Please note, it looks longer than it is. For many questions you only need to write about one.
1. Unemployment: You are an economist (or at least an aspiring one).
a. If I were to pin you down to a number, what number would you give for the current Natural Rate of Unemployment? Why?
b. Now suppose our economy is currently functioning at that Natural Rate of Unemployment. CHOOSE ONLY ONE OF THE SECTIONS (i, ii, or iii) BELOW AND ANSWER IT. Keep in mind that a good answer will include an understanding of both incidence and duration of unemployment, our stock-flow model of unemployment, and reasons grounded in economic theory for changes in unemployment rates.
i. Congress passes, and funds, an act that pays for 6 months of retraining expenses for anyone who has lost a job for demonstrably STRUCTURAL reasons. or
ii. A spike in oil prices moves the US macroeconomy into recession. Discuss both near term, and longer term changes in unemployment, or
iii. A near collapse of the US banking system causes a severe tightening of credit in US financial markets, moving the US macroeconomy into recession. Discuss both near term, and longer term changes in unemployment.
2. One might state the “Law of Demand” as it applies to demand for labor as follows. Other things remaining the same, if the wage rate falls, the quantity of labor demanded rises.
a. In the Short Run, we say this Law of Demand is due to the Scale Effect. Please explain.
b. In the Long Run, we say this Law of Demand is due to both the Scale Effect and the Substitution Effect. Please explain.
c. Would you expect the firm’s demand for labor to be more wage elastic in the Short Run, or in the Long Run? Please explain.
d. Suppose a firm uses three kinds of inputs to produce its product: Unskilled Labor, Skilled Labor, and Capital. Suppose Unskilled Labor and Skilled Labor are substitutes in production, Unskilled Labor and Capital are substitutes in production, and Skilled Labor and Capital are complements in production. Suppose technological change leads to a significant drop in the price of Capital. Please answer the following questions.
i. Predict the firm’s Short Run changes in employment of Unskilled Labor, Skilled Labor, and Capital. Please explain.
ii. Predict the firm’s Long Run changes in employment of Unskilled Labor, Skilled Labor, and Capital. Please explain.
iii. Be sure to explain carefully why your Short Run answers differ from your Long Run answers. Will Unskilled Labor employment and Skilled Labor employment be affected similarly or differently in the Long Run? Why?
3. Minimum Wage.
a. The standard microeconomic model tells us that if a minimum wage is effective, a rise in the minimum wage should decrease employment, increase the wages of certain unskilled workers, possibly decrease the wages of certain other unskilled workers, and have an ambiguous effect on total earnings of unskilled workers. Please explain.
Analysis of the potential effects of an increase in the effective minimum wage is perhaps more complicated than the above statement suggests. PLEASE CHOOSE ONLY ONE of the options below and answer it.
b. Research by economists Card and Krueger[1] in the mid 1990s came to an apparently contradictory conclusion that a rise in the minimum wage received by fast-food workers in New Jersey led to an increase in both wages and employment of unskilled workers. How might this be true? Summarize the possible reasons found in economic theory that might help to explain these findings.
c. A rise in the effective minimum wage can alter not only the total earnings of unskilled workers but the earnings of other workers as well. Use what you know about unskilled labor – skilled labor substitutability, and about how an increase in the wages of one tier of workers might affect the wages of another tier of workers, to discuss potential impacts on the distribution of earnings due to an increase in the minimum wage.
d. In many states recently legislated minimum wage increases (and recently proposed ones) call for large increases in the minimum wage (up to $15 per hour). These are not unlike Living Wages that have been adopted in a number of US cities, just on a larger scale. Use what you know to discuss the possible impacts on employment and earnings of such large increases in the minimum wage.
[1] Myth and Measurement: The New Economics of the Minimum Wage,1995.
Please submit with quality in a timely manner as there is a strict deadline.
