1. Consider the following information for country X: Population 400 million Empl
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Question
1. Consider the following information for country X: Population 400 million Employed 240 million Unemployed 12 million Not in the labor force 108 million
(a) Calculate the size of the labor force, the unemployment rate, and the labor force participation rate.
(b) Provide examples of individuals who are classified as “not in the labor force.”
(c) What economic factors might shift a person from “not in the labor force” to in the labor force? Discuss
(d) Identify and discuss some of the shortcomings of the unemployment rate as a measure of economic activity?
2. With aid of diagrams, explain what happens to wages and employment:
(a) if the government imposes a payroll tax on an employer who is a nondiscriminating monopsonist
(b) if the government imposes a minimum wage on an employer who is a perfectly discriminating monopsonist.
3. Assume that the labor demand for low-skilled workers in the United States is given as w=24 – 0.1E where w is the hourly wage and E is the number of workers (in millions), and that the supply of low-skilled workers is perfectly inelastic at 120 millions of workers. Due to some provisions in NAFTA, assume that the United States opened its borders to immigration, and this enabled 20 million low-skilled immigrants to enter into the United States and they supplied their labor inelastically.
(a) Find the market-clearing wage if immigration is not allowed. Show your answer graphically.
(b) Find the market-clearing wage with open borders. Show your answer graphically.
(c) How much is the immigration surplus when the United States opened its borders?
(d) How much surplus is transferred from domestic workers to domestic firms?
4. Explain the following concepts and use diagram(s) when/where necessary:
(a) reservation wage
(b) nonlabor income
(c) added worker and discouraged worker effects
(d) substitution and income effects
(e) effects of wage increase and pension benefits on retirement age
Explanation / Answer
a) SIze of labor force = employed + unempoyed = 240+12 = 252 million
Unemployment rate = Unemployed/labor force * 100 = 12/252 * 100 = 4.76%
Labor force participation rate = labor force / adult population , * 100
adult population = total population - not in labor force = 400-108 = 292 million
thus labor force participation rate = 252/292 * 100 = 86.3%
b) People who do not come under "not in labor force" are young who have not reached age of working; militiary people, elderly and home makers.
c) Any structural change in economy like decrease the entitled working age of labor, or inflation that pressurizes homemakers to go out and work are few examples of these changes which may bring someone from not in labor force to labor force.
d) Unemployment could be of ,any kind like structural, cyclical and frictional. Unemployment rate includes all these kinds of unemployment. However its only cyclical unemployment that measures ups and downs in economic activities. This is thar kind of unemployment which occurs when business cycle rwaches trough phase generally. But other unemployment like frictional (occurs because of assymetric information) and structural (occurs because of change in technology) dont measure the pace of economic activities.
Despite all three are included in unemployment rate and thats why unemployment rate is not a good measure of economic activity.
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