ECON 101 Tutorial: Week 21 Shane Murphy [email protected] Office Hours: Monday 3:00-4:00 – LUMS C85 Outline • Roll Call • Problems Chapter 23: Problem 2 What is the national unemployment rate right now? What is the unemployment rate for your demographic? Why might this be higher or lower than the national average? http://www.deptofnumbers.com/unemployment/de mographics/ http://www.nytimes.com/interactive/2009/11/06/b usiness/economy/unemployment-lines.html Chapter 23: Problem 7 Consider an economy with two labor markets, neither of which is unionized. Now suppose a union is established in one market. a) Show the effect of the union on the market in which it is formed. In what sense is the quantity of labor employed in this market an inefficient quantity? In the unionized market, the supply curve shifts up and to the left. Wages rise and the quantity of labor demand falls in the unionized market. b) Show the effect of the union on the non-unionized market. In the non-unionized market, the supply curve shifts down and to the right. Wages fall and the quantity of labor demanded rises. Chapter 23: Problem 9 Suppose the government passes an employee benefit that raises the cost of an employee by €4 per hour (assume no workers currently receive this benefit and workers value the benefit equal to cost)? a) What effect does this have on the demand for labor? b) What effect does this law have on the supply of labor? c) How does this effect wages and quantity of labor? Chapter 23: Problem 9 (a-c) Chapter 23: Problem 9 d) If a minimum wage prevents the wage from balancing supply and demand, what happens? Chapter 23: Problem 9 e) Now suppose workers do not value the benefit. What now? Chapter 23: Problem 10 Statistics from 2011 suggest that there are 75 million young people between 16 and 23 unemployed worldwide. Young people are 3 times more likely to be unemployed than those in other age groups and each month out of work prior to age 23 increases the likelihood that they will experience longer periods of unemployment later in life. a) Why are such statistics of importance to policymakers? b) What specific costs might be associated with youth unemployment to young people and to society? c) Should policymakers devote more resources to dealing with youth unemployment compared to other groups in society? Justify your response. Chapter 35: Problem 1 Using the new Keynesian AS curve, explain why when the output gap is very large the AS curve has an almost horizontal slope. The output gap is the gap between full employment and actual output. This is represented by (YFE minus Y1). When the output gap is big then many of the factors of production are lying idle, so bringing them into use won’t involve firms bidding against other firms. There won’t be much of a trade off between growth and price increases. Chapter 35: Problem 2 Why might governments find it difficult to accurately measure the size of the output gap? It is difficult to know where on the AS curve an economy is at and what the actual output gap is. The models used vary and the size of the various parameters that modellers input into the equations can lead to widely differing results. Remember that the economy is complex based on millions of individual decisions. Chapter 35: Problem 6 What sort of assumptions underlie the policy that cuts in income taxes would increase the supply of labor hours offered in an economy? Cuts in other workers’ income tax change incentives to work. A reduction in tax acts like an increase in wages so there is a substitution effect from leisure to work. There is an opposing income effect, because these earners have more income to buy leisure. The effect of the cuts are believed to differ according to the levels of income concerned. High tax rates provides a substantial disincentive to work. It assumes for these earners the substitution effect outweighs the income effect. Chapter 35: Problem 9 A government announces a decision to increas investment on higher education with the intension of increasing participation rate in higher education by young people to 45%. a) Does it matter what sort of degrees these young people do? b) To what extent is the proportion of young people going on to university an important factor in improving the quality of human capital? c) What else might the government need to put in place to ensure that the policy was a longer-term success? Chapter 35: Problem 10 How would a government be able to tell whether a policy of increasing private sector involvement in public sector services provision actually lead to a more efficient outcome compared to having those same services provided by the public sector? There has been an increase in transferring public ownership of assets to the public sector throughout Europe. The latest in the UK has been the privatization of the Post Office. The idea being that driven by providing high quality services and the profit motive, privatized companies are more likely to provide the services required by the public at lower cost, at higher productivity levels and more efficiently than if provision was in the public sector. The outcomes to look for are therefore better services, improved products at lower prices with more choice and produced with greater efficiency or productivity. This may sound simple, but the jury is still out. For example looking at the case of gas and electricity, then the issue becomes clouded by both external and internal factors. Externally gas and oil is subject to global supply and demand and internally many of the firms have complex pricing structures. Some energy producers are also retailers of energy and it is not clear how the cost centers work. In addition government procurement of services can be a cause of concern. Sometimes governments may tie themselves into long-term contracts which are poor value. At the other extreme firms may bid down their tender submission to stand a chance of getting the contract. It then might be cheap, but the service provided is poor and occasionally the provider loses money and defaults on the contract.