Library of Congress Cataloging-in-Publication Data Borjas, George J. Labor economics / George J. Borjas. — 6th ed. p. cm. ISBN (alk. Find all the study resources for Labor Economics by George J. Borjas. Nov 1, vitecek.info Other. Uploaded by I need problems solution of labor economics by George J. Borjas.
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Bill and Phil Phil Bill 35 Age b Compare the life cycle path of hours of work between the two workers if Bill had always known he would receive and, in fact, does receive a one-time inheritance at the age of In this case, because the inheritance is fully anticipated, and because it offers the same income effect with no substitution effect, Bill will work fewer hours or at least not more hours than Phil over their entire work lives.
The graph is on the next page. Under current law, most Social Security recipients do not pay federal or state income taxes on their Social Security benefits.
Suppose the government proposes to tax these benefits at the same rate as other types of income. What is the impact of the proposed tax on the optimal retirement age? Suppose social security benefits are the only pension benefits available to a retiree. The tax, therefore, can be interpreted as a cut in pension benefits. The cut in pension benefits shifts the budget line from FH to FE in the figure below, shifting the worker from point P to point R.
Note that FE and FH are both downward sloping, indicating that total retirement consumption is greater the later in life one retires. This shift generates both income and substitution effects. Both of these effects, however, work in the same direction. Under normal conditions, therefore, a tax on pension benefits will increase the optimal retirement age i. A worker plans to retire at the age of 65, at which time he will start collecting his retirement benefits.
Then there is a sudden change in the forecast of inflation when the worker is 63 years old. In particular, inflation is now predicted to be higher than it had been expected so that the average price level of market goods and wages is now expected to be higher.
The person faces the same choice, so his decision does not change. If retirement benefits are not adjusted for inflation, the purchasing power of retirement benefits falls.
If the person does not retire, he can enjoy the same consumption as he would without inflation as wages are assumed to fully adjust for inflation. If he retires at 65, his benefits are worth less in real terms they can buy him less consumption with inflation than without, so he cannot afford the same consumption path as before. Hence, his choice set over the years of retirement and consumption lies below the original pre-inflation choice set except at one point—where he does not retire at all.
Thus, as long as leisure i.
Presently, there is a minimum and maximum social security benefit paid to retirees. How would this likely affect hours worked of retirees?
Thus, the change in benefits offers these retirees a pure positive income effect. These retirees should reduce their hours worked if not leave the labor force all together after the age of These retirees will become more likely to work, or, if already working, more likely to work more hours after the age of Over the last years, real household income and standards of living have increased substantially in the United States.
At the same time, the total fertility rate, the average number of children born to a woman during her lifetime, has fallen in the United States from about three children per woman in the early twentieth century to about two children per woman in the early twenty-first century. Does this suggest that children are inferior goods? The conventional wisdom and empirical evidence suggests that children are normal goods.
Economically, children are a lot more expensive today than they were years ago consider education, housing, clothing, entertainment expenses. Children also produce less for the household in the 21st century than they did years ago. Under these conditions, the worker maximizes her utility by choosing to work 50 hours each week. Under the original scenario, let I be total weekly income, L be hours of leisure, and H be hours worked. The two budget lines for both scenarios are graphed on the next page.
To answer this question, one needs to find where the budget lines intersect.
Therefore, when faced with the negative income tax, the worker will move in that direction, which requires her to increase L hours of leisure and concurrently decrease H hours of work. This change in behavior must increase her utility. The absolute value of the slope of the consumption-leisure budget line is the after-tax wage, w.
Suppose some workers earn w for up to 40 hours of work each week, and then earn 2w for any hours worked thereafter called overtime. Other workers may earn w for up to 40 hours of work each week, and then only earn 0.
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