SOLUTION: TUTPA Labor Economy Rising Income Inequality in The United States Discussion

Read the following questions and answer the question in 2-4 paragraphs while using
information provided in the Textbook. Make to reference exactly where you’re getting
your information.
1. Explain the reasons for rising income inequality in the United States. If there are
arguments countering a reason, explain these arguments as well. (CHAPTER 7)
2. Long-answer Q from (Chapter 12) (Unemployment)
Q. 12-15. Consider the standard job search model as described in the text.
(a) Why are the asking wage and expected unemployment duration positively related?
(b) Can the standard job search model explain why unemployment duration is longer, on
average, for secondary workers when compared to primary workers? Discuss.
(c) In the context of the standard search model, explain how the economy-wide average
asking wage and unemployment duration are affected by an expanded underground (cash)
economy. What is the effect on the equilibrium unemployment rate?
Labor Economics
Seventh Edition
George J. Borjas
Harvard University
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2016 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. Previous editions © 2013, 2010, and
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ISBN 978-0-07-802188-6
MHID 0-07-802188-X
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Library of Congress Cataloging-in-Publication Data
Borjas, George J.
Labor economics / George J. Borjas. — Seventh edition.
pages cm
ISBN 978-0-07-802188-6 (alk. paper)
1. Labor economics. 2. Labor market—United States. I. Title.
HD4901.B674 2016
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.
About the Author
George J. Borjas
George J. Borjas is the Robert W. Scrivner Professor of Economics and Social Policy at the
John F. Kennedy School of Government, Harvard University. He is also a research associate at the National Bureau of Economic Research and a Research Fellow at IZA. Professor
Borjas received his Ph.D. in economics from Columbia University.
Professor Borjas has written extensively on labor market issues. He is the author of
several books, including Wage Policy in the Federal Bureaucracy (American Enterprise
Institute, 1980), Friends or Strangers: The Impact of Immigrants on the U.S. Economy
(Basic Books, 1990), Heaven’s Door: Immigration Policy and the American Economy
(Princeton University Press, 1999), and Immigration Economics (Harvard University Press,
2014). He has published more than 125 articles in books and scholarly journals, including the American Economic Review, the Journal of Political Economy, and the Quarterly
Journal of Economics.
Professor Borjas was elected a Fellow of the Econometric Society in 1998, and a Fellow
of the Society of Labor Economics in 2004. In 2011, Professor Borjas was awarded the
IZA Prize in Labor Economics. He was an editor of the Review of Economics and Statistics
from 1998 to 2006. He also has served as a member of the Advisory Panel in Economics at
the National Science Foundation and has testified frequently before congressional committees and government commissions.
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To Sarah, Timothy, and Rebecca
Preface to the Seventh Edition
The original motivation for writing Labor Economics grew out of my years of teaching
labor economics to undergraduates. After trying out many of the textbooks in the market, it
seemed to me that students were not being exposed to what the essence of labor economics
was about: to try to understand how labor markets work. As a result, I felt that students did
not really grasp why some persons choose to work, while other persons withdraw from the
labor market; why some firms expand their employment at the same time that other firms
are laying off workers; or why earnings are distributed unequally in most societies.
The key difference between Labor Economics and competing textbooks lies in its philosophy.
I believe that knowing the story of how labor markets work is, in the end, more important
than showing off our skills at constructing elegant models of the labor market or remembering hundreds of statistics and institutional details summarizing labor market conditions
at a particular point in time.
I doubt that many students will (or should!) remember the mechanics of deriving a labor
supply curve or the way that the unemployment rate is officially calculated 10 or 20 years
after they leave college. However, if students could remember the story of the way the labor
market works—and, in particular, that workers and firms respond to changing incentives
by altering the amount of labor they supply or demand—the students would be much better
prepared to make informed opinions about the many proposed government policies that
can have a dramatic impact on labor market opportunities, such as a “workfare” program
requiring that welfare recipients work or a payroll tax assessed on employers to fund a
national health care program or a guest worker program that grants tens of thousands of
entry visas to high-skill workers. The exposition in this book, therefore, stresses the ideas
that labor economists use to understand how the labor market works.
The book also makes extensive use of labor market statistics and reports evidence
obtained from hundreds of research studies. These data summarize the stylized facts that a
good theory of the labor market should be able to explain, as well as help shape our thinking about the way the labor market works. The main objective of the book, therefore, is to
survey the field of labor economics with an emphasis on both theory and facts. The book
relies much more heavily on “the economic way of thinking” than competing textbooks.
I believe this approach gives a much better understanding of labor economics than an
approach that minimizes the story-telling aspects of economic theory.
The book uses economic analysis throughout. All of the theoretical tools are introduced
and explained in the text. As a result, the only prerequisite is that the student has some
familiarity with the basics of microeconomics, particularly supply and demand curves. The
exposure acquired in the typical introductory economics class more than satisfies this prerequisite. All other concepts (such as indifference curves, budget lines, production functions, and isoquants) are motivated, defined, and explained as they appear in our story. The
book does not make use of any mathematical skills beyond those taught in high school
algebra (particularly the notion of a slope).
Preface to the Seventh Edition vii
Labor economists also make extensive use of econometric analysis in their research.
Although the discussion in this book does not require any prior exposure to econometrics,
the student will get a much better “feel” for the research findings if they know a little about
how labor economists manipulate data to reach their conclusions. The appendix to Chapter 1
provides a simple (and very brief) introduction to econometrics and allows the student to
visualize how labor economists conclude, for instance, that wealth reduces labor supply, or
that schooling increases earnings. Additional econometric concepts widely used in labor
economics—such as the difference-in-differences estimator or instrumental variables—are
introduced in the context of policy-relevant examples throughout the text.
Changes in the Seventh Edition
The Seventh Edition continues and expands traditions established in earlier editions.
In particular, the text has a number of new detailed policy discussions and uses the evidence reported in state-of-the-art research articles to illustrate the many applications
of modern labor economics. As before, the text continues to make frequent use of such
econometric tools as fixed effects, the difference-in-differences estimator, and instrumental variables—tools that play a central role in the toolkit of labor economists. In keeping
with my philosophy that textbooks are not meant to be encyclopedias, some of the material
that had been a staple in earlier editions has been shortened and sometimes even excluded,
so that the Seventh Edition is roughly the same length as previous editions.
Users of the textbook reacted favorably to the substantial rearrangement of material
(mainly of labor supply) that I carried out in previous editions. The Seventh Edition continues this reframing by tightening up and bringing together much of the discussion on
immigration. Specifically, I have moved the derivation of the immigration surplus model
to the general discussion of international migration in the labor mobility chapter. This
rearrangement of the material gave me the opportunity to add a new section that shows
how the gains from immigration can be greatly increased if immigrants generate human
capital externalities in the receiving country’s labor market. The extension of the immigration surplus model allows for an even more policy-relevant (and economically interesting)
coverage of an important topic—a topic that many students find to be a particularly useful
application of the theoretical models of labor economics.
The last edition introduced a Mathematical Appendix that appears at the end of the
textbook. This appendix presents a mathematical version of some of the canonical models
in labor economics, including the neoclassical model of labor-leisure choice, the model of
labor demand, and the schooling model. It is important to emphasize that the Mathematical
Appendix is an “add-on.” None of the material in this appendix is a prerequisite to reading
or understanding any of the discussion in the core chapters of the textbook. Instructors who
like to provide a more technical derivation of the various models can use the appendix as
a takeoff point for their own presentation. Many instructors welcomed the addition of the
mathematical appendix to the textbook. I, in turn, would truly welcome any suggestions
about how the appendix can be expanded in future editions.
Among the specific changes contained in the Seventh Edition are:
1. Several new “Theory at Work” boxes. The sidebars now include a discussion of how
workers take advantage of the institutional features of the Earned Income Tax Credit
viii Preface
to “bunch up” their hours and ensure they receive the maximum subsidy; the interesting relation between increases in the minimum wage and teenage drunk driving;
the important role that “Rosenwald schools” played in narrowing the education gap
between white and African-American workers; and the labor market impact of explicit
gender discrimination in employment ads in China.
2. A careful updating of all the data tables in the text. To the extent possible, the tables
now include information on the rapidly growing demographic group of “Asians” in the
U.S. labor market and the text often discusses the differences between Asians and other
racial/ethnic groups.
3. A careful summary and discussion of unemployment trends in the United States since
the financial crisis of 2008 and the subsequent Great Recession.
4. New sections that discuss the labor market effects of Obamacare; the experimental evidence on the link between various methods of incentive pay for teachers and student
achievement; the labor market impact of the explosive growth in trade with China; the
potentially important role played by the human capital spillovers presumably generated by
high-skill immigration; and the link between compensating differentials and income taxes.
As in previous editions, each chapter contains “Web Links,” guiding students to
websites that provide additional data or policy discussions. There is an updated list of
“Selected Readings” that includes both standard references in a particular area as well
as recent applications. Finally, each chapter in the Seventh Edition continues to offer
15 end-of-chapter problems, but there is at least one brand new problem in each chapter.
Organization of the Book
The instructor will find that this book is much shorter than competing labor economics
textbooks. The book contains an introductory chapter, plus 11 substantive chapters. If the
instructor wished to cover all of the material, each chapter could serve as the basis for about
a week’s worth of lectures in a typical undergraduate semester course. Despite the book’s
brevity, the instructor will find that all of the key topics in labor economics are covered.
The discussion, however, is kept to essentials as I have tried very hard not to deviate into
tangential material, or into 10-page-long ruminations on my pet topics.
Chapter 1 presents a brief introduction that exposes the student to the concepts of labor
supply, labor demand, and equilibrium. The chapter uses the “real-world” example of the
Alaskan labor market during the construction of the oil pipeline to introduce these concepts.
In addition, the chapter shows how labor economists contrast the theory with the evidence,
as well as discusses the limits of the insights provided by both the theory and the data. The
example used to introduce the student to regression analysis is drawn from “real-world”
data—and looks at the link between differences in mean wages across occupations and
differences in educational attainment as well as the “female-ness” of occupations.
The book begins the detailed analysis of the labor market with a detailed study of labor
supply and labor demand. Chapter 2 examines the factors that determine whether a person
chooses to work and, if so, how much, while Chapter 3 examines the factors that determine how many workers a firm wants to hire. Chapter 4 puts together the supply decisions
of workers with the demand decisions of employers and shows how the labor market
“balances out” the conflicting interests of the two parties.
Preface to the Seventh Edition ix
The remainder of the book extends and generalizes the basic supply–demand framework. Chapter 5 stresses that jobs differ in their characteristics, so that jobs with unpleasant
working conditions may have to offer higher wages in order to attract workers. Chapter 6
stresses that workers are different because they differ either in their educational attainment
or in the amount of on-the-job training they acquire. These human capital investments help
determine the economy’s wage distribution. Chapter 7 discusses how changes in the rate of
return to skills in the 1980s and 1990s changed the wage distribution in many industrialized economies, particularly in the United States. Chapter 8 describes a key mechanism
that allows the labor market to balance out the interests of workers and firms, namely labor
turnover and migration.
The final section of the book discusses a number of distortions and imperfections in
labor markets. Chapter 9 analyzes how labor market discrimination affects the earnings
and employment opportunities of minority workers and women. Chapter 10 discusses how
labor unions affect the relationship between the firm and the worker. Chapter 11 notes
that employers often find it difficult to monitor the activities of their workers, so that the
workers will often want to “shirk” on the job. The chapter discusses how different types of
incentive pay systems arise to discourage workers from misbehaving. Finally, Chapter 12
discusses why unemployment can exist and persist in labor markets.
The text uses a number of pedagogical devices designed to deepen the student’s understanding of labor economics. A c …
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