Dynamic LS and LS
Which are the implicit assumptions of the intertemporal substitution hypothesis?
Perfect credit markets
Perfect information
Absence of shocks to employment/wages
Which two types of LS elasticity can we distinguish when it comes to the long run?
Frisch -> evolutionary wage changes that leave lifetime utility unaffected (substitution effect)
Marshallian -> unexpected wage changes that affect total lifetime utility (income and substitution effect)
Which are the challenges for estimating intertemporal LS elasticity?
We have to observe the same individuals reacting to wage changes -> panel data
We need to control for permanent differences between individuals
Which are the empirical strategies to estimate intertemporal LS elasticity?
First differences regression
Fixed effects regression
What is a first difference regression?
Instead of regressing the dependent variable in levels on the independent variable in levels, we regress them in differences, so we look at changes in them.
It implicitly controls for permanent differences between individuals, since they drop out when taking differences
What is a fixed effects regression?
It is a regression using panel data in which we include one dummy variable for each individual. This way, we account for unobservable permanent differences among individuals, such as intelligence or ability.
Why the law of diminishing returns to labour?
At the begining, MP of labour increases due to specialization, but at some point it starts decreasing because it gets crowd
How do we derive the LD curve in the short run?
We cannot just add all the industry LD curves together because we have to take into account general equilibrium: when all firms increase their workforce, they also increase their output, so prices fall. When prices fall, VMPE falls as well, which makes firms to hire less than they would just adding all the curves.
Why do we focus on the decreasing part of the VMPE curve for computing the LD curve?
Because only firms paying wages smaller or equal to the VAPE will be maing profits and thus be participating in the market