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

Current wages =$35 per hour

1 week =35 hours of work, Dis-utility of effort per hour is $5. Reservation rent by government is $15 per hour for maximum 20 years.,

If covid pandemic is not there

(a). Employment rent =wage - Dis-utility of effort per hour -reservation rent

= $35-$5-$15

= $15.

b. Total employment rent = Employment rent per hour *Expected hours of lost work time.

Total employment rent for first 10 weeks as we consider after then he will be employed. So expected hours of loss of work time =35 hours per week *10weeks = 350 hours.

Total employment rent = $15*350 = $5250.

After pandemic if we consider extra cost of $3 as a part of employment rent. And this time he gets work in 30 weeks. As we know government will provide retention for maximum 20 weeks then for that extra then weeks we calculate the employee rent.

Employee rent: wages -Dis-utility of effort per hour + health expense

= $35-$5+$3

=$33.

Expected lost hours of 20-30 further week

=35 hours *10 =350

Total employee rent = $33*350=$11550

However for 1st 20 weeks we get retention of $15 but further if you got job after ten week then your cost might increases by $11550.

Hence these are the rent which cost to employees in case of loss of job. However based upon the wages they put their efforts in work.