Exam 2 Flashcards

Question

Traditional Solution: Village Moneylender:

Answer 1

Someone that lives in the village and provides small loans —> leveraging information from the village Study by Steel and found that 70-80% of moneylenders in Ghana have perfect repayment 79% interest rate average —> very high given good repayment rates, but village moneylender can solve problem because know people int he village May solve problems of adverse selection and moral hazard as swing by more often to monitor since live in the village But, may not be efficient as very high interest rate - need return > 79% to have this be profitable for borrower If whole village has a problem and need money for everyone like a large shock happening, problem as won’t be able to fund. Really only works for individual shocks

Answer 2

The idea of giving poor people loans Muhammed Yunus has the idea to rely on group liability and women, but the general idea of microfinance is more broad - can be for profit and individually - idea of providing small scale loans to poor people that formal banks won’t provide Yunus’s idea: Lend to groups rather than individuals so that you have group liability - other group members work to solve problems of moral hazard and adverse selection Group can only get further credit if everyone pays back, often lends only to women (as women are more responsible with expenditures), and giving credit to women who normally wouldn’t get credit otherwise Started in 1976 but has exploded - 137.5M loans issued in 2010 alone (average few hundred dollars) Different from village moneylender in that lower rate for this and source of financing and shocks are different —> village money lender is more constrained and can’t respond to negative shocks from everyone in the village while this can

Answer 3

May address adverse selection (explains information about villagers) and moral hazard (help monitor other people) Group members provide screening where people don’t want to enter a group with individuals who will default —> prevent adverse selection (only enter if good group) You form your own group —> I won’t enter a group with someone I know is bad at re-paying loans. Goal is to pick so you filter these people out Group members in the village provide monitoring —> prevent moral hazard

Answer 4

Work with Green Bank of Caraga, Philippines - looking at group vs individual liability Note that individual liability here has some components of group liability as meet with loan officer in a group, but not liable for the others like you are in group liab Experiment 1: 170 existing microfinance groups and randomly choose 85 to convert from group liability to individual liability —> testing just moral hazard as already selected the groups —> about monitoring after Experiment 2: Examine new groups formed in treatment and control areas —> only adverse selection here —> individual enters group, see if you like their qualities In the Green Bank, each loan cycle is 4 months and groups are 15-30 members. First level of liability is group of 5 members (liable for 4 others, but officer means with 3-6 total groups at same time) Initial loan $18-90, 2.5% monthly interest (start small, can get larger loans if meet repayment). Weekly meetings with officer to make repayments Ex - use money to buy a cow - need product within a week to repay

Answer 5

Experiment 1 —> looking at the number of times clients had difficulty repaying on the X axis and density on the Y axis Results are extremely similar for the control group and the treatment group - doesn’t matter if group or individual liability for repayments Experiment 2 —> looking at number of times clients had trouble repaying on the X axis and density on the Y axis —> the opposite effect is seen here! Treatment group has less difficulty repaying. Group liability selects worse individuals So, group liability doesn’t improve moral hazard or adverse selection, and screening worsened somewhat with group liability (experiment 2) Green Bank had very low default to begin with, and possible that other monitoring they do is sufficient though - so not necessarily very generalizable

Answer 6

Six randomized evaluations of microcredit —> see slides 18-20 for details Question is does offering microfinance loans make people’s lives better? There is an increase in borrowing, but no consistent effect on consumption per capita Yes, borrowing more, but not transforming their lives Modest take-up rates of credit among perspective entrepreneurs Lack of transformative effects on the average borrower Other criticisms of microfinance: 2010 Bangladesh prime minister accused microcredit industry of “sucking blood from the poor” Still high interest rates in Bangladesh (20-50%) and some are for profit with owners making millions during IPOs Presence of multiple microfinance institutions (MFIs) in a location creates indebtedness traps Rash of high-profile suicides of heavily indebted farmers in India - mass default results. Problem

Answer 7

Potential problems of moral hazard in executive compensation Moral hazard and adverse selection problems in lending (especially to the poor) Microfinance as a potential way to reduce the cost of monitoring and screening to make lending to the poor economically viable. Evidence from a randomized field experiment suggests that group liability (instead of individual liability) didn’t solve the problems of either moral hazard or adverse selection Other research on the impact of microfinance on economic outcomes is mixed.  

Answer 8

Do a study where send some people to preschool and don’t send others —> see long-term positive affects on those who went to preschool

Answer 9

Outcome of interest: Fairness - people like and value fairness See this with the ultimatum game: Two players, one makes an offer regarding how much to split the endowment and the other player can accept or reject the offer. If reject it, both get $0 Even though player 2 should really accept anything >0, he will only accept if perceived to be fair - rather take 0 than something unfair In higher stakes game, player 1 seems to offer more wide range of offers - low stakes offer less and more is rejected in the low stakes game Markets lead to more inequality than we prefer as a society (market failure) Inherent in human nature when treated unfairly to not like it Functional reasons: Impact on growth rates Though savings (want people to save, aspirations to do better), violence (too much inequality could result in more violence), political instability (if crazy high inequality, could over throw), and health/stress People also value equality - especially the poor. But even rich people still don’t like inequality

Answer 10

Inequality of outcomes: Easier to measure (income or wealth) However, outcomes reflect our own preferences For example, could choose to be a professor rather than work at a high paying job —> your choice to do this shouldn’t reflect inequality but rather is your own preference Inequality of opportunity: Perhaps what we are more interested in, but harder to measure Study in Ecuador kids - loving at inequality of opportunity for the young. Differences in cognitive ability scores start small and then widen over time for rich vs poor people with rich people having much better scores

Answer 11

Anonymity Principle: It shouldn’t matter who is earning the income Population Principle: Population size doesn’t matter, only the proportions of population earning different levels does (clone population, shouldn’t have an impact) Relative Income Principle: Only relative incomes matter, absolute sizes don’t. Doubling all incomes shouldn’t change inequality Transfer Principle: If transfer of income from one person to another who is richer, then new distribution is more unequal

Answer 12

1. Lorenz Curve Fits all four characteristics Curve with the cumulative percentage of households on the X axis and cumulative percentage of household income on the Y axis A 45 degree straight line would be a line of perfect equality In reality, it is a curve. The wider the curve is (I.e. more flat at the beginning and then more vertical), the more inequality there is. Further from the 45 degree line, more unequal So consider the point (80, 49.4) on a Lorenz curve —> 80% of households earn 49.4% of income, meaning that the other 20% of households earn a crazy 50.6% 2. Gini Coefficient: Also meets all four characteristics and maps to the Lorenz Curve On the curve, G = area between the 45 edge line and the curve / whole triangle between 45 degree line and the X axis More unequal will have a larger G, as the area between the line and the curve is larger for those curves The mean of all pairwise comparisons of income Take the sum of differences of person 1 from everyone else, then person 2, etc (and then normalize so the value is between 0 and 1) Example calculation: Consider 4 people, who make 1, 2, 8, and 9 For person one, the sum of the yj-yk term is (0+1+7+8) = 16, by taking the difference between their income (1) and the other incomes Person 2 it is 14, 3 it is 14, and 4 it is 16 —> total differences = 60 So, Gini = 60 (adding up the total differences)/(2*16*5) = .38 where 5 is the mean of the incomes (mu), and 16 is N^2 3. Kuznet’s Ratio (90/10 or 80/20) compares two points in the distribution (ratio of the shares of income of the poorest x% to the richest y%) Does not always satisfy the Transfer principle If transfer from 50th to 60th percentile, then not reflected here

Answer 13

Inverted U-shaped hypothesis where X axis is the GDP per capita and the Y axis is income inequality. Graph like an inverted U (lower case “n”) so when have low GDP or high GDP, less inequality than when at the middle In the initial phase of growth, inequality widens as certain groups benefit. Then, others catch up and inequality falls During process of development, shift of workers from old sectors to new (I.e. from agriculture to industry and/or from rural to urban) Three stages: 1. Everybody works in low pay old sector —> low inequality 2. Some workers shift to high pay new sector —> high inequality 3. Everyone works in high pay new sector (wages depressed in new sector and less competition in agriculture) —> inequality low again Policy implications —> even with increased inequality, don’t need intervention because will naturally fall on its own —> but could take a while, so could need to intervene to accelerate England and Wales from 1823-1915 exhibited this inverted U shape But, looking at Gini coefficients across countries, we don’t see a clear relationship (we would expect an inverted U if each country is at different stage)

Answer 14

First graph is of inequality (measured with Gini coefficient in the world) vs violent crime rate —> clear positive relationship Second graph is same thing but looking at robbery on Y axis —> similar positive relationship Third graph is in the US, looking at Gini coefficient on the X axis and log odds of mortality on the Y axis. See a positive relationship, and even controlling for own income, more likely to die with more inequality Subjective well-being: happiness: Typical questions - how happy are you, how satisfied with your life are you, where are you on the satisfaction latter See that people are happier with less inequality over time in the US measure by Gini Coefficient

Answer 15

May want to reduce inequality due to fairness concerns or for functional reasons related to business development and economic growth Including through channels of crime, health, stress, and happiness

Answer 16

By Country: Looking at Gini coefficient by country over time, expecting to see an inverted u per the Kinnetz theory, but we don’t see this for most countries. Some do at times, but not much US has rising inequality and France falling World Gini coefficient: Has fallen overall since 1970 with slight rises at time, but pretty big fall overall. Growth in poor places brings this down, oil price shocks important too World Gini excluding areas: Without China, growing inequality China growth contributes to decrease in global inequality Without US and Africa, less inequality and declining more Role of Africa: lack of Africa growth is contributing to global inequality, as China, India, OECD, and other middle-income and rich countries diverge away from Africa. So, Africa should be a focus if trying to lower overall global inequality

Answer 17

Look at curves showing distributions of income for World, China, India, USSR, Japan, USA In 1970, overall way more people making below $1 per day China and India massively up from 1970 to 2000

Answer 18

Rising in the US (about .46 in 2005 vs .44 in 1950 and .41 in 1970) Share of the top 10% is on the rise after a fall during the depression - about 48% And the US has more income inequality than Europe - rising in Europe too but not as much

Answer 19

Inequality across countries falling Global inequality falling: driven by China Inequality within countries is increasing in the US, varies for other countries

Answer 20

1. Skill biased technological change The idea: Technology replaces low skilled jobs Technological change favors highly skilled whose skills are complementary with new technology Evidence: Timing of increase in inequality coincides with introduction of personal computers and related information technology Looking at computer use at work from 1984 to 1997 - see that all workers are using computers more, and that while college graduates use way more than college dropouts than high school graduates than high school dropouts, this proportion has stayed relatively similar (in 1984 - 4.8% of high school dropouts used computers compared to 11.3% in 1997. For college grads, it was 41.5% increased to 75.2%. The proportion 41.5/4.8 and 75.2/11.3 are relatively similar) Conclusion—> Yes, this is a possible explanation, but not overwhelming support for it  2. Immigration Idea: 1.25M immigrants enter the US every year; 1/3 are illegal workers from Mexico and Central America - do they compete with low skilled workers for jobs and drive down low skilled wages (thereby increasing inequality)? Study uses variation across cities and across time in numbers of immigrants and natives and their wages Key result: Within education groups, immigrants and natives are imperfect substitutes Therefore, illegal immigration is not the key explanation for rising inequality The point here is that they don’t drive down natives’ wages because they aren’t perfect substitutes - not competing for same jobs, immigrants take worse jobs than low skilled Americans —> Not a factor, more immigrants don’t drive down low skilled earnings   3. Minimum wage changes Team presentation discusses this (not on exam, but seems like yes, it can, as a deadweight loss results)  4. Returns to capital Piketty’s argument in his book: the rate of return on the wealth, r, has systematically exceeded the rate of growth, g, of the economy Idea that the rich get richer because of such a high return on capital Look at a graph over time showing the share of the top percentile in total income on the Y axis and time on the X axis. The share of top income percentile in total income is increasing but the share of that excluding capital gains is not much lower —> so capital gains isn’t such a large amount While the share of top wage percentile in total wage bill is fairly significantly below the total income they have showing that the wage bill isn’t why the top 1% is doing so well, the gap also doesn’t seem to be coming from capital gains University of Chicago initiative on global markets survey of economists: Asking people if they think “The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate” Most people disagree/strongly disagree with this So, while this may explain some inequality, doesn’t explain most of it  5. Positive assortative matching Richer people marrying richer people - study sees that you marry people from similar income classes as similar education Study assigns a random assignment of spouses by education level —> would reduce level of inequality but doesn’t change the increasing inequality trend over time Again, this may explain some inequality, but not most of it  So, skill biased technological change and minimum wage seem like the best. returns to capital and positive assortative matching somewhat, and immigration bad explanation

Answer 21

Investment in skills; barriers to immigration; increasing minimum wage; changing tax system; wealth tax

Answer 22

From 1962-67, 123 low income 3 and 4 year-olds randomly assigned: Treatment: pre-school program Control: no pre-school Collected annual data until age 11, then follow up at 14, 15, 19, 27, and 40 Results: Pre-school group arrested less by age 40, earned more money by age 40, more likely to graduate high school, more likely to have basic achievement at 14, more likely to do homework at 15, and more likely to have an IQ above 90 by age 5. All of these are very significant results Large and long-lasting effects of pre-school education for low-income children This (and other studies) motivate current policy changes in some areas to provide free universal pre-K Some concerns could be small sample size and partial equilibrium results vs general eq policy changes

Answer 23

Considered several theories for rising inequality in the US: Evidence supporting skilled biased technological change Evidence against illegal immigration Returns to capital Positive assortative matching Lots of possible solutions to the market failure Direct (change tax code) Other (investment in skills, changing minimum wage, reducing immigration)

Answer 24

People criticize big corporations like Nike and Adidas for paying their workers in their factories abroad low wages by American standards

Answer 25

Nike pays factory workers in Indonesia about $3.5-4 per day - are these wages too low? Is there a market failure? Evidence: Look at the average wage paid by multinational affiliates compared to domestic manufacturing wages in high income, middle income, and low income countries While the wage for low income countries is much lower than middle income which is much lower than high income, the multinational companies may much more than the domestic firms in each of these places (ratio of MNC/domestic is 2.0 in low income, 1.8 in middle income, and 1.4 in high income) So, paying much more than market rate for wages in these countries Other evidence: Glewwe: Workers in foreign-owned apparel and footwear factories in Vietnam rank in top 20% of population by household expenditure Lukacs: Workers in USS owned factories in Shanghai earn three times the average wage of workers in other local factories ILO finds that wages paid in export-processing zones are higher than in villages from which the worker came Lipsey and Sjoholm find that foreign-owned plants in Indonesia pay 12% more for unskilled labor and 22% more for skilled labor than locally-owned plants do —> MNCs pay more than domestic firms

Answer 26

The real wage tells you how much you can produce per hour of work Recall: competitive firms —> zero profits So, if we assume the only price is labor here and firms are perfectly competitive: Profit = p*Q - w*L = 0 Where w is the nominal wage and L is the amount of hours of work (w*L is the cost) So, w/p (real wage) = Q/L So, this is the quantity of output per hour of work So, low wages signal low productivity, as being paid based off quantity of output per hour Competitive firms cannot pay wages above worker’s productivity as will be paying more than it earns per unit of output, making firm go out of business Competitive firms would be making profits if they pay wages below productivity - but then competitive firms would either (1) undercut each other’s prices or (2) hire more workers, driving wages back to productivity These arguments assume competitive markets, which may or may not be reasonable Evidence of wages reflecting productivity: Graph labor costs vs productivity across different countries at a specific time —> strong positive relationship —> lower labor costs associated with lower productivity Another graph with South Korea specifically —> massive growth in productivity from 1980 to 1995, and wages are growing with this productivity —> moving together

Answer 27

Competitive markets: real wage = productivity of labor Therefore, cost advantages of hiring cheap labor abroad are offset by lower productivity So, why produce there? Need to understand why certain countries tend to produce certain goods—> so, we need to understand why they are relatively better at producing these goods than other goods Remember: the location of production is determined by competitive advantage (important determinant of how this works)

Answer 28

Comparative advantage: relatively better at producing something better than others Absolute advantage: bets at producing something Point here is that even if I am the best at everything (absolute advantage), still would divide up production based on comparative advantages because I don’t have enough time to do everything

Answer 29

Imagine a world with two goods: Textiles (T) and Computers (C) Labor is the only input in the production Country A has total labor supply of L and can produce textiles and/or computers with the following technologies: Qt = 2Lt Qc = Lc L = Lc + Lt What this is saying is you can choose how to divide labor between textiles and computers, and for every 1 unit of labor, you produce 1 computer or 2 textiles. Production Possibility Frontier in this Example: Graph quantity of computers on X axis and quantity of textiles on the Y axis Can produce 2 textiles for every 1 computer, so the slope = ΔT/ ΔC = -2 This -2 is the opportunity cost - how many textiles have to give up to get one computer

Answer 30

Recall: competitive firms earn zero profits Computer firms —> Profit = Pc*Qc - w*Lc = 0 Only cost is labor Recall Qc = Lc in country A, so, plug in —> w = Pc Wage equals price of computers in country A  Similarly, for textile firms —> Profit = Pt*Qt - w*Lt = 0 Recall Qt = 2Lt in country A, so plug in —> w = 2Pt The wage is twice the price of textiles in country A  If workers can move freely between textile and computer production, then wage in both sectors will be equal, so w = 2Pt and w = Pc, so Pc/Pt = 2 Price of computers is double the price of textiles Recall the production possibility frontier from above —> we said the slope is ΔT/ ΔC = -2 and now we see the relative prices Pc/Pt = 2 —> relative prices tell us the opportunity cost

Answer 31

If Country A does not trade: Consumption is limited by domestic production (can allocate more labor to C or T, but capped by total labor L) By reallocating its labor supply, it can produce more or less textiles (in exchange for computers) to find its most preferred mix The cost of this reallocation (opportunity cost) is simply the relative prices of production domestically Constrained by PPR domestically but could shift PPR out with technological innovation or trade But, if country A does trade…

Answer 32

This means computers are cheaper to import than to produce at home. So, country A: Specializes in producing T Exchanges T for C through trade, rather than producing C directly This expands the PPF outwards (textile amount stays same but can have more computers, so the slope gets less steep as further outwards horizontally) Country A is better off as can get more computers for a given textile amount Point here is that when the price of computers is relatively less abroad, you will buy the computers from abroad and make textiles at home.

Answer 33

Now, international relative prices Pc/Pt > 2 —> other countries are better at producing textiles, textiles cheaper to import than to produce at home. So, country A will specialize in producing C and exchange C for T through trade, rather than producing T directly The PPF expands outwards, making country A better off —> same point of C but get higher on the textiles line —> steeper slope now

Answer 34

Whatever the prices on the world market, a country’s consumption possibilities expand through trade Think of trade as a substitute for having to produce it yourself. By trading some goods, you allow yourself to specialize in the things you are relatively good at producing Profits —> 0 in goods actually produced, where there is comparative advantage (wages = productivity)

Answer 35

1. Assume that in country D, we have Pc/Pt = 4. What does this mean? Means that in this country D, we can make 4 times as many textiles as computers 2. What happens if international relative prices is Pc/Pt = 4? Then, international trade its essentially irrelevant, as same price internationally as locally in your economy 3. What happens if international relative prices is Pc/Pt = 3? Now, internationally has 1 computer cost 3 textiles while at home 1 computer costs 4 textiles. So, a textile internationally is 1/3 a computer while at home it is 1/4 a computer, so a textile is cheaper to make at home. So, will make textiles at home and trade for computers —> country D has comparative advantage in textiles (would give up 4 textiles for 1 computer), and should produce textiles and trade with rest of the world for computers (which can produce 1 computer at cost of only 3 textiles)

Answer 36

Assuming a perfectly competitive world where countries can produce 2 goods - X or Y Profit = Px*Qx - w*Lx —> Profit = revenue - cost where cost is the wage * labor hours Assume in this country A, Qx = Lx and Qy = 3Ly This means that we can make 3 times as many Y as we can X So, Px/Py = 3 after plugging in, we can make 3 times as many Y as X w = the coefficient*denominator; w = numerator: w = 3Py and w = Px So, wage is three times price of Y but is the same as price of X So, plug in and solve for w, Px = 3Py —> Px/Py = 3 This means that the price of X is triple the price of Y, so we can produce 3 times as many Y as X for a given quantity of labor If the international relative price is LOWER (Px/Py < 3), then country A has the comparative advantage in Y. Consider when Px/Py is 2 internationally. This means that internationally, they can produce 2 times as many Y as X for a given quantity of labor while here we can produce 3 times as many Y as X. So, we are better at producing Y. So, country A has comparative advantage in the denominator when the international relative prices are lower If international relative price is HIGHER (Px/Py>3), then country A has comparative advantage in X. Consider when Px/Py is 4 internationally. This means internationally, they can produce 4 times as many Y as X for a given quantity of labor while here can produce 3 times as many Y as X, so they are better at producing Y, we will produce X and they produce Y So, country A has comparative advantage in the numerator when the international relative prices are higher If international prices is equal, then trade is essentially irrelevant

Answer 37

In country A, Qt = 2Lt and Qc = Lc Productivity is 2 in textile production and 1 in computer production Where do 2 and 1 come from? General production functions are that Qt = F(A,k,h)*Lt where: k is the physical capital per worker (sewing machines) h is the human capital per worker (education, health) A is technology With multiple inputs to production functions, there are many ways to produce the good - use lots of capital and little labor or some mix. Choose optimal mix based on production methods available and how much each input cost

Answer 38

If country A is poor, then physical capital, human capital, and technology will be scarce compared to raw labor. Country A will therefore choose mixes of inputs that are more labor intensive If capital and technology are more important in computer production than textile production, then country A will find computer production more difficult than textile For example, Country A’s labor productivity in textile production (2) is higher than computer production (1), as Qt = 2Lt and Qc = Lc In country A, Pc/Pt = 2  If country B is rich, then physical capital, human capital, and technology will be abundant compared to raw labor. Country B will therefore choose mixes of inputs which are more capital and technology intensive Country B will be more productive in both goods, say Qt=5Lt and Qc=5Lc 1 unit of labor —> get 5 of T or C —> has absolute advantage over both, but smaller advantage in textiles, as technology and capital are less important in textile production Comparative advantage determined by relative abundance of a country’s resources So, here Pc/Pt = 1, so international Pc/Pt is higher, so A has comparative advantage in computers, make those, trade for textiles

Answer 39

Why are some resources relatively abundant or scarce in some countries? What are underlying causes? Reason 1: Geography (oil, diamonds, bauxite, farmland) Important for understanding trade in some goods Doesn’t explain why some countries have advanced technologies or abundant capital while others don’t Reason 2: Non-market factors (institutions) Weak institutions (contracts, property rights, corruption, political instability) result in scarce physical capital, scarce human capital, and outdated technology

Answer 40

Strategy 1: Basic market strategy is to locate production according to comparative adv: Tasks that favor raw labor over capital should be produced in countries with relatively abundant low-skilled labor Alignment of profit and social welfare Strategy 2: Efficiency wage strategy is to treat workers better than minimum required (doesn’t work with competitive markets as they do earn profits) Evidence: unemployment exists - must be that wages are higher than market clearing rate Better nutrition; avoiding shirking

Answer 41

Are wages paid by MNC’s too high or too low? Theory of labor markets and trade Wages determined by productivity, comparative advantages determines what countries should produce, everyone better with trade

Answer 42

UAE policy change which allows for workers to have their visas picked up by new employer without needing to go to home country and wait to get a new visa —> this helps workers have their wages rise, as threat of going to somewhere else helps this. But, firms hire less new workers and pay them less money

Answer 43

Migrant workers here facing tough conditions and being paid very little

Answer 44

Point here is that take in migrant workers to lower global inequality even if it increases inequality in your own country Qatar and other oil countries doing this - pay these migrant workers very little, increasing inequality within country, but lowers overall global inequality

Answer 45

Focusing on a particular migration corridor - from poor countries, mainly in South Asia, into richer Gulf countries Gulf Cooperation Countries (GCC): Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE Authoritarian, large amount of oil, guest worker programs (temporary migration) Massive growth in migration to the countries with about the same number of total locals as migrant workers In UAE, about 8x more migrant workers than locals

Answer 46

Workers sign multi-year (2-3 year) contract with a firm No pathway to citizenship (for men in most cases) Women can get citizenship if they marry an Emerati man, but man can’t get citizenship if marry an Emerati woman Need a job to get the contract System of carrots and sticks: Rewards for staying for full contract, including the firm paying for airfare home —> carrots Government sanctions on those who fail to fulfill the contract, including not being allowed to sign another contract with another firm for 6 months —> sticks Some coercive elements here

Answer 47

Lots of western media newspaper headlines critiquing lack of human rights by UAE companies —> most of this coverage is about western companies in the UAE Workers in Qatar building for the World Cup and workers in the UAE building NYU Abu Dhabi and Guggenheim and more —> criticizing them Long working hours, poor working and housing conditions, lack of political/human/worker rights Abuse, passport withholding, strikes—> jail Suicides But, which the media doesn’t acknowledge, it is so much better than their home country conditions!

Answer 48

Hiring migrants in the GCC possible example Culture and norms may play a role in defining this Potential sources of repugnance (intense disgust): Coercion (are they coerced), regret (do they regret entering contract), externalities (brain drain to rest of country), inequality, degradation (labor contract degrading them?) Cultural and social norms decide what is normal vs. repugnant —> I.e. is it socially acceptable to hire someone to clean your home? What benchmark? Should we compare to other rich countries or to their origin countries (India, Pakistan)?

Answer 49

Idea for reducing global inequality is to encourage international migration GCC countries do more to improve global welfare than most other countries in the world Global vs within-country inequality Sharp contrast to media coverage —> Point is that while it increases inequality within the countries, these labor contract help massively reduce global inequality, as making way more money in UAE working than in India In the UAE, migrant workers (85% of workforce), earn average $5000 per year while Emiratis (15%) earn $300,000 per year —> extremely high inequality within country However, migrant workers come from poor countries where average income is $1000 per year Trade-off in openness to migration (reducing global inequality) and reducing within country inequality (and labor and political rights) US, for example, has less immigrations but much better rights. UAE allows immigration but lack of rights and more inequality within country

Answer 50

MLD = (1/N)*sum of ln (x bar/xi) from i = 1 to N N is number of households, xi is the income of household i, x bar is the mean of xi, value of 0 is perfect equality Unlike the Gini coefficient which maxes out at 1, no max here. Places more weight on extreme values bc no maximum Looking at this measure where we have post-tax internal inequality on X axis and impact of immigration on global inequality on the Y axis. Negative relationship with all the GGC countries very high on internal inequality but helping reduce global inequality the most Look even more unequal because of the extremes. So, while bad for internal inequality, good in reducing global inequality

Answer 51

Stated preferences - ask what people prefer and how much they prefer it Limitations: people may find these questions hard to answer For example, what kinds of courses would you like Penn to offer? Hard to answer this Revealed preferences - preferences which are revealed by choices that people make Look at choices students are making to infer their preferences Real choices we make to understand real preferences Ex: stated would be the stars given to a product while revealed would be how much you buy of the product  

Answer 52

Preferences are revealed by the choices that individuals make x1 and x2 are goods, p1 and p2 are corresponding prices, w is your earnings Budget constraint: p1*x1 + p2*x2 ≤ w How much you can afford Indifference curve gives one level of utility - want to get to the highest level of utility Graph on an indifference curve with x1 on the X axis and x2 on the Y axis —> represents how much of each of these goods you want Have a line with your budget constraint connecting the axes. Can afford any point within that shaded triangle. But, we can draw curves to the line to find the optimal point on the line. We want the point where the curve is tangent to the line —> x*. This is the optimal point Draw curves to each point on the line and we want the optimal curve so no curve is better —> tangent to the line

Answer 53

Do migrants prefer living and working in UA than home? Looking at proportion of Indian migrants re-signing after finishing a contract —> see that it is around 80%, dipped during the recession. Remember it is 2 sided, the firms may not give a contract, so not a great showing of demand. Also assuming not coerced re-signing. Overall, large re-signing rates suggesting them seem to like it better than the alternative

Answer 54

Major reform in 2011 allowed migrant workers to switch employers at the end of a contract in the UAE Prior to that, workers needed written consent from their employer to switch to another firm even at the end of a multi-year contract This increases job mobility and bargaining position of workers Still needed written permission during contact to move Difference-in-difference analysis where look pre/post 2011 reform Months before and after same individuals’ contract expirations Treatment: right after contract expires Control: right before contract expires Graph with contract expiration date on X axis and long change in contract compensation on the Y axis See a massive increase in compensation after the new policy (while it is still negative change in compensation at first due to inflation, after the reform, paid a lot more) Graph with contract expiration date on X axis and employer changes (3-month window) on Y axis This shows the total number of employer changes that occur by contract expiration date. Total includes employer transitions that occur within 3 months of the contract expiration. See a massive increase right after the new policy —> total job-to-job transitions massively up after the reform   Conclusions: Existing workers in the UAE: wages rose by 10% Job transitions increased However, firms hired fewer new workers and paid them 3% less Idea is consistent with the idea that there is a trade-off between labor rights and the number of migrants that firms will hire More labor rights, but hiring fewer people now Positive and negative consequences of international pressure to give migrant workers more labor rights

Answer 55

Opposing views: GCC countries and firms exploit poor migrant workers in a system like modern slavery, and international pressure/boycotts and government regulation is needed to protect workers Migrant workers are better off in jobs in GCC countries than in their home countries This is proven by the fact that they choose to take these jobs and to continue working in them International pressure/boycotts and government regulation may make (potential) migrant workers worse off As final thing shows - hire fewer new workers and pay less after human rights policy implemented

Exam 2 Flashcards

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