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AK ECON 3610 Sample Final Answer Key

AK ECON 3610 Sample Final Answer Key - YORK UNIVERSITY...

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Unformatted text preview: YORK UNIVERSITY ATKINSON COLLEGE ECON 3610.03 LABOUR ECONOMICS PROFESSOR HELMAR DROST ANSWER §ET TQ FINAL EXAMINATION PART I: 1d; 2b; 3a; 4b; 5b; 6a; 7c; 8c; 93’10c. PART II: T us i n 1: a) year average hggrly real wage index 1985 , 100.48 1990 98.89 1992 100.00 1995 101.03 1997 101.82 b) The percentage change in the average hourly real wage between 1985 and 1995 is 101.03 -— 100.48/100.48 = .55 c) There are at least three reasons: First, labour productivity throughout the 803, and 903 was significantly lower than during the 503, 605 up to the mid 703. This depressed nominal wage growth. Second, starting in 1988 the Bank of Canada pursued a zero inflation policy that drastically reduced the inflation rate. Low inflation rates give unions little cause to push for higher wages. Third, the 1990/91 recession further hampered nominal wage growth. ‘ d) The labour's share is total labour income divided by total national income or L x W/ PxY. V In a recession the numerator, i.e. total domestic income declines while the numerator does not decline, at least in the initial phases of the recession. The reasons are twofold: In a cyclical downturn firms tend first to adjust their labour input by reducing hours of work rather than by laying off workers. Firms hoard labour to preserve their investment in human capital. The other reason is that firms cannot easily cut wages. They are often bound by wage contracts. In conclusion, the labour’ share rises because L x W does not change significantly at first while domestic income declines. To Questign 2: a) The statement is true. The income of the husband is non—labour income of the wife (assuming that both pool their incomes). As the husband’s income increases the n0n— labour income of the wife increases. A change in non‘labou‘r income has a pure income effect, i.e. the wife’s demand for leisure increases and she tends to work less. A wage increase, on the other hand, has an income and a Substitution effect. A priori, we don’t know which effect is the stronger one. However, empirical studies indicate that for women the substitution effect outweighs the income effect. In case of a wage increase, therefore, the wife tends to work more. b) A reduction in the income tax rate implies an increase in the nominal after tax wage. A negative labour supply elasticity indicates that as wages increase labour supply declines. This would be the case of a backward bending supply curve. The income effect outweighs the substitution effect. c) A wage subsidy shifts the labour demand curve out to the right. The more inelastic, is. the steeper the labour supply curve, the larger the wage increase, is. the larger will be the share of the'subsidy that goes to the poor. . I ‘ h A (halal-LN. 6 e. (utters d) This is another question testing the understanding of the effect of non-labour income changes on labour supply. The drop in the value of stocks and bonds implies a drop in the value of household wealth and possibly a drop in non-labour income. A change in non-labour income has only an income effect (no substitution effect). If non-labour income declines the demand for leisure declines (pure income effect) assuming that leisure is not an inferior good. As demand for leisure declines the supply of labour increases. W m a) This would increase the ”demand elasticity for labour. An elimination of all tariffs imposed by the Canadian government on steel imports from non-NAFTA countries would increase competition from foreign countries which would make it more difficult for Canadian steel companies to pass higher Wages on to customers in form of higher prices. If companies cannot adjust through charging higher prices they can adjust to wage increases thr0ugh - layoffs. The higher layoffs in response to wage increases, the higher will be thedemand elasticity. ' b) Ardecision by the owners of.Canadlan steel mills to operate each mill longer than has been the practice in the past. (4) ‘ c) This would reduce the demand elasticity for labour since it becomes much more costly for companies to layoff. d) This would reduce the demand elaSticity. Steel is a major input into the production of machinery. As the machinery industry booms, the demand for steel increases. Steel companies can now easier pass on wage increases to customers in form of higher prices. They don’t have to adjust to higher wage demands via layoffs. e) This would generally not change the demand elasticity. A wage subsidy shifts the entire demand curve for labour out to the right, it does not change the slope. If students argue that the subsidy changes the elasticity, a case could only be made for a reduction in the demand elasticity. A wage subsidy allows firms to absorb a wage increase easier thus reducing the amount of layoffs. (I would give them 3 out of 4 points if they argue this way.) To Question 4: a) When the demand for labour' Is inelastic a minimum wage increase will lead to a relatively large wage increase and a relatively small job loss. N 5 0 Z, “L, Jo ole A251 ‘ lbw/«Jilin l l I : .3 Lie/451'“; l I b latch-14'2- 2— L. La > L‘ b) The employer contribution to OHIP is a payroll tax. An increase in the tax shifts the demand curve for labour down by the amount of the tax. The amount of the tax paid by the employer is BC and the amount paid by the employee is CD. The shares paid by employer ‘ and employees depends on the elasticities of labour demand and labour supply. it the demand curve is relatively inelastic (as compared to the supply curve) the employer pays a larger share of the tax and if the supply curve is relatively inelastic (as compared to the demand curve) the employee pays a larger share. c) This statement is incorrect. The monopsonist’s profit maximizing hiring rule is marginal cost of labour (MCL) equals marginal revenue product. For a monopsonist the MCL > ACL (average cost of labour) = W, whereas the competitive firm pays a wage equal to the MCL. The wage paid by the monopsonist is lower than that paid by the competitive firm. ‘ d) This would increase unemployment by more than if both demand and supply were relatively inelastic. ‘ ‘ .. , 19W a) The MPL is the change in widgets produced by each additional worker Number gt wgrkere Number gf widgete prgdgged fl MBHMEL; Pl 0 O O O y 1 8 8 4O 2 15 7 35 3 21 6 3O 4 26 5 25 5 30 4 20 6 33 3 15 b)The profit maximizing hiring rule is W = MPL X P = MRP: At a wage of $38.00, ASME should hire 1 worker (an MRP of 40 is closest to $38.00) 4 At a wage of $ 27.00_, ASME should hire 4 workers and at a wage of $22.00 it should hire 5 workers. : i Keel) =1? 7L Ascot/Cars l 2. 3 'f 5" 6 7 d)The demand curve would shift to the right, since the demand curve is MPL x P. e) Like in d) the demand curve shifts to the right. To Question 6: a) b) d) This statement is false. First, there are market structures , where competitive forces are not present, eg. when firms are monopolists in the commodity markets and/or monopsonists in the labour market. Second, in cases where wages are paid above equilibrium level (for example efficiency wages or unions have bargained for higher wages) workers will be lining up for these jobs. Under such conditions discrimination can persist since firms are not paying competitive wages in any case. The answer is no. Differences in education, turnover rates and absenteeism may not reflect in all cases a rational individual choice but may reflect discriminatory social practices. For example, women overall have higher turnover and absenteeism rates than men do which is often related to household responsibilities. Why do these practices emerge? Because of pre-market discriminatory practices. Many women do not or did not have equal opportunities to acquire human capital, the degree of labour force attachment , or the level of work experience that firms expect because of social customs that discriminate against women. This would not necessarily reflect employer discrimination. Salary differences between disciplines often reflect the supply/demand situation in the respective markets. it there is generally an oversupply of female applicants in the social work departments‘this tends to depress wages relative to disciplines where the opposite applies. e.g. business and computer science programmes. it however, the salaries in the social work department are lower as compared to a fine arts or humanities department which have more balanced numbers of men and women and if these disciplines are also characterized by excess supply of applicants then there seems to be a case for gender discrimination on the part of theemployer. in summary, the answer is it depends. One would expect discrimination to be more prevalent in the non-union sector than in the union sector. Within the union sector there is a much wider scope for administered wage setting mechanisms as opposed to purely market determined wage outcomes. Union policies are more often guided by equity considerations which address discriminatory practices. ‘ (Note: Ellis, students may argue that discrimination may be more prevalent in the union sector because unions try to exclude non-union members from union jobs. lf men are more represented in unions than women, which is the case in many manufacturing industries, then this practice has gender discriminatory implications. One could argue that unions do not directly practice discrimination but that serving the interests of their members ( keep non-union members out) contributes indirectly to discrimination. I would give students who argue this way 2—3 points) ...
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