Zildete LANDIM CRAUSAZ (18-308-528)

University of Geneva
GSEM
Geneva, November 17, 2021

Professor: Michele Pellizzari

Assistant: Eleonora Brandimarti

LABOUR ECONOMICS

Problem Set 2

Table of Content

page

Exercice 1 2

Exercice 2 6

Exercice 3 9

Appendix 13
 Exercice 1

a) The data were found from the OECD website. We used unemployment
rates for the population of men and women aged 15 or over. Then we each time
selected the data corresponding to the comparisons we wanted to make. We had
to transform the type of the Value variable containing the unemployment rates
in order to be able to use it as a quantitative variable. For that, we applied the
as.numeric function. The tests performed are comparison tests of means on paired
samples. For more details, the text of the script which provided the graphics and
the tests is given in the Appendix at the end of this document.
b) The Germany Case. The unemployment rate for both men and women
has fallen steadily and sharply from 2010 to 2019. In addition, the unemployment
rate for women has always remained lower than that for men. We carried out
a t.test which allows us to affirm that these results are statistically significant
(p-value = 2.197e-07). The graph illustrating the unemployment situation in
Germany is as follows:

c) The Switzerland case. Male unemployment experienced strong growth

between 2011 and 2016, then fell sharply until 2019. In addition, the unemploy-

2
ment rate for men remained lower than that for women. We performed a t.test
which indicates that this finding is statistically significant (p-value = 2.861e-05).
The corresponding graph is as follows:

d) The United States case. Between 2010 and 2019, unemployment for
men remained higher than that for women in the United States. But this result is
not statistically significant. We have indeed performed a t.test of p-value 0.08297,
above the standard level of 5%. The illustrative graphic is as follows:

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 e) Comparaison de la situation des femmes dans les trois pays. Com-
parison of the situation of women in the three countries. Between 2010 and 2015,
the unemployment rate for women was highest in United Stated. From 2016 to
2020, Switzerland had the highest unemployment rate for women, while between
2010 and 2013, the situation for women in Switzerland was better than in the other
two countries. Between 2013 and 2015, Switzerland experienced an intermediate
situation, with an unemployment rate lower than that of the United States and
higher than Germany. Over the entire 2010-2019 period, the unemployment rate
in the United States remained higher than that in Germany. The comparative
graph of the three countries is as follows:

4
 f ) Comparison of the situation of men in the three countries. Between
2010 and 2015, Germany systematically experienced an unemployment rate for
men between Switzerland (the lowest) and that of the United States (the high-
est), the three cases gradually approached. Then there was a transitional period
between 2015 and 2017. Subsequently, from 2017 to 2019, the United States had
an unemployment rate for men between Germany (the lowest) and Switzerland
(the highest). Raised). Below, we sketch a graphic that illustrates all of these
facts:

5
 Exercice 2

Consider a labour market characterised by the following labour demand and

labour supply schedules:

LD = 160 − 2w ; LS = −120 + 2w

a) Under the assumption that the market is perfectly competitive, the equi-
librium wage and employment are the solutions of the following equation:

LD = LS ⇔ 160 − 2w = −120 + 2w ⇔ 4w = 280 ⇔ w = 70

⇒ LD = LS = −120 + 2 × 70 = 20

b) Suppose that the market is dominated by a single monopsonistic employer.

In addition, suppose that the price of the consumption good is 1. Then the total
cost of labor is
L + 120
C (L) = wL = L
2

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and the marginal cost of labor is
∂ 1 L + 120
M CL = C (L) = L + = L + 60
∂L 2 2
The marginal revenue of labor is
160 − L
M RL = p × M P L = p
2
At the monopsonistic equilibrium, we have
160 − L 3 40
M CL = M RL ⇒ L + 60 = p ⇒ L = 20 ⇒ L∗ =
2 2 3
220
⇒ M CL = M RL =
3
And the equilibrium wage w is chosen in such a way that the labour demand
equals the labour supply:
40 120 + 40/3 200
L∗ = −120 + 2w∗ ⇔ = −120 + 2w∗ ⇔ w∗ = =
3 2 3
The monopsonistic equilibrium is represented as follows :

7
 Exercice 3

a) The firm’s profit function is given by

 
1 2
π (L) = p αL − βL − wL
2
The firm’s labour demand is the solution of the following maximization prob-
lem  
1 2
Lmaxπ (L) ⇔ Lmaxp αL − βL − wL
2
First order condition :
∂π (L) pα − w
= 0 ⇔ p (α − βL) − w = 0 ⇔ w = p (α − βL) ⇔ L =
∂L pβ
The firm’s labour demand :
pα − w
LD = ⇔ w = p α − βLD


pβ
b) If the labour supply function is LS = δw, then the perfectly competitive
equilibrium value w∗ is the solution of the equation :
pα − w∗ pα
LD = LS ⇔ = δw∗ ⇔ pα − w∗ = pβδw∗ ⇔ w∗ =
pβ 1 + pβδ
We deduce the other value L∗ :
pαδ
L∗ = δw∗ =
1 + pβδ
c) c.1.The equilibrium wage and labour with the monopolistic union is ob-
tained by maximizing the Union’s utility function U = wγ L1−γ , under a constraint
given by the labour demand function:

w = p (α − βL)max wγ L1−γ ⇔ w + pβL = pαmax wγ L1−γ

The lagrangian of this problem is

l (w, L) = wγ L1−γ − λ (w + pβL − pα)

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 First order conditions:

∂l(w,L) 
 ∂w = 0
  γwγ−1 L1−γ − λ = 0
∂l(w,L)
∂L
=0 ⇔ (1 − γ) wγ L−γ − λpβ = 0
 ∂l(w,L) = 0 − (w + pβL − pα) = 0
 
∂λ

From the first two equations, we obtain:

(1 − γ) wγ L−γ λpβ (1 − γ) w
γ−1 1−γ
= ⇔ = pβ ⇔ (1 − γ) w = pβγL (0.1)
γw L λ γL
On the other hand, the constraint is equivalent to

wγ + pβγL − pαγ = 0 (0.2)

Equations (1) and (2) give the equilibrium wage wu and labour Lu with a
monopolistic union:

L = (1−γ)w Lu = (1−γ)α
  
(1 − γ) w = pβγL
⇔ pβγ ⇔ β
wγ + (1 − γ) w − pαγ = 0 w = pαγ wu = pαγ

c.2. At the equilibrium with a monopolistic union, the labour supply is

LS = δwu = δpαγ

But the labour demand is given by

(1 − γ) α
Lu =
β
Hence there will be no unemployment if and only if
(1 − γ) α α
LS − Lu ≤ 0 ⇔ δpαγ − ≤ 0 ⇔ (δpβγ + γ − 1) ≤ 0 ⇔ (1 + δpβ) γ ≤ 1
β β
And there will be unemployment if and only if
(1 − γ) α α
LS − Lu > 0 ⇔ δpαγ − > 0 ⇔ (δpβγ + γ − 1) > 0 ⇔ (1 + δpβ) γ > 1
β β
The term (1 + δpβ) γ, which depends on δ, p, β and γ, is the parameter that
governs the presence of unemployment.

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 d) The firm’s profit function is given by
 
1 2
π (L, w) = p αL − βL − wL
2

The slope to this isoprofit curve at the point (L, w) is

∂π
∂L
(L, w) p (α − βL) − w
− ∂π
=
∂w
(L, w) L

On the other hand, with the utility function U = wγ L1−γ , the slope to this
indifference cure at a point (L, w) is:
∂U
∂L
(L, w) (1 − γ) wγ L−γ (1 − γ) w
− ∂U
=− γ−1 1−γ
=−
∂w
(L, w) γw L γL

A point (L, w) is on the contract curve if it is a tangency point between an

indifference curve and an isoprofit curve and if it is better than (Lu , wu ) for the
Union and for the representative firm.
In particular, the slopes of the two curves are identical at the point (L, w) :

(1 − γ) w p (α − βL) − w
− = ⇔ (2γ − 1) w = pγ (α − βL)
γL L
In addition, the end points C and D of the contract curve are such that:
C is the tangency point between an indifference curve and the isoprofit curve
passing by the equilibrium point (Lu , wu ) ;
D is the tangency point between an isoprofit curve and the indifference curve
passing by the equilibrium point (Lu , wu ) .
We determine C = (Lc , wc ) as the solution of the system

− (1−γ)w = p(α−βL c )−wc

 
c
(2γ − 1) w
c = pγ (α − βLc )
γLc Lc ⇔
π (Lc , wc ) = π (Lu , wu ) p αLc − 12 βL2c − wc Lc = π (Lu , wu )

We determine D = (Ld , wd ) as the solution of the system

(
− (1−γ)w = p(α−βL d )−wd

γLd
d
Ld
(2γ − 1) wd = pγ (α − βLd )
⇔
γ 1−γ γ 1−γ
wd Ld = wu Lu wdγ L1−γ
d = wuγ Lu1−γ

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 Consequently, if γ 6= 1/2 then the contract curve is the segment connecting C
and D and which has the equation
pγ pαγ pβγ
w= (α − βL) ⇔ w = + L
2γ − 1 2γ − 1 1 − 2γ

If γ < 1/2, the contract curve is an upward sloping segment, to the right of
the demand curve, with equation
pαγ pβγ
w= + L , L d ≤ L ≤ Lc
2γ − 1 1 − 2γ
.
And if γ > 1/2 then the contract curve is a downward sloping segment, to the
right of the demand curve, with equation
pαγ pβγ
w= + L , Lc ≤ L ≤ Ld
2γ − 1 1 − 2γ

In the case γ = 1/2, the contract curve is a vertical line with equation
α
α − βL = 0 ⇔ L = , w d ≤ w ≤ wc
β

e) Application. α = 0.3, β = 0.7, γ = 0.7, p = 1.

Determination of the equilibrium point A = (Lu , wu ) :
 
(1 − γ) α 9 9
Lu = = ; wu = pαγ = 0.21 ; A = , 0.21
β 70 70
 2
9 9 9 81
π (Lu , wu ) = 0.3 − 0.35 × − 0.21 × =
70 70 70 14000
 1−0.7
9
U (Lu , wu ) = wuγ Lu1−γ = 0.210.7 × ' 0.18125786
70

Détermination of C :
 
(2γ − 1) w
c = pγ (α − βLc ) 0.4wc = 0.21 − 0.49 × Lc
⇔ 81
p αLc − 12 βL2c − wc Lc = π (Lu , wu ) 0.3Lc − 0.35 × L2c − wc Lc = 14000
⇔ (Lc , wc ) ' (0.2807, 0.181143)

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 Détermination of D :
 
(2γ − 1) wd = pγ (α − βLd ) 0.4wd = 0.21 − 0.49Ld
⇔
wdγ L1−γ
d = wuγ L1−γ
u wdγ L1−γ
d = 0.18125786
⇒ (Ld , wd ) ' (0.3112, 0.1438)
The contract curve is a downward sloping segment [D, C] , to the right of the
demand curve, with equation
pαγ pβγ 21 49
w= + L⇔w= − L ; 0.2807 ≤ L ≤ 0.3112
2γ − 1 1 − 2γ 40 40
The Union can reasonably try to bargain the wage wc = 0.181143, correspond-
ing to the point C of the contract curve that ensures the highest level of utility.
From the point of view of the representative firm, the best wage is wd = 0.1438,
corresponding to the point D of the contract curve that ensure the highest level
of profit.
The plots of the contract curve, indifference curves, isoprofit curves, and of
the demand curve, are given below in the same graphic:

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APPENDIX: Script for the Exercice 1

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