6. Lothario is currently employed and earns $20 an hour. He works for 35 hours p

Question

6. Lothario is currently employed and earns $20 an hour. He works for 35 hours per week. There is currently no unemployment benefit or minimum wage. He estimates his disutility for work to amount to $3 per hour. Should he lose his job, he would remain unemployed for 20 weeks. i. What is his employment rent? (This is the baseline case) ii. Suppose the length of unemployment rises to 40 weeks. What is iii. Suppose the disutility for work rises to $4 per hour. What is his iii. Suppose that if he were unemployed, he would receive his employment rent? employment rent? unemployment benefits of S100 for 20 weeks. What is his employment rent?

Explanation / Answer

ans.

There is a difference between the value of the job (taking into account all the benefits and costs it entails) and the value of the next best option—which is being unemployed and having to search for a new job. In other words, there is an employment rent or the cost of job loss.

employment rent per hour=wage ? disutility of work per hour

total employment rent=employment rent per hour×expected lost hours of work

ans1.

given: wage= $20 per hour

disutility of work = $3 per hour

expected lost hours of work = 20 * 35 = 700 hours

total employment rent (TER) = (20 - 3) * 700 = $ 11900

ans2.

expected lost hours of work = 40 * 35 = 1400 hours

TER = (20 - 3) * 1400 = $ 23800

ans 3.

disutility of work = $ 4 per hour ; expected lost hours of work is same as part 1 i.e. 700 hours

TER = (20-4) * 700 = $11200

ans 4.

If lothario receives an unemployment benefit, it will partially offset the lost wage income.

given: that while lothario remains unemployed, he will receive a benefit equivalent to being paid $2.857 an hour for a 35-hour week (2.857 * 35 = 100 ) . This is his reservation wage. so he would be indifferent between having a job that paid $2.857an hour, and not working.

employment rent per hour=wage?reservation wage?disutility of effort

total employment rent=employment rent per hour × expected hours of lost work time

here ,

TER = (20 - 2.857 - 3) * 700 = $9900.1

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