Deck 12: Capturing Surplus

Question 1

Many people think that immigration into the United States,because it causes competition for jobs,will lower the wage rates of U.S. workers. Yet,even though the United States admits hundreds of thousands of immigrants each year,the average U.S. wage has continued to grow. Can you explain why? Are there any groups of workers within the economy for whom the fear of lower wages is justified? Explain

Answer 1

The impact of immigrants on the wages of U.S. workers depends on the situation where the immigrants and U.S. workers compete for the same jobs or they complement each other in the labor market.
On average,immigrants raise wages and expand employment opportunities for U.S. Workers.
For example ,semi-skilled immigrants working in the area of agriculture,construction,or household services,appear to improve the wages and earnings of U.S. workers by expanding the capacity of U.S. workers businesses and farms,increasing the responsibility and pay of U.S. workers and providing higher level of opportunities for higher-skilled U.S. Workers,particularly women,to pursue higher-paying careers.
In turn immigrants by default boost U.S. worker wages.
Thus immigration into U.S. has positive impact on wage rate for U.S. workers.
No. There should be no group of workers who feel that because of immigrants,their current pay will tend to be lower.

Question 2

Some advocates of the minimum wage argue that any decrease in the employment of the unskilled will be slight. They assert that an increase in the minimum wage will actually increase the total amount paid to unskilled workers (i.e.,wage × number of unskilled workers employed). Discuss what assumptions they are making about the wage elasticity of labor demand

Answer 2

As the minimum wage goes up,firms that hire minimum wage workers (unskilled workers)would want to hire fewer of them.
It is also the fact that the total amount paid to minimum wage workers (unskilled workers)goes up or down depends on the relative size of the percent increase in minimum wage versus the percent decrease in the number of unskilled employed.
If the percent increase in wage is higher than the percent decrease in employment then the demand for unskilled workers is inelastic.
If it is elastic,thus these advocates must assume that the demand for unskilled labor is inelastic.

Question 3

Suppose the demand for unskilled labor were completely inelastic with respect to the wage rate. Using graphs similar to those in Figure 14,but modified to reflect this new assumption,explain how a minimum wage above the equilibrium wage for covered unskilled workers would affect employment and the wage rate among:
a. Covered,unskilled workers
b. Uncovered,unskilled workers
c. Skilled workers

Answer 3

a)A minimum wage law is imposed in the market for unskilled labor with a view to provide them a better standards of living. Figure 1 shows the implication of this legislation in the market for unskilled labor. The market clearing wage rate is $6 per hour and the government announces a minimum wage of $8 hour.
With perfectly inelastic demand for skilled labor,this law increases the wage rate to $8 per hour,the market demand for unskilled labor is still at F,measuring L1 while the supply has risen to a point G,measuring L2. So there is excess supply of labor measuring L2 - L1.
b)In the market for unskilled labor where this legislation is not proposed,the surplus workers from the market for unskilled labor covered by minimum wage law migrate to this market. This increases the labor supply in this market. This is shown in Figure 2
Before the imposition of law,the market was operating at E,with the same wage rate $6 per hour. With increased supply and same inelastic demand for labor,there is again an excess supply. But since the demand is inelastic,there is a downward pressure on the wage rate which falls to $4.5 per hour. So there is a movement from E to F and from F to G. Only L3 workers would find employment.
c)This legislation has no effect on the market for skilled workers. The demand for skilled labor is usual downward sloping. The supply of unskilled labor is however,upward sloping. The equilibrium is Point E that determines the equilibrium wage rate of $30 per hour and equilibrium number of workers hired being L5. This is shown in Figure 3.
The market clearing wage rate is higher at $30 per hour and the government's announcement of a minimum wage of $8 hour is not at all binding in this market. So there is no change in the wage rate and employment.

Question 4

In the nation of Barronia,the market for construction workers is perfectly competitive. Explain what would happen to the equilibrium wage rate and equilibrium employment of construction workers under each of the following circumstances:
a. Young adults in Barronia begin to develop a taste for living in their own homes and apartments,instead of living with their parents until marriage.
b. Construction firms begin to use newly developed robots that perform many tasks formerly done by construction workers.
c. Because of a war in neighboring Erronia,Erronian construction workers flee across the border to Barronia.
d. There is an increased demand for automobiles in Barronia,and Barronian construction workers have the skills necessary to produce automobiles.
e. Tuition at trade schools that qualify Barronians for construction work become cheaper

Question 5

Suppose that dehydrated meat is an inferior good. Discuss the effect on the equilibrium wage rate and level of employment in the dehydrated meat industry of an increase in national income

Question 6

Suppose the supply of people who want to be "extras" in a film (people in the background of a film)is completely inelastic,because they will supply their labor to film production companies no matter what wage they are paid.
a. Draw a diagram illustrating how the equilibrium wage and equilibrium employment level for extras is determined.
b. On the same diagram,illustrate what will happen to the equilibrium wage and employment of extras if the demand in the product market (for films)increases

Question 7

Fifteen years ago,college professors frequently hired undergraduates as research assistants to gather basic information in the library. Today,most professors can get the information themselves using the Internet in less time than it would take to explain what is needed to a research assistant.
a. In the labor market for undergraduate research assistants,has the Internet been a substitutable or complementary technological change?
b. All else equal,what impact has the development of the Internet likely had on the wage and employment level of undergraduate research assistants?
c. Many college professors find that graduate student research assistants are more productive than before because they can use the Internet. All else equal,has the Internet been a substitutable or complementary technological change for graduate student research assistants? What effect would this have on their equilibrium wage and employment level?

Question 8

Suppose that in the market for U.S. meat packers,two things happen simultaneously: (1)Due to growth in less-developed countries,the demand for U.S. meat exports rises; and (2)Due to other job opportunities,fewer people find meat-packing an attractive job.
a. Which curve or curves in the labor market for meat packers would be affected by these changes?
b. If there were no other changes,could you predict the impact of these events on the equilibrium wage of meatpackers? On their equilibrium employment level? Explain

Question 9

The EITC is a subsidy given to workers for working. Suppose everyone in a particular unskilled labor market is receiving EITC payments of a given amount for each hour that they work.
a. Draw a diagram showing the impact of the EITC on the labor market equilibrium. [Hint: The subsidy is paid directly to workers,not to firms.] On your graph,identify the wage rate and employment level both before and after EITC is introduced.
b. What happens to the wage rate that employers pay to their workers after the EITC? Explain briefly.
c. What happens to the wage rate the workers get (including the subsidy)? Explain briefly

Question 10

How would each of the following,ceteris paribus ,affect the college wage premium over a long period of time?
a. Government scholarships are sharply curtailed.
b. Weird solar radiation renders all computers in the world inoperable.
c. Computers become even more complicated to operate

Question 11

Each of the following observations,ceteris paribus ,implies something about a particular labor market. For each one,(1)identify the relevant labor market; (2)state whether you expect the wage rate in that market to be higher than otherwise,or lower than otherwise; and (3)identify which conceptual explanation for wage differences (among those discussed in the chapter)you are applying to reach your conclusion.
a. Elevator repairers have a higher accident rate than most other jobs.
b. People who work in New York City have to pay higher rent than other people.
c. People like to work in New York City because there is a lot to do there.
d. It takes rare diligence,motivation,and practice to become a concert pianist.
e. Los Angeles has passed legislation requiring that fortune tellers become certified by the city.
f. Office cleaning services don't like to risk hiring exconvicts,because employers believe they are more likely to steal equipment than other employees

Question 12

[Appendix] The following gives employment and daily output information for Your Mama,a perfectly competitive manufacturer of computer motherboards.
A motherboard worker at Your Mama earns $80 a day,and motherboards sell for $27.50.
a. How many workers will be employed? How do you know?
b. Suppose the market wage for motherboard workers increases by $5 per day per worker,but the market price of motherboards remains unchanged. What will happen to employment at the firm? Why?

Question 13

[Appendix] Add MR and MC columns to Table 1 in the chapter and find the profit-maximizing output level using the MR and MC approach. When calculating MR and MC ,don't forget to divide ? TR and ? TC by the change in output,which is not one unit in the table. Does the profit-maximizing output level differ from the one found in the appendix,using the MR = W approach? Explain briefly