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PSCI255 Study Guide - Final Guide: Natalism, Incomes Policy, Reverse Engineering


Department
Political Science
Course Code
PSCI255
Professor
Hongying Wang
Study Guide
Final

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Discussion Review 3
1. What is collective action failure? What is the solution to this problem? Use wage restraint as an
example
Collective action failure refers to the consumption of public goods where the individual contribution is
negligible such that there is a strong incentive to free ride
There are two conditions:
1) Output is public good; that everyone has access to good
2) Output relies on collective contribution of all members but contribution of each individual is negligible
Two solutions:
1) Make output private
2) Decrease the number of contributors so cost to free ride is higher
Wage restraint satisfies both conditions of a collective action failure
1) It’s a public good. Wage restraint leads to low inflation. Low wages also make the nation more export
competitive.
2) It depends on the collective action of all firms/unions involved, but the contribution of any individual
firm is negligible so unions will try to maximize wages
The solution here is to merge unions (decrease # of contributors)
2. Wage bargaining can be centralized or decentralized. What type of bargaining leads to the
highest unemployment?

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Extreme centralization: Unions have partnerships with firms so they do not demand high wages; with
more profit, firms can hire more people; this leads to lower unemployment
Moderate centralization: Unions demand high wages and they have sufficient collective power to do so,
so they free ride; with less profit firms can hire less people; this leads to higher unemployment
Extreme decentralization: Unions demand high wages, but because they are so decentralized they have
low bargaining power so employers refuse to give high wages; this leads to low unemployment
3. What is the “social wage”? Why was the “social wage” abandoned after the 1970s?
Social wages are welfare benefits/services that the state provides to entice workers to give up high wages.
Unlike market wages which are paid by companies, social wage is paid by workers through taxes. This
exploits the rational behaviour of “time discounting” (ie. workers are hurt in the long run). Thus, this
doesn’t increase unemployment.
When the economy is growing fast, output is large and there is enough tax revenue to sustain generous
social wages. But when the economy slows down, such as it did in 1970s, output is small and more tax
revenue is needed to sustain the same level of social wages. Thus, social wages were abandoned here.
4. What is Baumol’s cost disease? Can wage equality help cure the cost disease?
Baumol’s cost disease is when wages in the low wage sector are contaminated by high productivity, high
wages service sector.

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For example, although wages for musicians have increased, their productivity hasn’t. To keep workers
from leaving, firms offer higher wages even though their productivity is low.
Key point is: increase in wages is not due to increase in productivity but due to higher wages in other
sectors
Wage equality would make bottom end job wages higher for the same level of productivity. This means,
low wage jobs are even closer to the higher wage jobs. Thus, wage equality exacerbates baumol’s cost
disease.
5. The 1970s ushered in a period of transition towards the service economy. The size and quality of
the service economy, however, is very different across countries. Can you explain this cross-country
variation?
Anglo Saxon nations
large private service sector
lots of low skilled, low wages, junk jobs
low taxes
example: daycare, babysitter, hamburger flipper
Scandinavian
large public sector
high quality jobs funded by higher taxes
example: state licensed daycare
Continental Europe
Wages are pretty equal so can’t have private service sector jobs
By principle of subsidiarity welfare services are delivered by family not state, so small public
sector
low taxes
6. What is the tri-lemma of the service economy?
There are three objectives that nations try to reach.
1) Job growth
2) Equality
3) Low taxes
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