Done By: Dhrushi Dodhia, Gurpreet Kaur and Kamya Raval.

Exercise 1 (30 points)

Background readings: Chapter 5,6

1A. (10 points) Discuss Canada’s competitive position relative to our largest trading
partner, the United States over the years 1989-2017.
Between 1989 and 2017, fluctuations in exchange rates largely affected labor costs and
productivity trends,affected Canada's competitive position to the United States.

● Comparing Canada to the United States in 2017, unit labour expenses were somewhat
lower than they were in the 1990s. The main cause of this fall was that hourly pay fell
more than productivity.
● Even so, since the late 1990s, Canada's productivity - measured in production per hour
,has been progressively lower than that of the US. The impact of this trend on Canada's
competitiveness position in global market.
● Over time, there were considerable fluctuations in the relative costs, which were mostly
caused by changes in currency rates. For example, between 1989 and 2001, unit labour
expenses fell as the value of the Canadian dollar fell from 85 cents to 64 cents relative to
the US dollar. In contrast, labour expenses increased dramatically after 2001 as exchange
rates increased by over 30%. They finally reached parity in 2011–2012 before beginning
to decline once more.
● Canada's competitiveness has been significantly impacted by the fluctuating exchange
rate, which has impacted its capacity to export products and services.
● The relatively low productivity performance of Canada has alarmed economists and
policymakers. The previous governor of the Bank of Canada, Mark Carney, emphasised
the risk associated with weak productivity following the 2008 recession and an increasing
value of the Canadian dollar.
● The likelihood of an export-led recovery is threatened by the combination of a weakening
currency and slow productivity growth. Even though the Canadian dollar has since
depreciated, Canada's capacity to compete is still limited by persistently low productivity
growth, particularly if wages rise sharply. The standard of living may be negatively
impacted by this circumstance.

1B. (20 points) Discuss overtime restrictions and job creation: theory and evidence. Explain
with words only, no graph needed.

Reducing working hours, such as reducing overtime, is a common topic these days. Some
individuals believe it is a wonderful concept since it would make employment more equitable
and beneficial to everyone. They claim that if people worked less, they would have more time for
themselves and their family. That may make them happy and less worried. Some believe it will
improve businesses because employees will be happier and more rested, potentially leading to
better productivity. They also feel that if companies cannot force employees to work overtime,
they will need to hire additional individuals to complete the task.

However, some people are concerned about lowering working hours. Some employees must
work extra hours to cover their bills and support their families. If they are unable to work extra,
they may not earn enough money, which could be problematic. Businesses may also struggle to
change their policies and may have to spend more money to comply with new requirements.

Economists study all of this. They consider how firms and workers may change if work hours are
reduced. They use buzzwords like "supply and demand" and "productivity" to predict what
would happen if we adjust how much people work. According to research, cutting work hours
could make some individuals happier and possibly create more jobs. However, it could present
some issues for employees and firms.

So, when policymakers discuss cutting labor hours, they should consider all of these factors.
They must strike a balance between making labor more equitable and ensuring that workers can
continue to earn a living and businesses can function properly. It's a tough problem with many
factors to consider.

People who advocate for shorter work hours argue that it makes labor more equitable and
beneficial to everybody. They believe that working less hours will allow people to spend more
time with themselves and their family, making them happier and less stressed. It may also benefit
businesses since employees will be more rested and happier, thus leading to higher performance.
Some people believe that if firms cannot force employees to work extra, they will have to hire
more workers to complete the task.

However, some people are concerned about reducing their working hours. Some employees must
work longer hours to cover bills and support their families. If they are unable to work extra, they
may not earn enough money, which could be problematic. Companies may find it difficult to
change their standards and may need to pay more money to comply with new requirements.

Economists analyze all of this, examining how businesses and workers may alter if work hours
are reduced. They use buzzwords like "supply and demand" and "productivity" to predict what
would happen if we adjust how much people work. According to research, cutting work hours
could make some individuals happier and possibly create more jobs. However, it could present
some issues for employees and firms.

So, when policymakers discuss cutting labor hours, they should consider all of these factors.
They must strike a balance between making labor more equitable and ensuring that workers can
continue to earn a living and businesses can function properly. It's a tough problem with many
factors to consider.
Exercise 2 (30 points)
Background readings: Chapter 7
Pick and give examples of 2 firms:
Firm 1: monopsonist
Firm 2: perfect competitive firm that hires labour in perfect competitive market
For each firm above, expand on and explain its hiring process, wages they pay, employment
level. How
do they determine the employment level? How each firm behaves when it wants to expand
its labour
force? Compare and contrast the total wage bills of the above firms.
Explain with words + graphs.
Firm 1: Monopsonist
We have decided to consider a local hospital as a monopsonist firm, which operates within a
local labor market where it is the primary employer of nurses. As the main buyer of nursing labor
in the area, the hospital has market power in determining the wage rate which indicates a
monopsony situation.
In the hiring process, the hospital sets wages unilaterally, taking advantage of its dominant
position in the local labor market. Unlike in a competitive labor market where wages are
determined by the intersection of labor supply and demand, the hospital decides to set wages
according to its own preferences.This means that the hospital can offer wages that are lower than
what nurses might expect in a competitive market, effectively reducing labor costs for the
institution. The hospital can hire more workers by offering a higher wage rate, but this also leads
to an increase in the wage rate for all workers. Therefore, the hospital has to balance the benefit
of hiring additional workers with the cost of increasing the wage rate for all workers.
Wages paid by the hospital are influenced by its monopsony power. The nurses receive
compensation that is typically lower than what they might receive in a more competitive labor
market. The hospital benefits from this situation by keeping labor costs down, thus reinforcing its
financial position.
The employment level at local hospitals is determined by its demand for nursing labor. The
hospital hires nurses up to the point where the marginal benefit of hiring an additional nurse
equals the marginal cost, considering factors such as patient care needs and budget constraints.
When the local hospital seeks to expand its labor force, it faces a delicate balancing act. While it
may wish to employ more nurses to meet growing patient demand, it is reluctant to raise wages
to attract additional applicants due to its monopsony position. As a result, expansion efforts may
be hindered by the inability to attract a sufficient number of qualified nurses at the prevailing
wage rate.
Firm 2: Perfectly Competitive Firm.
In this question, we have decided to consider a small software company as the competitive firm
that is a perfect buyer of labor. The software company is a competitive firm that has no market
power in determining the wage rate. It hires workers in a perfectly competitive labor market,
where the wage rate is determined by the intersection of the labor supply curve and the labor
demand curve. The labor demand curve of the software company represents the marginal
productivity of labor, which is downward sloping, while the labor supply curve is upward
sloping. The equilibrium wage rate is determined at the intersection of the two curves. The firm
hires workers up to the point where the marginal revenue product of labor is equal to the market
wage rate.
When the software company decides to expand its labor force, it does this in a manner that aligns
with prevailing market conditions. Unlike a monopsonist firm, the software company does not
have the power to set wages: instead, it must adhere to the market determined wage rate.
Therefore, to attract additional workers, the firm simply offers more job opportunities at the
prevailing market wage rate.
Overall, the perfectly competitive firm's ability to expand its labor force at the prevailing market
wage rate reflects the dynamics of a competitive labor market, where firms operate as wage
takers rather than wage setters. This flexibility allows the firm to respond to changing demand
conditions and grow its operations without facing significant hurdles or disruptions in the labor
market.
Comparison of Total Wage Bills:
The total wage bill for the local hospital is typically lower than the total wage bill of the small
software company because the hospital has the power to set wages below the market rate.
However, if both firms want to expand their labor forces, the total wage bill for the local hospital
would increase more than that of the small software company because the local hospital would
need to increase the wage rate for all workers, not just the additional ones.
Graph explanation.
Firm a) Perfectly Competitive Firm- Small software company
In the graph below, the demand for labor (D) by the perfectly competitive firm intersects with the
supply of labor (S) at point B, determining the equilibrium wage rate (W1) and employment
level (Q1).
Firm b) Monopsonist - Local Hospital
In the graph below, the demand for labor (MD) by the monopsonist firm intersects with the
supply of labor (MS) at point A, determining the equilibrium wage rate (W2) and employment
level (Q2).

These graphs illustrate the equilibrium points for both the small software company and the local
hospital in the labor market. In the case of the monopsonist firm, its ability to set wages below
the competitive level results in a lower wage rate (W2) and lower employment level (Q2)
compared to the perfectly competitive firm's equilibrium (W1 and Q1).