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economic impact of the added worker effect

economic impact of the added worker effect 1. Income Effect: the income effect is the response of desired hours of leisure to changes in one’s income. If wages are held constant and income increases then the desired hours of work will decrease. The relevance of the income effect in regards to the study of labor economics is very important. Employers, economists and Government institutions have the ability to determine the amount of time workers’ will seek to either choose more hours of work or more hours of leisure. This can be used to estimate the average number of work and leisure hours a sample of workers will utilize in a year or during a trend. 2. Added Worker Effect: The added worker effect occurs when there is a family that has only one bread winner that loses his or her job. Because of the lost income the family may choose for the recently unemployed family member to stay home while the other family member seeks employment. This then produces a new worker in the work force which is the added worker effect because the person was not already in the work force or seeking employment. The added worker effect is crucial to economists and the Government to determine the unemployment rate during times of recession as well as the rate of new entries into the work force. 3. Compensating Wage Differentials: Compensating wage differentials determines the level of risk an employee and employer chooses to offer. If an employer has an unsafe work place then their cost of reducing risk is relatively low compared to an employer who already has a safe work environment. At the same point, a worker chooses the level of risk he/she will assume in relation to the offered rate of pay. This is very important in the study of labor economics as it shows how workers and employers are affected when the state and Federal government pass job safety laws that demand higher levels of safety measures implemented in the workforce. 2. a) Limnologist 472000 = 449523.81-15000 = 434523.81 1.05 Chef 500000 = 476190.48- 40000 = 436190.48 In this situation Jen would pursue to be a chef. b) Limnologist 472000 = 410434.78 – 15000 = 39543.78 Chef 500000 = 434782.61 – 40000 = 394782.61 In this situation Jen would pursue to be limnologist. 2. a) The worker with the riskier job will move down to lower indifference curve. They would be moved down to a lower indifference curve because their job would not be as riskier anymore so the rate of pay would then decrease. The same worker in a safer work environment would not be affected as they are already on the level that the riskier worker has now been moved to. b) If perfect information was relaxed then the worker in the riskier environment may not change as he/she may now be happier. The safer worker may be happier also as he/she will move upwards on their indifference curve. c) If workers did not have mobility then they may be forced to move downward on the indifference curve as their firm may be the only firm that can employ them. Because of this they may be forced to stay with that firm and do not have the opportunity to seek employment with another firm in the same industry that may offer increased benefits, wages or a higher indifference curve for them. d) A compensating differential would not occur in a monopolistic market as the monopolist could offer the same wages at relatively any risk level due to their power in determining prices in the market place. Bibliography:

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