York University Labor Economics Questions

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1. Each of the following four examples describes an individual who is either a discouraged
worker, an added worker, an underemployed worker or an overemployed worker. Match each
example with the type of worker it is most clearly illustrating. [Use each worker type once.]
A.
B.
C.
D.
Added worker
Discouraged worker
Overemployed worker
Underemployed worker
Maria is very happy with her current job, particularly since she has seen a number of her friends
lose theirs during the current recession. She would be even happier with her job if her hours
weren’t limited to 35 hours per week.
Maintaining a healthy work-life balance is important to Lin. While she enjoys her career as a
lawyer, she would prefer having more leisure time to spend with her family.
Luis has been unable to find work during the current recession and has decided to enrol in a fulltime post-secondary program.
John had been a stay-at-home parent since his first child was born five years ago. However, he
recently started working part-time hours at a local grocery store after his wife’s employer laid her
off.
2. A labour force can be broken down as follows:
• Potential Labour Force Participants: 40 million
• Employed: 28 million
• Not working, but actively seeking work: 1.5 million
• Full-time students: 3 million
• Retired: 4.9 million
• Not working, discouraged because of lack of jobs: 600,000
• Not working, household workers: 2 million
a) Using the numbers above, calculate this economy’s labour force participation rate.
b) Using the numbers above, calculate this economy’s unemployment rate.
3. Consider two individuals, Carole and Mo, who each have a job opportunity that pays a wage
of $20 per hour and allows them to choose the number of hours per week they’d like to work.
Carole has stronger preferences for leisure than Mo. Ultimately, both Carole and Mo choose to
work more than zero hours per week.
Draw (and upload) one graph that includes:
• Carole and Mo’s income-leisure constraint
• Carole’s utility-maximizing indifference curve (UC) and choice of leisure hours (LC)
• Mo’s utility-maximizing indifference curve (UM) and choice of leisure hours (LM)
[Note: There are multiple, though similar, ways to draw this graph. Focus on ensuring that the
constraint, indifference curves and hours worked align with the information provided above.]
4. Consider an individual who lives in an economy without a welfare program. They initially
work T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour
income.
a) Draw a graph that reflects this individual’s income-leisure constraint, utility-maximizing
indifference curve (U0), choice of leisure hours (L0) and income (Y0).
b) Now, assume that a welfare program has been implemented in this economy. The welfare
benefit is smaller than the individual’s initial income level (Y0) and there is a 50% clawback on
any labour income earned. The individual now maximizes their utility by working and collecting
a partial welfare benefit.
On the same graph as part a, draw this individual’s new income-leisure constraint, utilitymaximizing indifference curve (U1), choice of leisure hours (L1) and income (Y1).
5. Consider an individual who initially works T-L0 hours per week, where (T-L0)>0. They earn
an hourly wage (W) and no non-labour income.
a) Draw a graph that reflects this individual’s income-leisure constraint, utility-maximizing
indifference curve (U0) and choice of leisure hours (L0).
b) The government then implements a wage subsidy program in which worker wages are
increased by 10%. This wage subsidy program has no limits, so there is no phase-in/out. This
wage subsidy produces both an income effect and a substitution effect on the worker’s choice of
leisure hours. Assume that the substitution effect is stronger than the income effect.
On the same graph as part a, draw this individual’s new income-leisure constraint, utilitymaximizing indifference curve (US) and choice of leisure hours (LS).
[Note: When incorporating the 10% wage subsidy into the graph in part b, I am not expecting
perfect precision. Just try your best to draw the new income-leisure constraint as though a 10%
wage subsidy has been added.
6. Consider an individual who was employed prior to having a child. Now, they face daycare
costs (M) if they choose to go back to work. Assume that they earn an hourly wage (W) and their
non-labour income (YN) is greater than their daycare costs (YN > M). Despite the daycare costs,
this individual chooses to work T-L0 hours per week.
Draw a graph that reflects this individual’s income-leisure constraint (both with and without
daycare costs), utility-maximizing indifference curve (U0) and choice of leisure hours (L0).
7. Consider an individual who had been planning to retire in five years. Unfortunately, they’ve
just been laid off and the highest-paying job they’ve been able to find pays a lower hourly wage
than did their previous job.
a) Using the concepts of the income and/or substitution effect, describe why we might expect this
individual to retire earlier than they originally planned.
b) Using the concepts of the income and/or substitution effect, describe why we might expect
this individual to retire later than they originally planned.

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