Midterm Format and Sample Questions Economics 5215: Topics in Labour Economics
Format: Part 1: Multi-part question on labour supply theory and/or empirical work.
Part 2: Write notes on 4-5 different issues mentioned in the course (some choice).
Coverage: Course work up to the end of today material on the tobit model) lecture. There
will be no questions on STATA programming.
Examples:
1. Use Gronau’s model to explain and illustrate the effects of a rise in the productivity
of home production on the division of time between market work, non-market work and leisure.
2. The static model of labour supply has been criticized for ignoring inter-temporal aspects of the labour supply decision. Provide a discussion of the ways in which labour supply is an inter-temporal decision. What new variables does the inter-temporal model suggest should be added to standard labour supply equations?
3. Illustrate the static labour supply model budget constraint in the presence of a progressive tax system. How does this complicate the basic model? What are the econometric implications of this problem?
4. (a) Explain why OLS estimates of an hours of work equation are likely to be biased.
(b) The tobit model provides a possible way of estimating the hours equation that deals with the
problems in (a). Outline how the tobit model estimates are made (derive the likelihood
function for the tobit case).
5. Say that a person has the following Cobb-Douglas utility function.
U = Yalb
faces the budget constraint: Y = w H + N
faces the time contraint: T = l + H
where Y = income, l = hours of leisure, w= wage rate, N =non-labour income, H = hours
worked, T = total time to be allocated.
(a) What is the person’s reservation wage? (derive an expression) Under what conditions does the person participate?
(b) Derive the person’s labour supply equation.
(c) Derive the effect on hours worked of a change in w, N and b.
(d) Illustrate the effects of the changes in (c) in the usual leisure-income diagram.
6. (i) Much of the research in modern labour economics has been driven by the
availability of microdata. What is microdata?
(ii) What is a cross-sectional data set? Give an example. What is panel data?
(ii) Statistics derived from microdata are often weighted. Why? What does the
weight variable represent?
7. The Basic Static Model of Labour supply
Let:I = amount of non-labour income
w= wage rate
Y = total income
le = quantity of leisure chosen
U = U(Y,le) utility function.
(a) Set up the individual’s maximization problem.
(b) Derive the first order conditions.
(i) For a participant
(ii) For a non-participant.
(c) Explain and interpret your conditions. Illustrate them with a diagram.
(d) Based on this framework what variables would you put in a labour supply equation?
8. What is the linear probability model? How are its coefficients interpreted? What are the limitations of the model?
9. The model of labour supply focuses on the labour supply decision of an individual person. Often instead we are interested on the “aggregate” labour supply, i.e. the labour supply summed across everyone in the labour market being modelled. Assuming that N is the total number of people who could supply labour to this labour market, that E(H|H>0)=E(H |w>w*) is the hours worked by a typical participant in this labour market and that P(w*) is the cumulative distribution function for reservation wages for people in this labour market, derive an expression for the effect of a rise in the wage rate on total hours worked in this labour market.
10. Edward Prescott argues that tax cuts can cause large increases in labour supply. This seems surprising given that income and substitution effects of tax cuts are likely to conflict. Explain why Prescott thinks the income effects of the change can be largely ignored. How might his argument help explain differences in labour supply behavior between the US and Europe (provide a diagram).