11. (8 points) An econometrician collects information on hours worked, wage rate

Question

11. (8 points) An econometrician collects information on hours worked, wage rates, and nonlabor income. She uses the data to estimate a regression equation of the form h-atbwitct where h, is hours worked, wi Is the wage rate, vi is nonlabor income, and n captures other factors that affect labor supply. (a) Describe why there might be a positive relationship in the data between the wage rate and hours worked. b) Describe why there might be a negative relationship in the data between nonlabor income and hours worked

Explanation / Answer

a) There will be a positive relationship between wage rate and a number of hours worked as a worker increases his hours of work or does overtime then he/she will incur more wages per hour. There is a substitution between work and leisure in a labor market. An income effect would imply that a worker should increase hours of work and leisure together but the substitution effect suggests that more hours of work should be done as wages rise.

b) There is a negative relationship between nonlabour income and hours of work as a worker experiences increase in nonlabor income his/ her hours of work would decline as it has been compensated by higher nonwage income hence income effect dominates in this case.

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