Zildete LANDIM CRAUSAZ (18-308-528)

University of Geneva
GSEM
Geneva, October 27, 2021

Professor Michele Pellizzari

Assistant: Eleonora Brandimarti

LABOUR ECONOMICS

Problem Set 1

Table of Content

page

Question 1 2

Question 2 4

Question 3 5

Question 4 6

Question 5 13
 Question 1

a) We adopt the following notations for the years j = 1, 2 :

Ej = Employment in year j
Uj = U nemployment in year j
Ij = Inactivity in year j
Lj = Labour f orce in year j

According to the assumptions of this question, the relations between the ag-
gregates in years 1 and 2 are given below:


 Ej + Uj +
Ij = 150 , j = 1, 2
10
E2 = 1 − 0.1 − 900 × E1 + 0.04 × I1 + 0.2 × U1




U2 = (1 − 0.2) × U1 + 0.1 × E1

10

 I2 = (1 − 0.04) × I1 + 900 × E1
E1 = 90 ; U1 = 10 ; I1 = 50




L1 = 100 ; L2 = E2 + U2


Note that
10 10
1.11% = = %
900 9
We deduce that


 Ej + U
j + Ij = 150 , j = 1, 2
10
E2 = 1 − 0.1 − 900 × 90 + 0.04 × 50 + 0.2 × 10 = 84


 U2 = (1 − 0.2) × 10 + 0.1 × 90 = 17
10
I2 = (1 − 0.04) × 50 + 900 × 90 = 49


and the labor force in year 2 is given by the formula

L2 = E2 + U2 = 84 + 17 = 101

Unemployment rate in year 1 :

U nemployed U1 10
= = = 10%
Labour F orce L1 100

2
 Employment rate in year 1 :
Employed 90
= = 0.6 = 60%
W orking Age P opulation 150
Labor force participation rate in year 1 :
Labour F orce 100
= = 66.67%
W orking Age P opulation 150
Unemployment rate in year 2 :
U nemployed U2 17
= = = 16.83%
Labour F orce L2 101
Employment rate in year 2 :
Employed 84
= = 0.56 = 56%
W orking Age P opulation 150
Labor force participation rate in year 2 :
Labour F orce 101
= = 67.33%
W orking Age P opulation 150
Our results are summarized in the table below.
year 1 year 2
Working Age Population 150 150
Labour Force 100 101
Employed 90 84
Unemployed 10 17
Unemployment rate 10% 16.83%
Employment rate 60% 56%
Labor force
66.67% 67.33%
participation rate

b) The employment rate has decreased and the unemployment rate has in-
creased, while the labor force participation is relatively stable over time. These
results indicate an unfavorable development of the labor market. It could be a
consequence of an economic crisis.

3
 Question 2

Consider the production function

1
Y = 20L − L2
4
a) The marginal product of labor is

∂Y 1
MP L = = 20 − L
∂L 2
b) At the labor market equilibrium, we have
w
MP L =
P
where P is the consumption price of the final good and w is the market wage. If
P = 3 and w = 30, then the labor demand is the solution of the equation
1 30
20 − L =
2 3
which is equivalent to
1
L = 10 ⇔ L = 20
2

4
 Question 3

Consider a firm using capital K and labour L according to a generic production

function Y (K, L) . Assume all markets are perfectly competitive. Let w be the
prevailing wage rate and c the cost of renting capital. The firm sells its product
at the market price P .
a) The profit function for this firm is

π (K, L) = P × Y (K, L) − w × L − c × K

b) The optimality conditions for the maximisation of profits when the firm
can adjust both labour and capital are given below:
(
∂π(K,L)
M P K = Pc
 
= 0 P × M P K − c = 0
∂K ⇔ ⇔
∂π(K,L)
∂L
=0 P × MP L − w = 0 M P L = Pw
MP L w/P MP L w
⇒ = ⇒ =
MP K c/P MP K c

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 Question 4

Consider an economic agent with the following utility function:

U (C, L) = C 1/2 + L1/2
where C is consumption and L is leisure. Assume that the price of the consumption
good is p = 2, the wage is w = 4 and the total endowment of time is T = 24.
a) The budget constraint of the agent assuming she does not have any non-
labour income.
p × C = (T − L) × w ⇔ pC + wL = wT ⇔ 2C + 4L = 96
⇔ C + 2L = 48 ⇔ C = 48 − 2L
The slope of this constraint is −2. The absolute value of the slope is the relative
price of leisure.
The vertical intercept is 48, which is the maximal consumption of the agent,
when he does not take any leisure.
The budget constraint is graphically represented as follows :

6
 b) The marginal rate of substitution between consumption and leisure is given
by the formula r
MUL ∂U/∂L (1/2) L−1/2 C
= = −1/2
=
MUC ∂U/∂C (1/2) C L
The equation of the indifference curve of level U0 is :

2
U (C, L) = U0 ⇔ C 1/2 + L1/2 = U0 ⇔ C = U0 − L1/2

The map of indifference curves is obtained by assigning different values to U0 .

We obtaint the following graph:

c) At the equilibrium the marginal rate of substitution is equal to the relative

price, that is
r r
MUL w C w C 4 C
= ⇔ = ⇔ = ⇔ = 4 ⇔ C = 4L
MUC p L p L 2 L

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 By taking the budget constraint into account, the demand of consumption
goods C, the demand of leisure L and the labor supply S, are solutions of the
following system :
   
 C = 4L  C = 4L  C =4×8  C = 32
2C + 4L = 96 ⇔ 8L + 4L = 96 ⇔ L=8 ⇔ L=8
S =T −L S =T −L S = 24 − 8 S = 16
   

Equation of the indifference curve corresponding to this optimal point (L, C) =

(8, 32) :
√ √ √ √ √ 2
C 1/2 + L1/2 = 32 + 8 ⇔ C = 32 + 8 − L
Graph representation of the optimal choice:

GRAPHICS

8
 d) Assume that the agent also has some non-labour income equal to v = 6 per
day. The equation of the new budget constraint is

p×C = (T − L) × w + v ⇔ pC + wL = wT + v ⇔ 2C + 4L = 96 + 6
⇔ 2C + 4L = 102 ⇔ C + 2L = 51 ⇔ C = 51 − 2L

This budget constraint is less restrictive than the constraint in question a). But
the two constraints have the same slope, as the price and wage remain unchanged.
Graphically, the two constraints are parallel lines:

9
 e) At the equilibrium the marginal rate of substitution is equal to the relative
price, that is
r r
MUL w C w C 4 C
= ⇔ = ⇔ = ⇔ = 4 ⇔ C = 4L
MUC p L p L 2 L
By taking the budget constraint into account, the demand of consumption
goods C, the demand of leisure L and the labor supply S, are solutions of the
following system :
   
 C = 4L  C = 4L  C = 4 × 8.5  C = 34
C + 2L = 51 ⇔ 4L + 2L = 51 ⇔ L = 8.5 ⇔ L = 8.5
S =T −L S =T −L S = 24 − 8.5 S = 15.5
   

We observe a pure income effect. With a non-labor income, the economic

agent increases his consumption of goods, and also increases his leisure time. In
the new situation, the individual works less and consumes more.

10
 The equation of the indifference curve corresponding to this optimal point
(L, C) = (8.5, 34) is
√ √ √ √ √ 2
C 1/2 + L1/2 = 34 + 8.5 ⇔ C = 34 + 8.5 − L

Graph representation of the optimal choices with and without a non-labor

income:
GRAPHICS

f ) Assume that the agent has some non-labour income equal to v. The budget
constraint is
pC + wL = wT + v ⇔ 2C + 4L = 96 + v
At the equilibrium the marginal rate of substitution is equal to the relative
price, that is
r r
MUL w C w C 4 C
= ⇔ = ⇔ = ⇔ = 4 ⇔ C = 4L
MUC p L p L 2 L

11
 In consequence, the demand of consumption goods C, the demand of leisure
L and the labor supply S, are solutions of the following system :
  
 C = 4L  C = 4L  C = 96+v 3
2C + 4L = 96 + v ⇔ 8L + 4L = 96 + v ⇔ L = 96+v
12
S =T −L S =T −L S = 24 − 96+v
  
12

The minimum level of the daily non-labour income v, that would induce the
agent to withdraw from the labour force, is the solution of the following equation
96 + v
L = 24 ⇔ = 24 ⇔ 96 + v = 288 ⇔ v = 192
12

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 Question 5

a) In order to replicate the estimates in columns (i), (ii) and (iii) and rows 1
to 4 of Table 3 in the paper, we have adopted the following notations.

index Variable
FTE employment before,
1.
all available observations
FTE employment after,
2.
all available observations
Change in mean FTE
3.
employment
Change in mean FTE
4. employment, balanced
sample of storesC

Our results are then summarized in the table below. They are very close to
the results given in the article. The notations are those in the R script.

Var PA (i) NJ (ii) NJ-PA (iii)

AV PA = 23.33 AV NJ = 20.44 AV NJ PA = -2.89
1.
(SDT PA = 1.33) (SDT NJ = 0.50) (SDT NJ PA = 1.43)
AV2 PA2 = 21.17 AV2 NJ2 = 21.03 AV2 NJ PA2 = -0.14
2.
(SDT2 PA2 = 0.93) (SDT2 NJ2 = 0.51) (SDT2 NJ PA2 = 1.06)
AV21 PA21 = -2.17 AV21 NJ21 = 0.59 AV21 NJ PA21 = 2.75
3.
(SDT21 PA21 = 1.22) (SDT21 NJ21 = 0.47) (SDT21 NJ PA21 = 1.31)
AV21 PA214 = -2.28 AV21 NJ214 = 0.47 AV21 NJ4 PA214 = 2.75
4.
(SDT21 PA21 = 1.22) (SDT21 NJ21 = 0.46) (SDT21 NJ4 PA214 = 1.31)

We have done several statistical tests to identify the results that are significant.
The p-values of these tests are given in the following table

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 Var PA (i) NJ (ii) NJ-PA (iii)
Tobs 1 iii = -2.021
1.
(pvalue 1 iii = 0.047)
Tobs 2 iii = -4.132
2.
(pvalue 2 iii = 0.895)
Tobs 3 i = -1.78 Tobs 3 ii = 1.26 Tobs 3 iii = 2.1
3.
pvalue 3 i = 0.079 pvalue 3 ii = 0.213 pvalue 3 iii = 0.039
Tobs 4 i = -1.87 Tobs 4 ii = 1.022 Tobs 4 iii = 2.1
4.
pvalue 4 i = 0.065 pvalue 4 ii = 0.31 pvalue 4 iii = 0.039

The estimates in cases 3.ii and 4.ii can be interpreted as the causal effect of
the minimum wage rise in New Jersey on employment at fast food restaurants
in New Jersey. But theses effects are not statistically significant. The pvalues of
the corresponding tests are respectively 0.213 and 0.31. These pvalues are greater
than 5%.
b) We have done a simple univariate regression with the change in full-time
equivalent employment at each restaurant as a dependent variable and as ex-
planatory variable a dummy equal zero for restaurants in Pensylvania and one for
restaurants in New Jersey.
With our notations in the script, the model is

F T Eemployment21 = β 0 + β 1 state + ε

And the ordinary least square estimation of the coeffcient β 1 on the explana-
tory variable is β
b1 = 2.75 which is equal to the estimate in the case 4.iii. It is also
very close to the estimates 2.76 obtained in case 3.iii.

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