5 th 2007 INSTRUCTIONS : Answer all questions. Make sure you show ALL your work. 1. Labor Supply: a) (5 pts.) According to Juhn/Potter what is the future of the Labor Force Participation Rate and why? Juhn/Potter conclude that the rise of the Labor Force Participation rate that we have seen since WWII has most likely come to an end. They don’t expect female labor force participation to rise any further than the high levels in the 90s unless targeted policies (subsidized child care, EITC) push more women in the labor force. Juhn/Potter also cannot predict much of a reversal in the trends of LFPR of men. While it is possible that stricter eligibility rules for disability claims will keep some men in the labor force and while some stricter social security rules might induce some men to stay in the LF longer Juhn/Potter do not think that this will translate into much growth in the LFPR. b) (4 pts.) Mindy faces a market wage of \$10 per hour and she can work a maximum amount of 168 hours. Her marginal rate of substitution equals C/L where C=consumption and L=leisure. Calculate the transfer amount that will make her indifferent between working and not working. She will be indifferent when C/L=reservation wage = \$10. C/168=10. C=\$1680. One would have to give Mindy \$1680. c) (6 pts.) Is there a welfare policy that will unambiguously induce people to work more AND join the labor force? Explain your answer. The answer is no. Here are the three examples used in class. Take-it-or-leave-it Grant - Somebody out of the labor force will not be induced by a grant to join the labor force - Somebody that is working experiences an income effect only and will work less Grant combined with grant-reduction by hour worked - Somebody out of the labor force will not be induced by a grant to join the labor force 1

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