Minimum wages & imperfect competition
What is the effect of a payroll tax cut in a simple model in which firms are homogeneous and equally affected?
Depends on how elastic LS is in relation to LD
If it is more elastic, wages will decrease sligtly and employment will decrease more. If it is less elastic, wages will decrease more and employment will decrease sligtly
Which are the assumptions of a search and matching model for determining the impact of a tax cut?
Homogeneous workers with presence of unemployment
Heterogeneos firms that differ in productivity
Searching costs for hiring new workers
What is the effect of a payroll tax cut on wages and unemployment according to a search and matching model?
Wages will increase more at high productivity firms because employed workers have higher alternative options to bargain with while unemployed workers remain with the same outside option.
Employment will increase more at low productivity firms because they experience a higher cut in their labour cost (their wages do not increase as much)
What is the effect of a minimum wage that affects equally all industries in a competitive market on employment and unemployment?
Employment decreases -> LD curve is downwards slopping
Unemployment increases more -> wage is higher so now more people want to work
Deadweigth loss -> VMPE>opportunity cost of leisure
Whar is the effect of a minimum wage in one sector when there are multiple LM?
Depends on wether people migrate from the covered to the uncovered sector or viceversa.
Migration to the covered sector: Wages increase in the uncovered sector because LS shifts left
Migration to the uncovered sector: Wages decrease in the uncovered sector because LS shifts right
What does the literature say about the effect of minimum wage on employment?
Early longitudinal studies -> decrease in employment (limitations: OV, reverse causality)
Cross-sectional state studies -> no effect (limitations: unobservable state heterogeneity, no result for the aggregate otutcome)
Current panel studies -> increase in employment (limitations: measurement error, limited external validity, anticipation effects, impossibility to test parallel pre-trends)
Cross-country evidence -> modest decrease in employment, but heterogeneity
What is the LM equilibrium when the firm is a non discriminating monopsonist?
Firm chooses employment so that MCE = VMPE, but now MCE is not constant because wage is not exogenous.
This results in an inefficient situation, because now wage is lower than VMPE. There is underemployment and a deathweight loss.
How common is monopsony power in the LM according to empirical evidence?
It is far spread but heterogeneous, with country, industry and worker variation
How do labour unions set wages?
Optimization problem. they maximize union's utility u(w,E), which is increasing in w and in E, subject to LD.
They set wage so that indifference curve is tangent to LD function.
Insider-outsider problem: tends to give more weight to w because people not belonging to the union do not get a say.
When do workers decide to join an union?
If expected utility fo leisure and consumption when joining the union is larger than expected utility not doing so E[u(Cu,Lu)]>E[u(C*,L*)]
Which are the LM conditions that make it more likely that firms have monopsony power?
Few firms
Firms sufficiently differenciated
Sufficiently high searching costs
Why is the MC of hiring an additional worker higher than the wage for a non-discriminating monopsonist firm?
Because it faces an upwards sloping labour supply curve, so if it wants to hire an additional worker, it has to rise all the workers' wages
Thus, the MC of hiring an additional worker is that worker's wage + increase in the wage that has to be made in all the other workers
According to empirical evidence, what is the effect of an increase in union density?
A redistribution from consumers to workers -> wages increase but prices also increase, leavin firms' profit margins unaffected
Conclusion: firms have both monopoly and monopsony power
Heterogeneity: profits for larger firms increase but for smaller firms fall
Which individuals are more likely to unionise?
Individuals are more likely to join a union if they work blue collar jobs, full-time and are more exposed to job discrimination.
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