LABOR ECONOMICS

A recommendation was made to reduce the standard work week in the United States from 40 hours per week to 35 hours per week, with no reduction if pay (an effective pay increase would occur because workers would receive the equivalent of 40 hours pay at rates in effect at the time of the work week change for working 35 hours per week in the future) with overtime pay mandated by law for all hours in excess of 35 hours per week. The contention of proponents of the proposal was that the plan would reduce levels of unemployment. The requirement of this question is to comment on the claim that the proposal would reduce unemployment.

There are two important aspects of the proposal in relation to the effects on employment. Each of these aspects relates to the "employment-hours trade-off" discussed by Ehrenberg and Smith (2003, pp. 136-140). The marginal product of labor and the marginal expense of labor also are affected by each of the aspects of the proposal.

The two aspects of the proposal are (a) giving all workers an effective wage increase by paying them for 40 hours of work while simultaneously reducing the time required to earn this level of total wages to 35 hours, and (b) dissuading employers from using overtime by mandating that overtime pay requirements kick-in at 35 hours of work per week. The first aspect of the proposal immediately creates a 14 percent increase in the regular-time wage rate. For purposes of illustration, assume that a wo

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level of unemployment because consumers would have access to products from other countries where the artificially-induced increase in effective wage rates did not apply. The demand for products produced in the United States would fall in an open economy, and, in turn, the demand for workers by employers in the United States would fall. Employment would be transferred from the United States economy to economies with lower wage rates, with consequent increases in the levels of unemployment in the United States. A firm wants to offer paid sick leave to its workers, but it wants to encourage them not to abuse it by being unnecessarily absent. The firms is considering two options, as follows: (a) ten says of paid sick leave per year; any unused sick leave days at the end on the year converted to cash at the worker's daily wage rate; or (b) ten days paid sick leave per year; if no sick days are used for two consecutive years, company will by workers a $100,000 life insurance policy. The requirement of this question is to compare the incentive effects of the two options, both immediately and in the long-run. The two proposals being considered by the company involve (a) employee preferences, (b) the levels of wealth of employees, an

Category: Economics - L