Question

Roberto works in a factory making electric cars. Currently, his firm pays him $35 per hour and he works 35 hours per week. Each hour he works he experiences disutility of effort from working valued at $5 per hour. In addition, should Roberto lose his job the government will pay him an unemployment benefit of $15 per hour, for each hour he would otherwise work each week, for a maximum of 20 weeks. Prior to the coronavirus pandemic if Roberto lost his job the expected duration of unemployment before he would find another job is 10 weeks.

(a) Calculate Roberto's (i) employment rent per hour and his (ii) total employment rent.

b) With the advent of the coronavirus pandemic the economy has gone into recession causing Roberto's expected duration of unemployment to increase to 30 weeks.

Furthermore, the dramatic increase in the expected duration of unemployment has resulted in psychological stress from unemployment valued at $3 per hour.

In the light of these developments re-calculate Roberto's:

(i) Employment rent per hour and

(ii) Total employment rent .

(Hint: It will be necessary for students to base their calculations on two periods, the first, covering weeks 1-20, when the unemployment benefit is available and the second, covering weeks 21-30, when the unemployment benefit is not available)

Answer 1

Roberto's wage per hour = $35

Number of hours worked per week = 35

Total income in a week = $35 * 35 = $1225

Disutility from working (per hour) = $5

Total disutility experienced in a week = $5 * 35 = $175

Unemployment benefit (per hour) = $15

Total unemployment benefit in a week = $15 * 35 = $525

Maximum number of week unemployment benefit can be collected = 20

i) Employment rent is also known as the cost of job loss. By working, every hour, Roberto earns $35(income) but he also experiences (cost) a disutility of $5 and (next best alternative) loses out on unemployment benefit of $15 per hour.

Hence, Roberto's employment rent per hour = $35 - $5 -$15 = $20

ii) Expected number of weeks, the worker will remain unemployed is 10

Hence, for these 10 week the total employment rent = employment rent per hour * number of hours in week worked * number of weeks = $20 * 35 * 10 = $7000

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Now, the corona virus pandemic has happened. Two changes entail :

• Roberto's expected duration of unemployment is now 30 weeks
• The psychological stress of unemployment is valued at $3. This is the cost he is avoiding by being employed. Hence, the previous disutility of (-)$5 and avoidance of pyschological stress $3, means that the net cost of employment is now only (-)$5 + $3 = $2
• The unemployment benefit will not be given after 20 weeks

Therefore, we divide the total unemployment period into parts,

From 1-20 week,

Employment rent per hour = $35 - $15 - $2 = $18

Total employment rent for 20 weeks = $18 * 35 * 20 = $12600

For 21-30 week,

Employment rent per hour = $35 - $2 = $33 (since unemployment benefits are not available now)

Total employment rent for 10 week = $33 * 35 * 10 = $11550

Note: In both above cases, 35 is the number of hours he usually works in a week.

Hence, Total employment rent of Roberto for 30 weeks = $12600 + $11550 = $24150