| Date | May 2019 | Marks available | 2 | Reference code | 19M.3.HL.TZ0.3 |
| Level | Higher level | Paper | Paper 3 | Time zone | Time zone 0 |
| Command term | State | Question number | 3 | Adapted from | N/A |
Question
Table 1 provides information about Fairland.
Table 1
Figure 6 illustrates Fairland’s demand (D) for and supply (S) of low-wage labour.
Figure 6
In order to raise the living standards of low-wage workers, the government of Fairland has decided to impose a minimum wage of $10 per hour.
The marginal rates of income tax in Fairland are given in Table 2.
Table 2
Government economists have estimated that citizens of Fairland spend 10 % of any additional income on imported goods and pay a tax rate of 20 % on every extra dollar of income. The marginal propensity to save for Fairland’s citizens is 10 %.
Calculate the unemployment rate in Fairland using Table 1.
Outline two difficulties in measuring unemployment.
Draw and label a curve that illustrates Fairland’s minimum wage on Figure 6.
Calculate the resulting unemployment among the low-wage workers.
Define the term marginal rate of tax.
Fred is a low-wage worker in Fairland. As a result of the minimum wage his income will increase from $15 000 per year to $19 000 per year.
Calculate how much additional income tax Fred will need to pay.
Using an AD/AS diagram to support your answer, explain the mechanism through which monetary policy can help an economy reduce the level of unemployment.
State two interventionist supply-side policies that are likely to increase the demand for low-wage labour in Fairland.
State two market-based supply-side policies that are likely to increase the supply of labour in Fairland.
Using this information, calculate the value of the Keynesian multiplier.
Using your answer to part (i), calculate the increase in government spending necessary to increase nominal GDP by $100 billion.
Markscheme
Unemployment rate = × 100 = × 100 =
× 100 = × 100
Any valid working (such as the correct calculation of the labour force) is sufficient for [1].
= 26.57 % or 26.69 %
(this depends on when rounding has taken place)
An answer of 26.57 or 26.69 without working is sufficient for [1].
Possible difficulties may include:
- some of the unemployment is hidden, because some people who are able and willing to work have become discouraged and have given up looking for a job
- some of the employed are underemployed and, while officially working, do not fully utilize their time (involuntary part-timer workers) or skills/experience
- there may be false claims by those who seek to obtain unemployment benefits, or those in the informal labour market seeking to avoid income tax) thus distorting the official statistics
- the unemployment figure is an average and ignores regional, ethnic, age and gender disparities.
Any other reasonable response should be rewarded.
Award [1] for an accurate, labelled minimum wage line.
Unemployment = number of workers willing to supply their labour − number of workers demanded by firms = 40 million − 14 million
Any valid working is sufficient for [1].
= 26 million
An answer of 26 million or 26 without working is sufficient for [1].
3000 × 10 % + 1000 × 20 %
Any valid working is sufficient for [1].
= $500
An answer of $500 or 500 without any working is sufficient for [1].
OR
Initial tax paid = 10 000 × 5 % + 5000 × 10 % = 1000
New tax paid = 10 000 × 5 % + 8000 × 10 % + 1000 × 20 % = 1500
Any valid working is sufficient for [1].
Change in tax paid = 1500 − 1000
= $500
An answer of $500 or 500 without any working is sufficient for [1].
NB Responses which apply the bands such that, for example, 10% is charged on $7 999 rather than $8 000 may be fully rewarded.
Any form of aggregate supply curve (SRAS, LRAS or Keynesian AS) is acceptable.
Candidates who incorrectly label diagrams can receive a maximum of [3].
For AD/AS, the vertical axis may be price level or average price level. The horizontal axis may be output, real output, national output, real national output, national income, or GDP. A title is not necessary.
Any other reasonable response should be rewarded. For example, a diagram showing the labour market, with axes labelled “wage rate” and “employment” or “quantity of labour”, with accurate explanation may be fully rewarded.
Award [1] for each appropriate policy stated.
Policies may include:
- investment in infrastructure
- tax cuts or tax allowances in industries that hire low-wage labour
- subsidies for firms that hire low-wage labour
- Investment in education and training/human capital
- Investment in health.
Examiners should be aware that some candidates may take alternative approaches, which, if appropriate, should be fully rewarded.
Examiners should be aware that some candidates may take alternative approaches, which, if appropriate, should be fully rewarded eg cuts in employee social security contributions.
=
Any valid working is sufficient for [1].
= 2.5
An answer of 2.5 without any working is sufficient for [1].
Change in government spending =
Any valid working is sufficient for [1].
= $40 billion
An answer of 40 billion or 40 or $40 billion without any working is sufficient for [1].
OFR applies.
Examiners report
This question proved difficult for candidates. Although many were able to calculate the size of the workforce, a common error was to use an incorrect denominator in the calculation of the unemployment rate.
Lower achieving responses commonly described frictional and seasonal unemployment as a difficulty of calculation or stated that statistics were too complex for an accurate calculation. The majority of candidates identified hidden unemployment and underemployment as difficulties, although explanations were not always clear and accurate enough to achieve Level 2. Some responses neglected to show that part-time working is an issue only if the part-time nature of the employment is involuntary. Overall, a significant proportion of responses demonstrated a clear understanding of the inherent concepts.
Well-answered, with a small number of inaccurate or unlabelled curves.
A significant number of candidates were able to draw the curve representing the minimum wage but then calculated the resulting unemployment incorrectly. A common error was to provide an answer of 40 − 12 = 28, a consequence of misreading the graph.
Relatively few candidates were able to provide a clear and accurate definition. Responses which stated the idea that “it’s what you pay in the top bracket, or in different brackets” were common, as was the idea that it is the change in the rate of tax if income increases.
Although there were many accurate responses, a large number of candidates applied a single “rate of income tax” to each salary, resulting in an answer of $3800 − $1500 = $2300.
This question was answered very well, reflecting the ability of candidates to explain how expansionary monetary policy works with use of a diagram. A small number of candidates neglected to refer to interest rates or components of aggregate demand.
A range of supply-side policies was suggested, with many being non-interventionist, such as a reduction in corporate taxes or a reduction in the minimum wage. There were also many responses which did not focus on low wage labour, such as “subsidies” or “help for infant industries”. In order to be rewarded for each policy, candidates were required to identify how these policies might influence the labour market. It is clear that many candidates were unable to do so.
As for part (g), a range of policies suggested were not market-based nor would they influence the supply of labour. An increase in the minimum wage, for example, is not market-based.
Generally well-answered by the majority of candidates.
Well-answered, with a number of candidates benefitting from the own-figure rule from part (i)
