Econ 440 - Problem Set 2

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Feb 20, 2024

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Labor Economics Fall 2024, Problem Set 2 Name: Navya Ahuja 1 True/False/Uncertain (25 points, 5 points each.) 1. True. Asymmetric information occurs when one party has more knowledge, and in this case, the owners and managers at the firm can't fully observe a worker's effort. This can cause issues like moral hazard - which is hidden actions - and adverse selection, where some characteristic of a product or service being exchanged is not known to the other parties. 2. False. Although both employer and employee contribute 6.2% for Social Security, there are also other payroll taxes besides Social Security and Medicare. Additionally, employers could allocate the 6.2% to areas other than wages. Correction: Eliminating payroll taxes wouldn't guarantee lower employer costs or higher employee wages. 3. Uncertain. More English-speaking immigrants indicates that there is a larger subset of people who will be able to do jobs requiring language literacy, so wages might fluctuate. Having said that, there are many more factors that must be considered to understand whether this will actually cause a decrease in wages, most importantly the skills that will be used in their jobs. If the immigrants have a similar skill level to natives, then there won’t be a change in wage. However, if there is a notable difference, then there might be a small difference in wage. 4. False. Although immigration often leads to a negative impact on wage due to capital- thinning effects in the short run, in this case it is specifically mentioned that immigrants are bringing capital with them. As capital and labor are complements based on the simple model, each labor bringing in a proportional amount of capital would lead to wage being unchanged. Correction: Immigration to the United States will have a no negative or positive effect on the wages of natives if immigrants bring capital with them 5. False. In the long-run, there can be endogenous technical change, migration and skill adjustments by the native population, so their wages will stabilize better than in the short term. As capital increases to match the larger work force, wage will also rise due to the rightward shift of the demand curve. Correction: The long-run effects of immigration on native workers’ wages are likely more positive than the short-run effects.

2 Labor Demand in a Competitive Market (15 points, 5 points each) 3 College Wage Premium (10 points) 1. The formula for college wage premium is college wage / high school wage. Theoretically, an increase in the college share would lower CWP by directly lowering college wage. Under the assumption that college workers and non-college workers are complements in production, there would be an increase in high school wage too. This is because by being complements, the productivity of non-college workers would be boosted. As a result, businesses might expand production due to higher output, which would require more workers of all skill levels. The figure below shows how overtime, the wage of college and non-college workers meet at a similar level. 2. The fact that the college wage premium has increased since 1970 indicates that there is a larger demand for individuals the specialize in a niche area, and this counterbalances the supply issue. This relates to the concept of skill-biased technical change, and possible causes are

computerization and globalization. Additionally, some more explanations for rising inequality in the past few decades is worker bargaining power, considering the decline of unions and minimum wage, as well as crime. All of these dynamics put together have led to a decline in the demand for low-skilled (relative to a college education) labor, and an increase for demand for college workers.

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