PRIN OF ECONOMICS
PRIN OF ECONOMICS ECON 202
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This 9 page Study Guide was uploaded by Miss Kristy Veum on Wednesday October 21, 2015. The Study Guide belongs to ECON 202 at Texas A&M University taught by Staff in Fall. Since its upload, it has received 31 views. For similar materials see /class/225835/econ-202-texas-a-m-university in Economcs at Texas A&M University.
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Date Created: 10/21/15
abor Markets Introduction L Poverty and 39 Income D s rbu on I Observations 0 People with similar skills earn very different incomes 0 Some ofthe worlds wealthiest people 15 come from poor countries 0 ManyAmericans are homeless and malnourished m l The Economic Value of Work l The Economic Value of Work I The Market for Labor 0 Equilibrium wage and quantity are determined by the supply ofand demand fora s eci c cate o of labor p g ry I The wage equals the value ofmarginal 0 Changes In supply and demand will d t VMP change the equilibrium wage and quantity pro 0 39 I Observation 0 Wages will differ among workers with different levels of productive ability aupm quotWm vown mmmmwm mm mumr a mum 1m lmam mmm m i l The Economic Value of Work i The Economic Value of Work I How much will Rennie and Laura earn I Value of Marginal Product at Mackintosh Potter 7 o Marginal product of laborx the net price of it sold I each uh 0 Price 1 10pot in competitive market Renme S WW 100 WSW 107 10 100 0 Clay the only input available at no cost Lauraig WW 120 WSW 107 10 120 Cost 010 handlin feel 0 o S g p I Assuming a competitive labor market 0 Rennie produces 100 potswk and Laura Rennies wa e will be 100 produces 120 potswk g 39 o Laura39s wage will be 120 mme quotWm vown mmmmwm mumr a mum 1m lmam mmm mm Employment and Productivity in a Woodworking Company when P 20 Total number of cutting extra cmng VMP Number ofworkers boardsweek boardsweek ismeeki 0 0 1 30 30 600 2 55 25 500 3 76 21 420 4 94 18 360 14 280 5 108 compamve labor mama Adlrondack would hire 4 workers wage Sosawk At a given wage the number employed depends on MP rdlects diminish raurns MP of the worker lrvMPgtwagecontlnueto nlre lnceonneproduct y SildeT i The Occupational Demand for Labor 01 VMP1 02 VMP2 E a e f a a l 2 E E l l i l 1 150 5 1 Employment in rm 1 Employment in rm 2 ipersonhoursdayi ipersonhoursdayi SildeE i The Occupational Demand for Labor D VMP1 VMP2 E o E o l E 1 0 2a Total Employment ipersonnoursdayi SildeS i The Supply Curve of Labor wage isnouri Supplyforaspeclflc ccupatlon ls upward o in o L1 L1 Employment of programmers ipersonnoursyeari side in The Effect of an Increase in the Demand for Computer Programmers S we a occurwhen ne supply andordemand for labor changes L1 L1 Employment of programmers ipersonnoursyeari Slide 11 Explaining i Differences in Earnings I When labor markets are competitive differences in wages are determined by differences in VMPs side 2 Explaining i Differences in Earnings I Explaining Differences in VMPs I Human Capital oAn amalgam offactors such as education training experience intelligence ener y work habits trustworthiness and initiative that affect the value ofa worker s marginal product gt4 see 13 An Economy with Two I Nonun zed Labor Markets D VMP 02 VMP2 r E 5 5 a a f f a a 1 5 75 Employmentln marketl Employmentln mamaz y We 15 The Effect of a Union Wage Above the Equilibrium Wage D VMP 02 VMP2 Mzrkzl umnmzes Wage Shourl 1 and sets w 312 Wage Shour g u m 5 100 Employment In marketz lnonumomzeo market l 1 15 Employment In mametl lumomzeo marketl gt4 see 17 Explaining i Differences in Earnings I Explaining Differences in VMPs I Human Capital Theory 0A theory ofpay determination that sa s a worker s wage will be proportional to his or her stock of human capital I Changes in demand can influence the value of human capital gt4 see A An Economy with Two Nonun39 nized Labor Markets MP VMP2 Wage ism url 2 0 Total employment Momersoayl gt4 see 5 Explaining i Differences in Earnings I Compensating Wage Differentials I The wage rate depends on the VMP and the working conditions gt4 see 1a Explaining i Differences in Earnings I Compensating Wage Differential I The differences in the wage rate positive or negative that reflects the attractiveness of a job s working conditions I Examples oJob safety 0 Police arid fireyfighters oSchedules o Dayvs riight 0 Teachers Slide 15 Explaining i Differences in Earnings I Discrimination by Employers I An arbitrary preference by an employerfor one group of workers over another y Slide 21 Explaining i Differences Earnings I Discrimination by Employers I Then oThe discriminating rm s pro t will be less oFirms employing females will be more pro table oThe demand for females will increase and female wage rates will rise until it equals the wage for males and the VMP oTo discriminate the employers would pay males a wage that is greaterthan their VMP and reduce their pro t y SlideZ Explaining i Differences in Earnings I Discrimination in the Labor Market I Competitive labor theory predicts that wage differentials not based on differences in VMP will be eliminated I However women and minorities continue to receive lower wages that white males with similar measures of human capital siaezu Explaining i Differences in Earnings I Discrimination by Employers I Assume oMale and female employees are equally productive oAn employer prefers to hire male employees oMale employees are paid more y M322 Explaining i Differences Earnings I Discrimination by Others I Customer Discrimination oThe willingness of consumers to pay more for a product produced by members of a favor group even ifthe quality of the product is unaffected y slaw Explaining i Differences in Earnings I Other Sources of the Wage Gap I Willingness to accept risk I Quality versus quantity of education I Courses taken and degrees pursued by sex and race v simez Income Quintile and by the Top 5 Percent of Mean Income Received by Families In Each i Families 19802000 2000 dollars Quintile 1930 1990 2000 Bottom 20 percent 6 12756 6 12625 6 14232 Second 20 percent 27769 29443 32263 Middle percent 41950 45352 50925 Fourth 20 percent 53200 65222 74913 Top 20 percent 97991 121212 155527 Top 5 percent 139302 190137 272349 v Slidezi i Recent Trends in Inequality I Observations I In 1980 CEOs earned 42 times as much as the average worker today they earn 500 times as much I The US has a high degree of upward and downward economic mobility v SlideB Explaining i Differences in Earnings I WinnerTakeAII Markets I One in which small differences in human capital translate into large differences in Day V was i Recent Trends in Inequality I Observations I From WWII to the 1970s income growth was almost 3lyr for all groups I From 19802000 the income growth of the bottom 20 was less than half of 1 I Real income of the top 1 more then doubled from 1980 2000 gt4 513223 i Why is Income Inequality a Moral Problem I hoosing the Rules for Distributing Income I Assume 0A Veil of ignorancequot oNational income is xed oMost people are risk adverse I How should income be allocated v seem i Why is Income Inequality a Moral Problem I What would happen to the incentive to work if everyone was guaranteed an equal amount of income I Rewards for hard work and risktaking raise national income I Such rewards lead to inequality Slidell i Methods of Income Redistribution I Difficulties in Developing Programs to Reduce Income Inequality I Identifying who will receive benefits I Undermining the incentive to work slides i Why is Income Inequality a Moral Problem I The inequality created by a market system may be inefficient if people would choose less inequality when choosing distributional rules from behind a veil of ignorance slaw i Methods of Income Redistribution I Welfare Payments and lnkind Transfers I Assistance to the poor includes oCash transfers olnkind transfers slaw i Methods of Income Redistribution I Welfare Payments and lnkind Transfers I Aid to Families with Dependent Children AFDC oFederal Cash Transfer Program oCriticisms 0 Created an lhcehtlve forthe fatherto leave the household 0 Reduced the lhcehtlve to Work slmea i Methods of Income Redistribution I Welfare Payments and lnkind Transfers I 1996 Personal Responsibility Act 0 Responsibility of welfare transferred to the states oStates receive a lumpsum payment from the federal government oFiveyear lifetime limit on receipt of bene ts smeas i Methods of Income Redistribution I MeansTested Benefit Programs I Benefit level declines as the recipient earns additional income I May make people better off if they do not work I Costly to administer slaw i Methods of Income Redistribution I The Negative Income Tax NIT I Every person would receive a tax credit I A person with no income would receive the credit in cash I People who earn income would receive the tax credit and pay taxes on their income at less than 100 slaw i Methods of Income Redistribution I The Negative Income Tax NIT I Advantages olncentive to work oLower administrative cost snags i Methods of Income Redistribution I The Negative Income Tax NIT I An Example oPoverty threshold in 2001 18000 for a family offour living in a city oAssume the NIT credit 18000 oEight families pool their payments 144000 and move to a rural location and produce their own food slam i Methods of Income Redistribution I The Negative Income Tax NIT I An Example oCreates and incentive not to work oThe political cost is high because the NIT guarantees income to all who do not work SlldeM The Effect of Minimum Wage Legislation on Employment Unemployment Wage shoun lt2 La Employment slam Worker and Employer Surplus The Effect of a Minimum Wage in an Unregulated Labor Market Employer surplus withoutminimum wage S E o 5 s w Shour m Worker surplus without D minim um wage 5000 100 L lpersonnoursaayl Ey how much will a minimum wage reduce total economic surplus chapter 1 term panels raenyena We mammal slaeu chaptericl cleansers remnant mammaan saeu i Methods of Income Redistribution i Methods of Income Redistribution I The EarnedIncome Tax Credit EITC I Example continued I A policy under which lowincome workers I Using an EarnedIncome Tax Credit receive credits on theirfederal income tax eWith no minimum wage employment 5000 personhoursday oWorkers get paid 5hr oWorker surplus is 4000day less than with the minimu oThe tax credit would be 080hr for 5000 person hoursday SideAS Silde i Methods of Income Redistribution i Methods of Income Redistribution I Example I Public Employment for the Poor I If the EITC were financed by a 4000 tax I Overcomes the shortcomings of the EITC on employers employersurplus would be and IT 4000 greater than under the 7 minimum eEITC does not help the unemployed wage oNlT reduces the incentive to work amen snueu i Methods of Income Redistribution l Public Employment for the Poor Disadvantages of public service employment oPeople may leave private sectorjobs oThe output created by the jobs may not have any value olncrease in government bureaucracy Slidem l Methods of Income Redistribution l A Combination of Methods Use a NIT with payment set below the poverty threshold Set the public service wage below the minimum wage Privatize the management of the public service employment program wean Income by Source in a Combination NIT Jobs Program NIT anateJob NIT Public Job Poverty threshold y Slide 51
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