ECON6032 Application assessment 1

Consult the factsheets on overtime rates and penalty rates and the discussion of the

effects of penalty rate reductions linked to below.

1. A worker is currently working 8 hours per day.

a. Construct an appropriate indifference map and budget constraint to represent 8

hours work per day as the optimal choice.

If the employer wanted the worker to work more than 8 hours per day they could offer a

higher hourly wage for hours worked greater than 8 per day (overtime).

b. Add a budget constraint that represents higher hourly wages for hours worked

beyond 8 per day, show the new optimal choice and comment on the change in hours

worked.

Now imagine if the employer paid a higher hourly wage for all hours worked, and the

increase was just enough to allow the worker to have the same consumption and freetime combination they could afford with the overtime rates.

c. Show a budget constraint consistent with this higher hourly wage (hint: remember the

definition of the budget constraint, and think where the combination chosen with

overtime would have to sit if it was still just affordable) and indicate the optimal choice

with this pay arrangement. Which payment approach would the worker prefer? Which

would the employer prefer? How does this explain the pattern of payment approaches

we observe?

2. Redraw your original diagram in 1 a) above again. Imagine this represents the

worker's optimal choice of labour supply on a weekday.

a. Why might workers value leisure time much more on a weekend compared to

weekdays? Draw in an indifference curve going through the current chosen combination

of free time and consumption that reflects the different relative value on weekends (a

different colour would be good). Would the current combination be optimal on

weekends? Show the optimal weekend combination and comment.

b. If the employer wanted the worker to supply the same daily hours of labour on a

weekend as they were on a weekday, what would have to happen to the wage rate paid

on weekends (penalty rates)? Illustrate on the diagram.

c. In 2017 the Fair Work Commission reduced penalty rates in a group of industries

across Australia. To date there is little evidence that these cuts have resulted in increases

in employment. Why might this be?

https://drive.google.com/file/d/1pcft5pqqoZlCKEZfB81n9BMfhWmGmDDz/view

https://drive.google.com/file/d/10BpJT5LI0VNF8cZnF8f_dpJkz4pwPeu7/view

https://drive.google.com/file/d/1R_E-SPwJj8iT-vcd0C4L3p_IpqrcpdHY/view