econ481

Order Details;

Econ
481
Spring
2015
Professor
Jessamyn
Schaller
Problem
Set
5:
Labor
Mobility
Due
in
class
April
23,
2015
1. A
worker
with
an
annual
discount
rate
of
5%
currently
resides
in
Tucson
and
is
considering
whether
to
remain
there
or
move
to
Phoenix.
There
are
three
work
periods
remaining
in
the
life
cycle.
If
the
worker
stays
in
Tucson,
she
will
earn
$40,000
per
year
in
each
of
the
three
periods.
If
she
moves
to
Phoenix
she
will
earn
$42,000
per
year
in
each
of
the
three
periods.
What
is
the
highest
(present-­‐value)
migration
cost
she
will
be
willing
to
incur
and
still
make
the
move?
2. Looking
at
the
data,
suppose
that
we
see
that
immigrants
who
have
just
arrived
in
the
US
one
year
ago
earn
15%
less
than
their
native
equivalents
(same
age,
education,
etc),
while
immigrants
that
arrived
20
years
ago
earn
5%
more
than
their
US
equivalents.
How
might
assimilation
explain
this
phenomenon?
How
might
selection/composition
bias
instead
explain
this
phenomenon?
3. In
the
US,
the
wage-­‐skills
relationship
in
the
labor
market
before
government
intervention
is
wUS=100+0.4s,
where
s
is
the
number
of
“efficiency
units
of
skill”
and
w
is
the
weekly
wage.
In
Canada,
the
wage-­‐skills
relationship
is

wC

250
+
0.2s.
a. Draw
the
wage-­‐skills
relationships
for
the
2
countries
on
a
graph.
Will
immigration
from
Canada
to
the
US
be
positively
or
negatively
selected?
Where
will
the
skill
cutoff
be
between
immigrants
and
non-­‐immigrants
in
Canada
(i.e.
what
value
of
s)?
b. Now
suppose
the
US
creates
a
welfare
program
that
imposes
a
weekly
wage
floor
of
$280
(i.e.
it
provides
a
subsidy
for
any
worker
that
earns
less
than
$280
per
week
that
brings
them
up
to
that
level).
Draw
the
wage-­‐skills
relationship
for
the
US
and
Canada
on
a
graph.
What
happens
to
migration
from
Canada
to
the
US?
Who
will
migrate?
What
are
the
new
cutoffs?
4. Consider
the
case
of
“extremity’
selection,
where
both
the
most
skilled
and
the
least
skilled
from
a
source
country
choose
to
migrate.
a. In
the
Roy
Model,
what
must
the
graph
of
the
return
to
skill
on
the
two
countries
look
like
to
generate
this
scenario?
Draw
an
example.
b. How
can
we
explain
this
type
of
selection?
Give
two
different
explanations.
c. Looking
at
immigrants
from
Mexico
to
the
US,
Chiquiar
and
Hanson
find
evidence
for
the
opposite
kind
of
selection–
“intermediate”
selection,
where
only
workers
from
the
middle
of
the
skill
distribution
migrate.
How
do
they
explain
this
finding
in
the
context
of
the
Roy
Model?
5. Phil
has
two
periods
of
work
remaining
prior
to
retirement.
Assume
that
Phil
maximizes
the
present
value
of
his
expected
lifetime
earnings
and
his
discount
rate
is
10
percent.
He
is
currently
employed
in
a
firm
that
pays
him
the
value
of
his
marginal
product,
$62,000
per
period.
There
is
one
other
firm
that
Phil
could
potentially
work
for.
There
is
an
80
percent
chance
of
Phil
being
a
good
match
for
the
other
firm
and
a
20
percent
chance
of
him
being
a
bad
match.
If
he
is
a
good
match,
his
VMP
at
the
new
firm
will
be
$65,000
per
period.
If
he
is
a
bad
match,
his
VMP
at
the
new
firm
will
be
$40,000
per
period.
a. Suppose
it
takes
a
full
period
to
discover
whether
Phil
is
a
good
or
bad
match
with
the
new
firm.
Thus,
when
the
firm
is
making
Phil’s
initial
offer,
the
managers
do
not
know
what
his
productivity
will
be,
though
they
do
know
the
distribution
of
possible
outcomes
described
above.
What
wage
will
the
firm
offer
in
this
initial
period?
b. After
the
value
of
the
match
is
determined,
Phil
will
then
be
offered
a
wage
equal
to
the
realized
value
of
his
marginal
product
in
the
firm.
When
offered
that
wage,
Phil
is
free
to
(a)
accept
or
(b)
return
to
his
original
firm
and
his
original
wage.
He
can
do
this
immediately,
so
that
if
he
gets
a
low
wage
offer
from
the
new
firm,
he
can
go
back
to
his
original
firm
and
earn
his
original
wage
in
the
second
period
(Note

this
is
different
than
the
example
I
gave
in
class
).
What
should
Phil
do?