1. Suppose that Congress increases the minimum wage to $12 an hour, and it is binding.
a. Use a supply and demand model for low-skill labor to show the effect on the number of unskilled workers employed.
b. Does the change in employment depend on the labor demand elasticity or the labor supply elasticity or both? Explain, using a graph.
c. Which elasticity (or elasticities) affects the change in unemployment? Explain with a graph.
2. The health care law passed in March 2010, usually referred to as Obamacare, requires employers (with more than 50 employees) to offer health insurance to their full-time employees. This requirement is often called the "employer mandate," because employers must provide health insurance or pay a fine of $2000 per worker each year (for any worker who then must purchase health insurance in the exchanges as part of the "individual mandate"). The law stated that this requirement would go into effect 2014 but was delayed until 2015 by presidential dictate.
a. How would the employer mandate affect the demand curve for labor? Show your answer on a graph. If there is no change in labor supply, how would this policy affect employment and wages?
b. Why might the labor supply curve shift in response to the employer mandate? How would this shift in labor supply affect wages and employment? Show on a new graph.
c. Use a new graph to show the effect of the employer mandate on workers who earn the federal minimum wage. Assume the minimum wage is binding.
3. A study published February 2010 in the Journal of the American Medical Association found that between 1995 and 2006 there was a 25% decrease in average inflation-adjusted fees per hour for physicians. During that same period, physicians reported a 7.2% decline in hours worked per week (to 51 hours). The authors of the study said that physicians had "less incentive to work."
a. Use the income-leisure model to explain the results of this study.
b. Do physicians have a backward-bending labor-supply curve? Explain.
c. What was the average work week for physicians in 1995? Show your work.
4. Suppose the supply curve of physicists is given by w = 10 + 5L, and the demand curve is given by w = 50 - 3L.
a. Calculate the equilibrium wage and employment level.
b. Now suppose that the demand for physicists increases to the equation of w = 70 - 3L.
What is the new equilibrium wage and employment level?
c. Instead of the instantaneous adjustment you did in part (b), assume that the market for physicists is subject to "cobwebs." Explain in words what will happen as this market adjusts to the demand shift. What conditions are required for a labor market to experience cobwebs?
d. Now smile as you neatly draw a cobweb adjustment in the model of the market for physicists.
5. The economic stimulus bill of 2009 was an $800 billion expenditure program. Some economists recommended instead a one-year elimination of the payroll tax, which would have had about the same $800 billion effect on the federal budget.
a. Use the labor market model to show the effect of the one-year elimination of the payroll tax.
b. What is the effect on worker surplus and employer (producer) surplus?
c. What is the effect on the deadweight loss? What does a deadweight loss in the labor market represent?
d. Why is the gain in well-being from a tax reduction likely to be larger than a gain in well-being from an equivalent spending program?
6. The Americans with Disabilities Act provides protection from arbitrary firing of handicapped workers by their employers. How would this provision affect employment of handicapped workers? Hint: if you were a rational employer, how would this regulation affect your willingness to hire a handicapped worker?