Labour Economics HWK#3

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Humber College *

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Economics

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Apr 3, 2024

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Matthew Freemantle Mark Valdez Exercise 1 (30 points) Background readings Chapter 8 Statement: safety regulation to increase level of safety in company X would make the workers or the firms or both workers and firms worse off. Is the above statement true or false? Consider and analyze if the above statement is true or false for 2 situations: 1.1 (15 points) Perfect competitive markets (page 227-228) There are different scenarios within the Perfect competitive markets that will impact whether firms or workers are worse off due to the safety regulations. In graph A shown the competitive equilibrium is depicted as Ec, with the wage Wc being paid for the level of safety Sc, with no external factors on third parties where the market does not extract appropriate compensation, Sc can be considered at a socially optimal level, which shows that neither the employers or the employees want to to move from that level of safety. If they were to move from Sc neither party would equally benefit from the change making them no worse off than what they were previously. If there were to be an increase in safety which is depicted by Sr in the graph, this would make one or both of the parties worse off. If the firm remains on the same isoprofit schedule due to being in a competitive market by having zero excess profits, workers will be on a lower level of utility which is due to workers not voluntarily willing to accept the wage reduction of Wc to Wr in return for the the safety increase of Sc to Sr. In this circumstance the workers are worse off but the firms remain the same.

In graph B, if the firm were to have excess profits then it could absorb the increased cost of the higher safety regulations. The firm would need to increase their isoprofit schedule and workers will stay on the same indifference curve. The workers will still receive a decrease in their wage but this will be offset in the increase of safety thus workers are not worse off, but with the firms they will take costs of the safety regulations by taking lower profits which would make the firm worse off than before the increase in the safety regulations Not all firms will be affected by the increase of safety regulations the same way, in graph C it depicts three different firms and how the increase in Safety Sr affects each firm. Firm 3 will not be affected by the increase of safety due to them already exceeding the standard safety environment in their firm, the iso

profit curve will always be to the right of Sr. Firm 2 could meet the standards of the increase in safety but only if the workforce are willing to provide a wage concession. For Firm 1 they would go out of business due to their isoprofit schedule being below that of Firm 2. Firm 2 could also offer a higher compensating wage than firm 1 and still stay in business. 1.2 (15 points) Imperfect information (page 229-230) Explain with words + graphs for each situation above. With imperfect information for the graph that is given above, a given compensating wage Wa, which is associated with an actual safety level of Sa, workers may perceive their level of safety to be greater at Sp, their perceived level of utility would be at Up, while their actual level of utility would be at Ua. With this in mind, any increase in the safety level between Sa and Sr could improve workers' utility without making the employee worse off since they would be on the same or even a lower isoprofit schedule which represents a higher profit. The optimal standard would be at point Eo as this would be between the employer's isoprofit schedule and the workers highest attainable indifference curve. In conclusion with imperfect information as long as the safety level is between points Sa to Sr the workers would be better off. Exercise 2 Background readings Chapter 9,10 2.1 (10 points) Explain why the labour demand in the public sector may be inelastic or elastic (page 302) Theory as to if labour demand is inelastic or elastic in the public does not indicate whether one is true, we must appeal to the empirical evidence. Which from many U.S studies shows that labour demand in the public sector is inelastic and the more essential the service, the greater the inelasticity. There are many examples as to why the evidence points to labour demand in the public sector being inelastic, such as the possibility of a substantial union impact on wages followed by the possibility that the demand for labour in the public sector may be wage inelastic. Unions can bargain for wage increases without the

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worry of large reductions in the employment of their members. Also, it may occur because noncompetitive forces restrict the use of substitute inputs as well as substitute services. Another reason why the evidence points to labour demand in the public sector being inelastic is because many of the services produced in the public sector are so-called essential services which are not provided in the private sector, also that when these services are provided, they are mainly under government regulation. Consumers (taxpayers) are unable to substitute other services that are provided by the public sector; the demand for these services may be relatively price (tax) inelastic. This means that wage increases can be passed onto taxpayers in the form of a tax increase without there being a reduction in the demand for these essential services, this produces a derived demand for labour. There are often few good inputs to substitute for public sector labour as it becomes expensive. Which may reflect the public sector production function and may reflect that the public sector is heavily professionalized and professional labour tends to have a degree of control over the use of substitute inputs even in nonprofessional labour. There are also factors that work in the opposite direction, mainly the high ratio of labour cost to total cost in many public services, which points to demand being elastic. Substitute inputs and services can be used certainly in the long run and the essentiality of the service can work against the public sector. Restricting their right to strike and the empathy they receive from the public during a strike. Even with these factors working in the opposite direction theory does not point to whether labour demand is elastic or inelastic, so we must go by the empirical evidence which suggests that labour demand in the public sector is inelastic. 2.2 (10 points) What is the role of the government in the training process? What are empirical results of the evaluation of government training programs? (page 273-275) In situations where trainees cannot afford training costs or cannot use their future earnings as collateral for loans, and where there are labour market imperfections such as imperfect information, regulatory constraints, or contract enforcement issues, the private market may not provide an optimal amount of training. These imperfections also explain why firms often bear the cost of general training. For example, the German apprenticeship system, where firms pay for extensive general training despite its potential transferability to other firms. This is because imperfect labour market information reduces the likelihood of trained workers being poached by competitors. Complex training cannot be specified in contracts, leading to more firm-based training in countries like Germany. Also, labour market institutions like unions or minimum wage laws can compress wages, reducing the incentive for workers to invest in general training. Governments or firms can address this by subsidising general training investments. Moreover, some companies naturally provide on-the-job training as part of their production process. However, the indirect nature of this training makes it challenging for purchasers to assess its quantity and cost. While non-paying workers may be forced to accept lower wages, the public-good characteristics of training (available to all workers) and the difficulty in excluding non-payers create challenges in optimizing training provision.

In summary, the government involvement in training may be necessary to address market imperfections, ensure adequate investment in general training, and manage the public-good aspects of on- the-job training. Evaluation of government training programs presents significant challenges to accurately assess their effectiveness. These programs are usually criticized based on how they affect people's incomes, either through increased wages or better job opportunities. However, a fundamental problem arises because we cannot directly observe what a person's income would be without training. The lack of a reliable control group complicates the evaluation process. One common but flawed method of measuring effectiveness is to compare a person's gain before and after training. This approach ignores several important factors. For example, individuals may enrol in training programs due to low income, which may be due to temporary difficulties in the labour market. Even without training, these individuals' earnings can naturally improve over time. This phenomenon is known as "mean reversion," which can falsely attribute income growth to training alone. To mitigate this problem, it is necessary to compare the income growth of trained individuals with a carefully selected control group of individuals who did not receive training. The formation of such a control group is difficult, because the people who chose the training can differ imperceptibly from the non-trained people, which can lead to an overestimation of the effect of the training. The self-selection of motivated individuals into training programs or the preferences of training providers towards promising candidates can distort the evaluation results. To address these complex issues, conducting randomized trials in which individuals are randomly assigned to either training or control groups offers a more reliable evaluation method. Although these experiments have limitations, they offer advantages over artificially constructed control groups. Studies evaluating different training programs, especially in the United States, show different effects depending on the target group. The returns to training are modest for disadvantaged workers, especially women, while there is little evidence of positive effects for displaced, older men, and blue-collar men. A meta-analysis of labour market programs highlights the effectiveness of programs that focus on human capital accumulation, such as educational programs. Although the short-term effects may be small, these programs tend to produce positive results in the long term, particularly benefiting the long-term unemployed and during economic downturns. In general, training programs show improvements in income and employment prospects, especially in certain populations and settings, but are not a comprehensive solution to broader social problems such as poverty or the restoration of broad industry-specific skills. Accurate assessment of these effects requires careful consideration of control group selection, program design, and the broader economic context. Exercise 3 (10 points) Background readings Chapter 11 Describe and discuss the picture that emerges concerning immigrant assimilation in Canada. (page 323- 327) Economic assimilation of immigrants can present itself in several different dimensions. After arriving in a new country, such as Canada, immigrants may initially experience unemployment while looking for work. Thus, it is reasonable to expect that immigrants assimilate according to their working hours, perhaps starting lower than the native-born but catching up over time. This trend can also be seen

in their salaries. Upon arrival, immigrants may lack certain less observable native-born skills, such as language skills, knowledge of the local labour market, and specific but unobservable skills important to Canadian businesses. In addition, their education may not be fully recognized. Over time, however, their wages are expected to rise to match those of natives. Indeed, if immigrants are positively selected—that is, they are the most motivated and capable relative to unobservable factors—their wages may eventually exceed those of natives. An increase in income can also indicate a decrease in discrimination, especially since immigrants who have been in the country longer face less discrimination than recent arrivals. Most studies on assimilation focus primarily on income as a measure of economic performance. Earnings include both hours worked and wages, although studies tend to focus on wages, looking at full-time workers throughout the year. The main purpose of such studies is to understand the assimilation profile of immigrants shown in Figure 11.5. This profile compares the wage growth of natives with the wage growth of immigrants after migration (YSM). If immigrants experience assimilation as they age, characterized by additional income, their incomes may eventually catch up with those of natives. However, the degree of assimilation, or the size of the immigration effect, may affect whether immigrants ever achieve equality with natives. Earlier studies of immigrant assimilation emphasized major initial disadvantages offset by rapid income growth, but potential problems arise with such simplistic analyses, such as ignoring changes in the effects of immigrant entry over time. Problems in estimating assimilation profiles using individual cross-sectional data. It refers to subtracting the effects of age and year of birth. Cohort effects play a crucial role in understanding immigrant assimilation, as shown in Figure 11.6. Comparing cohorts between different time points allows a more accurate assessment of assimilation, considering changed entry points and actual assimilation effects. However, challenges remain, such as possible changes in cohort composition due to migration or changes in immigration policy, which can affect average incomes and complicate assimilation analyses. Analyzing cohort effects not only helps measure assimilation, but also sheds light on changes among immigrants. performance and the wider financial landscape. It is important to understand whether immigrant activity is declining because of changes in immigrant skills, changes in immigration policy, or changing economic conditions. Figure 11.7 represents the income of immigrants by group. This shows how wages have changed over time and highlights the complexity of accurately estimating assimilation. Also, that the immigrant’s starting point is better than the native-born (wages) up until 1985 and gets worse from there on out. Finally, the study of economic outcomes and assimilation of immigrants requires trends in cohort effects, entry status, and actual assimilation over time. This approach is important for policy makers and researchers who want to design effective immigration policies and understand the dynamics of immigrant labour market integration.

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Labour Economics HWK#3

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