As you may have learned in courses in microeconomics, whenworkers’ wages rise, their decision about...

As you may have learned in courses in microeconomics, when workers’ wages rise, their decision about how much time to spend working is affected in two conflicting ways. The income effect is the impulse to work less because greater incomes mean workers can afford to consume more leisure. Thesubstitution effect is the impulse to work more because the reward for working an additional hour has risen (equivalently, the opportunity cost of leisure has gone up).

Productivity increases have pushed real wages higher in both Europe and the United States over the last few decades. Blanchard’s hypothesis uses geographic differences in cultural preferences to explain why hours of labor per worker in the United States differ from those in Europe. Apply the income and substitution effect concepts to Blanchard’s hypothesis and answer the questions below.

As real wages have increased over the last four decades, hours of labor per worker have (remained constant/risen) in the United States and (remained constant/fallen) in Europe.

These data suggest that the (substitution/income) effect was dominant in most workers' preferences in Europe

They also suggest that the income effect (dominant over/is roughly equal to) the substitution effect in most workers' preferences in the United States.

Solutions

Expert Solution

As real wages have increased over the last four decades, hours of labor per worker have (remained constant/risen) in the United States and (remained constant/fallen) in Europe.

These data suggest that the (substitution/income) effect was dominant in most workers' preferences in Europe

They also suggest that the income effect (dominant over/is roughly equal to) the substitution effect in most workers' preferences in the United States.

Europeans work less hours than Americans. One clarification is that the higher pay charge rates in Europe lessen the motivating force to work. A subsequent clarification is a bigger underground economy in Europe because of more individuals endeavoring to sidestep the high duty rates. A third clarification is the more noteworthy significance of associations in Europe and their capacity to can foresee diminished work hours. A last clarification
depends on inclinations, whereby Europeans esteem leisure more than Americans do, and thus choose to work less hours.

Rahul Sunny answered 1 year ago

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