EC619 LABOUR ECONOMICS 3
SEMESTER 2 – SUMMER 2007
Professor Kent Matthews, Professor Stephen Smith, Professor Paddy Geary, Professor Donal O’Neill, Dr. Aedín Doris.
Answer Parts A, B and C. All questions carry equal marks. The duration of the examination is 3 hours.
Answer all of the following. Each answer should be no more than two pages long. (a) Discuss the intuition behind the instrumental variable estimator and provide an example from labour economics that illustrates its usefulness.
(b) The government, in an effort to stimulate growth, gives a tax credit to employers who invest in new machinery and other capital goods. Discuss what implications, if any, this policy will have for capital and labour use by employers.
(c) In a statement during the 1992 US presidential campaign, one organisation attempting to influence the political parties argued that the wages paid by US firms in their Mexico plants were so low that they “have no relationship with worker productivity.” Comment on this statement using the principles of profit-maximisation.
(d) Discuss the econometric methodology you would use to estimate the parameters of a labour supply participation equation, explaining your choice carefully. Outline the variables you would use to specify the equation, using theory to guide you.
(e) Draw the budget constraint that faces individuals in a progressive income tax system. Briefly discuss the complications that progressivity introduces to the estimation of labour supply. (f) What is the Difference-in-Differences estimator? Derive the Difference-in-Differences estimator from an expression for the effect of a policy change on an outcome variable. What assumptions must hold for the use of this estimator to be valid?
Answer one question
All answers must be explained carefully
When the production function is homogenous it is possible to write the elasticity of labour demand as a function of labour’s share in total cost (s),...
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