Assignment 1 Labour Economics

Semester 1, 2024-25

Deadline: 24:00 on Oct 20, 2024

Instructions:

●   Please complete all questions, totaling 100 marks.

●   Late submission will receive a deduction in total marks!

●   This is an individual assignment. You are expected to complete it on your own without copying the work from other student(s), and without allowing other student(s) to copy your work.

●   Students canNOT use Generative AI tools in this assignment.

●   Please observe UIC’s academic honesty policy. Plagiarized work will receive zero mark.

I. Multiple Choice (1.5 ’*20=30 marks)

1. Who is not included in the labor force?

A. A par-time wedding singer.

B. A person being too frustrated to look for a job in past four weeks.

C. A person who didn’t work for a restaurant due to typhoon in past 3 days.

D. A person working 34 hours a week or more at $30 per hour.

For questions 2 - 5: Of the 1,600,000 people (age 16+) in a particular country,  1,000,000 are employed, and 200,000 are unemployed.

2. The labor force participation rate is                

A.  80%                          B. 75%                            C. 93.75%                      D. 60%

3. The unemployment rate is                .

A.  16.67%                     B. 14.29%                       C. 17.25%                       D. 20%

4. If 50,000 residents who want jobs have given up looking for one, the unemployment rate is                 .

A.  14.29%                     B. 13.04%                       C. 11.68%                       D. 16.24%

5. Base on question 4, the employment rate is                .

A.  80%                          B. 75%                            C. 62.5%                         D. 55%

6. How does the presence of an underground labor market of illegal immigrants bias the government's calculation of the labour force participation rate (LFPR)? Assume although all illegal immigrants are adults and actively try to find a job, not all can succeed.

A. The official government statistic on the LFPR understates, because illegal immigrants working in the underground labor market should not be counted as being employed, and in the labor force.

B. The official government statistic on the LFPR overstates, because illegal immigrants working in the underground labor market should be counted as being employed, and in the labor force.

C. The official government statistic on the LFPR understates, because illegal immigrants working in the underground labor market should be counted as being employed, and in the labor force.

D. The official government statistic on the LFPR overstates, because illegal immigrants working in the underground labor market should not be counted as being employed, and in the labor force.

For questions 7 - 12: Ashley’s preferences for consumption and leisure can be expressed as U(C, L) = (C – 20) *(L – 20).

This utility function implies that Ashley’s marginal utility of leisure is C – 20 and her marginal utility of consumption is L – 20. There are 100 hours in a week available for work and leisure. Ashley earns $20 per hour. She also receives $200 worth of welfare benefits each week regardless of how much she works.

7. The slope of Ashley’s budget line is _______

A. -15                               B. -20                                  C. 15                               D. 20

8. When L = 80 and she is on her budget line, the marginal rate of substitution is _______

A.  9.67                          B. 7.99                            C. 6.67                            D. 5.33

9. Ashely’s reservation wage is                    

A.  2.25                              B. 3.75                               C. 4.00                                D. 4.5

10. Ashely’s optimal amount of consumption is                and leisure is                

A.  $650; 80 hours             B. $770; 65.33 hours         C. $820; 64 hours               D. $910; 64.5 hours

11. If government offers extra $1000 subsidy and start to collects 50% payroll tax, Ashely will            labor force and her

utility will                  to                .

A.  remain in; increase; 58,320                                                 B. remain in; decrease; 94,400

C. exit; decrease; 58,320                                                           D. exit; increase; 94,400

12. Base on question 11, if Ashely find a job that offers her $40 per hour salary, the substitute effect of higher income on

labor hours is              .

A. 20 hour                         B. 80 hours                        C. 10.5 hours                      D. 89.5 hours

13. Which figure is bended backward?

A. Indifference curve                                                   B. Labor demand curve

C. Labor supply curve                                                 D. Life cycle path of wages and hours

14. In a particular industry, labor supply is ES  = 150 + 5w and labor demand is ED  = 400 - 20w, where E is the level of employment and wis the hourly wage. Suppose the government sets a minimum hourly wage of $12. The unemployment rate is                , and the firm’s surplus changes by                .

A. 23.81%; -$360              B. 12.20%; -$360               C. 23.81%; $160                D. 12.20%; $160

For questions 15 – 17: For a firm in perfect competitive market for both input and output, the price of output is constant at $300 per unit, MC =4Q, the current capital stock is fixed at 25 units, and the cost of a unit of capital is $400. The production function is

f(E,K) = E½K ½,

so that the marginal product of labor is

MPE  = 0.5(K/E) ½ ,

the marginal product of capital is

MPK = 0.5(E/K) ½ .

15. The firm hires              units labor in the short run, and the market wage level is                     .

A. 180; $50                   B. 180; $125                   C. 225; $50                     D. 225; $125

16. If price of output increases to 600,                units output will be produced, labor demanded of this firm is

 in the short run, and wage level is              

A. 200; 300; $50          B. 200; 300; $100           C. 150; 900; $50             D. 150; 900; $100

17. Basing on 16. In the long run, capital price rises to $450. To produce the same level output, the optimal quantity of capital is _____ and the optimal quantity of labor is _______.

A. 150; 600                           B. 150; 450                            C. 50; 600                 D. 50; 450

18. Assume coffee machine and labor are the only two inputs for a coffee shop. The labor demand elasticity will be smaller if ________ in the short run.

A. Coffee machine is the perfect complement for labor in the shop.

B. Coffee has a relative elastic demand

C. Labor cost is a large part in the total cost of the shop.

D. The supply of tea machine is quite elastic.

19. The cross-elasticity of labor with respect to capital is

A. the quantity change in labor demanded relative to a percent change in the price of capital.

B. the percent change in labor demanded relative to a percent change in capital quantity.

C. the percent change in labor demanded relative to a percent change in the price of capital.

D. the percent change in wage of labor relative to a percent change in the price of capital.

20. Firms usually face asymmetric variable adjustment costs because

A. firms vary in size.

B. firing workers is relatively easy, comparing to hiring workers.

C. workers are reluctant to change jobs during a recession but not during an expansion.

D. firing workers can be difficult and costly for legal reasons compared to hiring workers.

II. Short Question. (70 marks)

1. (10 marks) In the absence of the tax credit, a typical worker can work up to 5000 hours in a year with wage rate $10/hour. The Earned-Income Tax Credit (EITC) grants the worker a credit of 50 percent on labor earnings as long the worker earns less than $10,000. The credit is capped at $5,000. The worker receives this maximum amount as long as he/she earns between $10,000 and $15,000. If the worker earns more than $15,000, the $5,000 credit decreases by 20% of the difference between actual income and $15,000.

1) What is the annual income when the tax credit decreases from $5,000 to zero?

2) List themathematic equations for the worker’s original budget line and the budget line under the EITC, and draw a figure with proper numbers labelled.

2.  (10 marks) An industry has perfect competitive market in both labor market and output market. Assume there are many identical small firms in the industry. Why is industry labor demand curve steeper than the sum of labor demand curve of each firmin the industry? Explain with proper figures about the labor market of a firm, output market, and the industry labor market.

3. (50 marks) Pollution can directly impact workers' health, leading to increased medical expenses, reduced productivity, and extra spending on preventive measures. From 2005 to 2016,an investigation (Hoffmann and Rud, 2024) about the impact of dangerous pollution, due to fine particulate matter (PM 2.5), on the labor supply finds that there is a 7.5% reduction in working hours per week on high pollution days in the metropolitan area of Mexico City. High-income individuals reduce labor supply more in the response to pollution. Generally speaking, the paper suggests that income disparities play a more significant role than gender differences in how  individuals  adjust  their  labor  supply  in  response  to  high pollution  levels.  The  econometric  model (regression equation) of the research is as the following: 

where the unit of observation is individual i who resides in locality l of municipality monday t that falls within week w. The outcome yilm,tw is the number of hours that individual i reported working on day t. PM2.5lm,tw is the number of hours in which fine particulate matter exceeded the WHO’s IT1, IT2, IT3, or AQG in locality l of municipality monday tin week w. Xilm,tw is a vector of time-varying weather and demographic controls that consists of maximum temperature in locality lon day t, precipitation in municipality monday t and its square, age of individual i and its square, gender of individual i, and years of schooling completed by individual i and its  square.  The  equation  includes  a  set  of  municipality  fixed  effects,  αm,  to  control  for  time-invariant unobserved determinants of labor supply that are common to a municipality; a set of day of the week fixed effects, ηd, to control for any unobserved patterns in labor supply across days of the week; and a set of week fixed effects, φw, to control for any unobserved determinant of labor supply that varies overtime but is common to all individuals in Mexico City, such as seasonality in the labor market.

1) (8 marks) For atypical worker, the person always has a marginal decision: whether should one more labor hour be provided or not. Assume all workers are paid by hourly wage stated in legal labor contract. How would pollution impact the marginal decision? Explain with analysis about marginal benefit, marginal cost, direct/explicit cost, and indirect/implicit cost.

2) (12 marks) Assume all workers are paid by hourly wage stated in legal labor contract, and have no non- labor income. Also, leisure is normal goods for all workers. For atypical worker, how would the pollution influence his/her after-tax-expense wage rate and optimal quantity of labor hours supplied? Explain with analysis of income effect, substitute effect, and a figure showing the variation of optimal decisions.

3) (7 marks) Comparing with the poor, high-income individuals reduce labor supply more in response to pollution since they often have more savings and financial security, and more flexibility in terms of working hours or the ability to work remotely. Besides, they might place a higher value on health and well-being, and prioritize long-term health over short-term income. Assume all people have the sametime endowment. How would such differences influence the budget line and indifference curve between the poor and the rich? Draw figures for the poor and the rich with the budget lines and indifference curves.

4) (10 marks) To investigate possible moderate effects on the influence of pollution on labor supply, what do Hoffmann and Rud (2024) do? And what do they find?

5) (13 marks) Provide one possible different method that could be used to investigate moderate effects in 4). Explain with regression equations.

Reference

Hoffmann, B., & Rud, J. P. (2024). The unequal effects of pollution on labor supply. Econometrica, 92(4), 1063-1096.