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LABOR ECONOMY, QUESTIONS Screen Shot 2021-07-14 at 19.08.24 is higher…

- - - - Maximally feasible supply of hours worked
        - L: voluntary unemployment
        
        employment rate:
        share of the active population working
        
        non-employment rate:
        
        Interpretation:
        
        a shift of the labor demand curve to the right reduces (here: voluntary) unemployment. Similarly, a decline in labor supply will lead to a fall in unemployment.
        
        When markets clear, **voluntary unemployment and the wage
        level are inversely related** However, it should be noted that this relationship describes a link and thus no causality of wage and unemployment is implied as both are endogenous variables.
    - - unemployment rate: or approximately
        
        Interpretation: since the market clearing, , assumption no longer applies wages are independent of the market clearing level. The unemployment rate is therefore influenced by exogenous changes of supply and demand: a demand increase and a reduction of supply lead, ceteris paribus, to a decline in the unemployment rate.
        
        In contrast to Marshallian paradigm, as long as unemployment exists, , Wages and unemployment are positively correlated.
  - - - In the Marshallian Paradigm with market clearing:
        • If demand shocks predominate, wages and employment are positively correlated
        • If supply shocks predominate, wages and employment are negatively correlated
        • In a stochastic setting, the correlation is conditioned by
        the size of the elasticities of supply and demand
        • The size of the effect of shocks to demand (supply) on
        wages will depend on the elasticity of supply (demand)
        
        Equilibrium wage and employment is
        always an interplay of the shifts and two elasticities
        
        In order to estimate the impact of policy intervention it is essential to identify the shock
- - - - exogenous increase in the wage ->
        higher production costs -> higher prices ->
        lower demand for the good ->
        lower demand for working hours for that good
        
        this first rule can explain:
        
        why of a single firm is generally higher than that of an industry.
        
        elasticity is higher in the long run than the short run
        
        stronger preference of trade unions to bargain on the industrial rather than the firm level (a lower elasticity of demand reflects higher market power of trade unions)
        
        why open economies ceteris paribus are more strongly affected by increases in labor costs (competitiveness) than closed economies or sheltered sectors (that produce e.g. non-tradable goods and services ---> higher for exporting firms
        
        ? open economies more affected because elasticity is higher and it is hard to deal with?
        larger market, demand for goods more elastic, labor demand greater
  - - - Hicks-Allen elasticity of substitution :
        the percentage change in factor intensity
        (K/L) in response to a one percent change in the ratio of the respective marginal products
        
        : the percentage change in the factor ratio to a (small) proportional change in the marginal rate of substitution (MRS) or as the (absolute) slope of the isoquant at a given point of production
        - not necessarily constant, its a local concept
        
        If Y=F(K,L) has constant returns to scale, then:
        
        Leontief prod. function: impossible to substitute labor
        
        substitutability can be visualized using isoquants
        
        second rule can explain:
        
        why the elasticity of labor demand prior to the choice of the production technology by the firm is higher than ex post (the so-called putty-clay-problem)
        
        higher when the (Hicks-Allen) elasticity of substitution is higher
        
        is higher in the long run (when choice of technology is endogenous)
        
        is higher for deregulated labor markets
        
        Production factors can only be employed in xed proportions into the production process. Employing more of only one of the factors does not increase the output; no substitution between inputs is possible.
        Leontief: fixed coefficient production: when L increase, K same (rare)
        
        Cobb-Douglas: perfect substitues
  - - - increase in wages -> rise in demand for the other prod. factor (here, capital) -> raise in quantity and price of the other factor
      - the direct, negative reaction of labor demand to an increase in wages (scale and substitution effect) is related to a rise in demand for the other production factor (here: capital) and consequently to a respective reaction of quantity and price on the other factor market.
        If supply is not totally elastic and the market cannot supply the quantity demanded under unchanged conditions, higher prices for the other factor will result.
        
        third rule can explain:
        
        why an exogenous increase in the minimum wage leads to a shift of the whole wage structure:
        the desire to substitute away from hours worked by lowwage, low-skilled workers and towards those of higher qualified workers is offset by the limited supply of the latter and their resultant wage increase
        
        higher in countries open to capital mobility
        
        higher in countries open to labor migration from „abroad“
        
        higher in the long run (factor mobility takes
        time)
  - - - higher in services than in manufacturing sectors (in services they tend to have higher labor share in value-added or lower cost shares of material inputs)
        
        exception: the fourth Marshall rule can have exceptions.
        This is because the product price elasticity also plays a role (the first Marshall-Hicks rule). If it is relatively low relative to the the elasticity of substitution, the fourth rule may be overturned
- - - - Dimensions of labor supply:
        
        extensive margin (who works?)
        
        intensive margin (if working, how much?)
        
        intertemporal aspects (when?)
        
        mobility (where, how?)
        
        institutional constraints
        
        Total hours supplied =
        employment(extensive margin) x hours per worker(intensive margin)
        
        BASIC STATIC MODEL: RESERVATION WAGE MODEL
        - utility maximization problem under constraints -
        budget, markets, regulation: U(C,F)
        
        labor supplied if wage exceeds some critical value (what does critical value depend on?)
        
        households are wage takers
        
        Formal Analysis
        
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        Graphical Analysis
        
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        C: consumption
        F: leisure
        
        for utility maximization to take place:
        
        Hessian matrix of utility function must be negative definite. Meaning:
        Uff and Ucc are both negative, sufficient condition is Ufc >= 0
  - - - Uncompensated elasticity: Marshallian elasticity
        substitiution effect + income effect
        
        Compensated elasticity (holding output constant): Hicks(holding intertemporal substitution effect fixed) or Frisch elasticity(holding life time wealth constant)
        
        Slutsky Form: total change in supply elasticity consists of income effect and a substitution effect, and both effects collectively must equal total change
        
        Increase in wage can lead to: either an increase in leisure or in labor depending on which effect dominates
        
        to check what happens, differentiate C, F, and L* wrt W and check their sign
        
        Taxes and Incentives
        
        Taxes reduce the net return from work and flatten the budget line (changes the slope of the budget constraint)
        
        consumption can decrease and labor supply stays the same
        
        budget line can shift out, and both consumption and labor supply get reduced
        
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        Pandemic effect:
        
        Fear of contracting disease has the effect of shifting preferences away from risky work and towards less risky leisure.
        
        Optimal choice at given wages implies less individual labor supply which translates at the mean into a shifted and possibly steeper aggregate labor supply curve
        AND
        
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        labor supply goes down if govenrment gives back the tax and dont change their incentives to work: income / wealth effect
  - - - if we give people wealth, they would want more leisure, shifting the budget constraint to right, meaning some jobs will not be done at the same rate anymore
        
        Note: negative income tax -> makes it more attractive to get off the corner solution
        
        F' > F more leisure
        L decreases
        
        effect: government has to pay for more leisure -> wages go up -> prices of goods and services go up
        
        HOME PRODUCTION
        
        Household work: household activities such as consumer purchases, services that you could use market force for
        
        Gronau Model of Home Production
        
        household production is perfectly substitutable for market consumption
        
        neoclassical prod. function
        
        initial wealth V(0)=0
        
        work in household (h) and units of consumption goods produced f(h)
        
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        PS 6 - Q2
        
        Home Prod: A
        
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        No Home prod: B
        
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  - - - When to supply labor?
      - Basic issues involving labor supply over time:
        
        Impatience
        
        time-varying wages
        
        time-varying preferences
        
        wealth and savings
        
        Assumptions: perfect foresight, time separability,
        budget constraint,
        human capital
        
        Time-seperability: marginal utility of some argument in time t is independent of that argument in some other period
        
        Time-dependence: periodic utility function itself can depend on time
        
        Formal
        
        we allow for the possibility of change in preferences over time: before we didnot have this
        
        r nominal here, because Pt and Wt are nominal
        
        utility is time separable
        
        other than the budget constraint, C and L are not effected with
        the decisions on the last period: time seperability
        
        we again assume Inada conditions for C and F
        
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        Graphical
        
        Temporary wage increase:
        
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        lifetime labor supply negatively influenced by wealth (income effect discourages labor supply)
        
        wage: temp increase, increases labor supply via subst. effect
        permanent: depends on whether income or subt. effect dominates
        
        COMPENSATING DIFFERENTIALS
        
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        check Ps 5
- - - - Formal Investment Problem
        
        Human capital: state variable but not saleable
        human capital at a point of time can not change (drop or jump) but continuosly change
        
        depreciates over time
        
        Efficiency of human capital investment depends
        on existing stock of human capital
        
        Finite-lived individual, initial wealth, skills, human capital
        
        relation between Ct, Ht and Lt: key
        
        investment in human capital is costly in terms of time and resources
        
        Wt determined by: , r being "return to skill" or market rate
        
        Optimal investments will depend on:
        
        positively on the efficiency of investment
        
        positively on the utility value of human capital
        
        positively on the rate of return to human capital
        
        negatively on the remaining time horizon
        
        negatively on the interest rate
        
        negatively on the rate of depreciation
        
        Wealth effect on human capital investment ambiguous: marginal valuation of consuming more might be less than the leisure time you want to take
        
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        2 TYPES OF EDUCATION
        
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  - - - wage=marginal product doesnt necessarily have to be true
        
        economic rent : a surplus or deviation of return from some competitive levels
        
        The wage could be thought of as a mechanism for sharing rents between the employer and the worker
        
        Nash Bargain: the strategy of allocating economic rents between players
        
        the workmen desire to get as much, the masters to give as little as possible.
        
        adam smith: In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.”
        
        Pareto optimal points -> wage-employment combinations at which none of the negotiating partners can be made better off without hurting other party
        ALL POINTS ON CONTRACT CURVE ARE PARETO OPTIMAL
        Contract curve: all points at which indifference and isoprofit curves are tangent to each other
        
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        is economic rent opportunity cost?
  - - - in competitive model, if employer cut wages by one cent per hour, all workers would disappear, however in monopsony model profit will increase
        
        Manning test: what happens to labor supply to a firm,
        if it reduces its wage unilaterally by a small amount?
        
        return to primal problem, fix capital stock and neglect market power
        
        from Marshall-Hicks-Rule #1, we know that a less-than-perfectly elastic product demand is necessary to generate rents (Robinson 1933) from product market power??
        
        you need market power to generate rent/surplus/profit
        
        Monopsony: Basic Formal Theory
        
        how did we derive the fact that employer does not change W but change L and thereby indirectly setting W: assumption of the model
        
        the more inelastic the demand, the higher the exploitation set by the monopsonist:
        
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        case of dynamic labor supply
        
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- - - - 2- Take FONCs wrt L, K, Y, lambda
        
        Comparative statics analysis can allow both
        quantitative and qualitative analysis of local
        response of optimal labor demand to exogenous
        changes in the environment.
        
        : elasticity of product demand
        : inverse price elasticity of product demand
        = 1-
        : elasticity of rental rate and wage
        ((uncompensated)elasticity of labor supply to the firm ): how much labor supply increases if you offer them additional wage
        
        Use these and transform the FONCs into:
        
        3- Loglinearize the FONCs
        
        Loglinearized:
        
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        taking the natural logarithm of each of the first order conditions and considering a 1st order Taylor
        expansion around values at optimal behavior
        
        this yields a set of linear equations
        relating deviations in the logarithms of relevant
        endogenous variables to each other and to log
        changes in the exogenous variables.
- - - - labor demand elasticity wrt wage W
      - labor supply elasticity wrt wage W
      - elasticity of substitution:
        
        If Y=F(K,L) has constant returns to scale, then:
        
        Standard assumptions concerning Y=F(K,L)
        
        1- positive marginal products -> more input leads to more output
        
        2- diminishing marginal product -> declining in own input
        
        3- marginal products are increasing in other input
        
        4- constant returns to scale