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Labor force participation, Minimum Wage & Average and marginal tax rates

  1. (10 points) Labor force participation.

Go to and look for the IPUMS CPS dataset. Change the sample to January 2020 to December 2022. Choose the variables empstat, labforce, durunemp, educ, age, nchlt5, & sex. You will need to create an account to extract the variables of interest. Download the data, the STATA command files, and the basic codebook. The data will be downloaded in a zipped folder. You will need to extract the file and put it in your working directory.

Restrict your sample to civilians who are between the ages 16-65. Calculate the unemployment rate and the labor force participation rate for the US over time, by gender, for families with and without children, by college degree, and for individuals below and above the age 30. What is the average length of unemployment? To calculate the statistics of interest, use the weight hwtfinl. Describe the current state of the economy.

  1. (5 points) Average and marginal tax rates.

(a) Assume the Jones family earns $250,000 per year in income and has no deductions. How much do they pay in taxes? What is their average and marginal tax rates using the schedule below?

Marginal tax rates.

0-17,850 12% 17,851-72,500 18% 72,501-146,400 20% 146,401-223,050 25% 223,051-398,350 33% 398,351-450,000 35% 450,001 + 39.6%

  1. (5 points) Minimum Wage

What is the effect of a wage increase on hours worked? Show the theoretical effect using the labor-leisure framework we covered in class. By referring to the articles we discussed in class, discuss the empirical effect of an increase in the minimum wage on employment?

  1. (10 points) Labor supply. (a) Assume Jamaal can work up to 60 hours per week at a rate of $10 per hour, and that

because of a government subsidy, Jamaal has $200 in unearned income per week. Draw Jamaal’s budget constraint showing how much Leisure (L) and Consumption (Y) he can have. Label both axes with values and titles. Call this Line A. Assume that Jamaal is a leisure lover and at his preferred bundle he works for 10 hours. Label this point A and draw an indifference curve for this bundle labeled UA. How much does he earn?

(b) Now assume that the cost of child care for Jamaal’s daughter is $100 per week which he pays only if he works any hours > 0. Re-draw his budget constraint on the same graph and label it Line B.

What effect will this cost likely have on the amount of labor Jamaal supplies assuming both consumption and leisure are normal goods? Talk about this in terms of income and substitution effects. If Jamaal preferred to work 10 hours in the case of no child care costs, how many hours do you think he will work now?

(c) Now assume that Jamaal’s employer is willing to pay $3.33 of Jamaal’s child care expenses for every hour he works, but only if he works 30 hours or more. Now re-draw Jamaal’s budget constraint and label it clearly as Line C. Given what you drew for your previous indifference curves, how do you think this will affect Jamaal’s consumption of Leisure and Market Goods? Will he work more, less or the same? Explain why.

  1. (10 points) EITC. Assume that the structure of EITC is as follows:
  2. During the phase-in range, EITC recipients receive an additional 20% of their income for each dollar earned up to a maximum of a $2,000 credit.
  3. They can earn this $2,000 credit until the phase-out range, which begins when they start earning $15,000 or more.
  4. During the phase-out range, the credit reduces by 10% until it reaches $0. (a) Graph the structure of the EITC with Income on the X-axis and the EITC credit on

the Y-axis. Clearly label all relevant points on the graph, including the maximum credit, earnings when the credit reaches $0, and earnings at the end of the phase-in range and at the beginning and end of the phase-out range.

(b) Now assume a worker earns $1,000 per-week if she works and can work up to 40 weeks a year. Plot a budget constraint for consumption (Y) on the Y-axis and hours of Leisure (L) on the X-axis assuming that EITC exists. Now, on the same graph, draw her budget constraint before EITC legislation was enacted (i.e. if EITC never existed).

Be sure to label on both the Y and X axes the values for each part of EITC. That is, at how many weeks of work does the phase-in end; what will our worker earn? At how many weeks of work does the phase-out begin and end; how much does our worker earn at each point?

(c) Now assume that this worker was initially working 36 weeks before EITC was enacted. Draw an indifference curve showing this point and label the curve UN and the point N . Now draw another indifference curve for the same worker assuming that EITC legislation has just passed. Label this curve UE and her preferred bundle of Leisure and Consumption point E. After EITC is passed, do you think she’ll work more, less or the same? Show this and say why.

Last Updated on April 25, 2023

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