HW 2 Solutions

HW 2 Solutions - Homework#2 Solutions Chapter 3 3 In 2006...

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Homework #2 Solutions Chapter 3 3.) In 2006 the United States had a population of 299 million, of which 70 million were either under 16 years of age or institutionalized. Approximately 151 million people were either employed or unemployed but actively seeking work. What was the participation rate in 2006? The labor force participation rate is calculated as: (non-institutional population 16 years or older in the labor force/non-institutional population over 16) *100 Using the numbers given we can calculate: (151 /(299-70)) *100% =65.5% 9. ) Use a work-leisure diagram to demonstrate that (a) if African-Americans have labor market opportunities that are inferior to those of whites and (b) nonlabor income is available in the form of say, disability benefits, African-Americans will have lower participation rates even though the work-leisure preferences (indifference curves) of African-Americans and whites are identical. Consider a scenario where the work-leisure preferences of an African-American and white person are identical. If the African-American faces inferior work opportunities compared to the white person, we can illustrate this as the African-American receiving lower wages for the same amount of work as the white person. Lower wages imply a flatter budget constraint. Furthermore, if there are non-labor income benefits available to the African-American person, this increases his income at 24 hours of leisure (0 hours of work) by the amount of the benefit. This is illustrated in the figure below. Using the same indifference curve for both individuals, we see that while the white person participates in the labor market, the African-American person is better off not participating. Note that the budget lines have been drawn so that both the African-American and white person have some non-labor income (say savings), but that the African-American is additionally eligible for some extra non-labor income via disability benefits.

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11). “The added-worker effect can be explained in terms of the income effect, while the discouraged-worker effect is based on the substitution effect.” Do you agree? Yes. The added-worker effect is based on a reduction in the partner’s non-wage income. We know lower nonwage income increases the probability of working, so the income effect encourages individuals to enter into the market. The discouraged-worker effect can be explained by a reduction in the wage rate that people get offered during economic downturns. This lowers the opportunity cost of leisure (price of leisure) and so people are more likely to consume leisure. The discouraged worker effect results in people staying out of the labor force. Additional Problem 1.)
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HW 2 Solutions - Homework#2 Solutions Chapter 3 3 In 2006...

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