Economics of Labor Markets
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Course Introduction
Economics of Labor Markets explores the functioning and dynamics of labor markets, examining how workers and employers make decisions regarding employment, wages, and working conditions. The course covers fundamental topics such as labor supply and demand, wage determination, human capital investment, unemployment, discrimination, and the role of public policy in shaping labor market outcomes. Students will analyze empirical data, study real-world labor market trends, and gain an understanding of contemporary issues, such as the impact of technology and globalization. The course provides critical insights into how economic principles apply to labor market behavior and the broader implications for society and economic policy.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 12th Edition by Ronald G. Ehrenberg
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Chapter 1: Introduction
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Q1) Omitted variable bias exists if the omitted variable is
A) unrelated to the dependent variable or the independent variable.
B) related to the dependent variable, but unrelated to the independent variable.
C) related to the independent variable, but unrelated to the dependent variable.
D) related to both the independent variable and the dependent variable.
Answer: D
Q2) Transactions that impose costs on parties not directly involved in the transaction represent
A) a market failure due to price distortion.
B) a form of public good, as the costs are shared with the public.
C) a market failure characterized by an externality.
D) government intervention to reduce income inequality.
Answer: C
Q3) Improvements in equity
A) involve comparing the welfare lost by some against the welfare gained by others.
B) are impossible if the initial distribution is Pareto Optimal.
C) generally increase efficiency.
D) can be scientifically evaluated.
Answer: A
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Chapter 2: Overview of the Labor Market
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Q1) When the price of capital increases,the quantity of ________ demanded will ________,but the effect on ________ is ambiguous.
A) labor; increase; capital
B) labor; decrease; capital
C) capital; increase; labor
D) capital; decrease; labor
Answer: D
Q2) The labor force is made up of
A) all members of society.
B) all members of society who are at least 16 years of age.
C) all members of society who are at least 16 years old and are either employed or unemployed.
D) employed workers, unemployed workers, and retired workers.
Answer: C
Q3) Which of the following events will cause a surplus of workers?
A) a wage above the market-clearing wage
B) an increase in the supply of workers
C) a decrease in the demand for workers
D) more workers wanting to work at higher wages
Answer: A
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Chapter 3: The Demand for Labor
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Q1) Consider an employer that is a monopolist in its product market versus an otherwise comparable employer that is a competitor in its product market.A wage increase will have
A) a comparatively larger effect on employment of the monopolist because the monopolist is the only seller of the good.
B) no effect on employment of the monopolist because the monopolist will simply pass the increase in wage cost on to consumers by charging a higher price.
C) the same effect on employment because the profit maximization condition is MRP = MEL whether the firm is a monopolist or whether it is competitive in the product market.
D) a comparatively smaller effect on employment of the monopolist because the monopolist will be able to pass some of the increase in wage cost on to consumers by charging a higher price.
Answer: D
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Chapter 4: Labor Demand Elasticities
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Q1) The short run own-wage labor demand elasticity
A) includes only part of the scale effect.
B) includes only part of the substitution effect.
C) includes both scale and substitution effects.
D) includes all the scale effect.
Q2) The minimum wage is a relatively blunt instrument with which to reduce poverty because
A) only about half the labor force is covered by the minimum wage.
B) only about half the employers comply with the law.
C) most workers whose wages are affected by minimum wage increases do not live in poor families.
D) minimum wage increases cause large increases in unemployment.
Q3) If the quantity of auto workers demanded decreases from 66,000 to 54,000 when the equilibrium wage increases from $12.00 per hour to $14.00 per hour,then the own-wage elasticity of demand for these workers is
A) inelastic.
B) elastic.
C) zero.
D) neither elastic nor inelastic.
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Chapter 5: Frictions in the Labor Market
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Q1) If workers share in the cost of training but also share in the productivity payoff from the training,then we expect that
A) quit rates will be lower.
B) quit rates will be higher.
C) layoff rates will be higher.
D) employers would have no incentive to hire such workers in the first place.
Q2) Suppose that a monopsonist employs 100 workers at a wage of $15 per hour.Assume that the monopsonist has maximized profit and that the marginal revenue product is $20 per hour at the current employment level.Explain how imposition of a minimum wage in this setting could increase employment at the firm.Illustrate your discussion with an appropriate graph.What is the highest minimum wage that could be imposed without loss of employment? Explain and illustrate graphically.
Q3) Workers with firm-specific training are ________ likely to be laid off than are workers with general training because ________.
A) more; they are paid less than workers with general training
B) more; their wage is less than their marginal product
C) less; they are paid less than workers with general training
D) less; their wage is less than their marginal product
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Chapter 6: Supply of Labor to the Economy: The Decision to Work
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Q1) A person who receives time-and-a-half overtime for working more than 8 hours per day will have a ________ which is ________ beyond 8 hours of labor.
A) budget constraint; flatter
B) indifference curve; flatter
C) budget constraint; steeper
D) indifference curve; steeper
Q2) An increase in travel time to work will likely ________ labor force participation and ________ hours spent working and traveling (of those working and traveling before and after the wage increase).
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Q3) Why are indifference curves between money income and leisure convex to the origin of the graph? In your discussion,introduce the concept of marginal rate of substitution between leisure and money income and explain its relevance to the convexity property of the indifference curves.
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Chapter 7: Labor Supply: Household Production, the Family, and
the Life Cycle
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Q1) If two partners are substitutes in the production of household goods,then if one partner increases their leisure time (while still earning the same income),the other partner's leisure time is likely to A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease.
Q2) An increase in the daily cost of child care would likely
A) increase the labor force participation rate of mothers.
B) increase the utility from not working.
C) increase the hours of work of mothers who continue to work.
D) increase the utility of a family with young children.
Q3) If someone enjoys household production (such as raising children)this A) would be shown by a shift in his budget constraint.
B) will make his household production isoquant curves flatter than otherwise.
C) is the same as being more productive in household production.
D) will make his household production isoquant curves steeper than otherwise.
Q4) What is the distinction between the added worker effect and the discouraged worker effect? Which effect tends to dominate quantitatively?
Page 9
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) Lawyers work in pleasant surroundings at low risk of injury,but they generally receive higher pay than construction workers.This is because
A) construction workers don't receive a compensating wage differential for their risk of injury and less pleasant surroundings.
B) lawyers and construction workers are not comparable due to different preferences.
C) lawyers and construction workers are not comparable due to different education levels.
D) lawyers' work must be considered unpleasant by many workers.
Q2) Holding all other factors constant,workers who are strongly averse to risk will tend to have jobs paying
A) average wages.
B) below average wages.
C) above average wages.
D) at least average wages.
Q3) The Occupational Safety and Health Administration is tasked with implementing and enforcing federal safety and health standards.Why are federal safety and health standards necessary in the workplace? Use the hedonic model to answer the question.
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Page 10
Chapter 9: Investments in Human Capital: Education and Training
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Q1) If both the demand for and the supply of college graduates shift to the left,then the equilibrium wage would ________ and the number of college graduates would
A) increase; change ambiguously
B) change ambiguously; increase
C) decrease; change ambiguously
D) change ambiguously; decrease
Q2) If average lifetime earnings of both high school and college graduates double,then the number of people attending college will consequently A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease.
Q3) Suppose that a technological innovation causes the price of capital to decrease and that,in turn,this causes the demand for college graduates to increase and the demand for high school graduates to decrease.Use human capital theory to predict the effect of the technological innovation on college enrollment rates of 18-year olds.Explain using either the present value method or the internal rate of return method.
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) One immigrant to country X increased her annual wage from $8000 (in her home country)to $10,000 in Country X.There are no costs to moving.At the same time,one native worker saw their wage fall from $15,000 to $10,000 because of the entry of the one immigrant into the labor market.The native worker was producing $16,000 worth of goods and the immigrant added another $11,000 worth of goods to total output.Both continue to work at $10,000.Given that nothing else happens,which of the following statements is true? Country X (not counting the immigrant)is
A) better off by $5000.
B) worse off by $5000.
C) better off by $1000.
D) worse off by $4000.
Q2) The Immigration Reform and Control Act of 1986 was
A) the first act to increase the number of immigrants allowed to enter the United States each year.
B) the first act to punish employers of illegal immigrants.
C) the first act to place quotas on immigrants by skill level.
D) the first act to limit immigration to America.
Q3) How does the quit rate behave over the business cycle?
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Chapter 11: Pay and Productivity: Wage Determination
within the Firm
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Q1) Which of the following types of pay is NOT linked to output?
A) commissions
B) profit sharing
C) hourly wages
D) piece-rate pay
Q2) A promotion tournament is
A) a process to assure the most productive worker is paid his or her marginal product.
B) a process to help a corporation get rid of "deadwood."
C) a way to insure that all diligent workers get big rewards.
D) a process to motivate several workers to try and win one high-paying job.
Q3) A "signal" will not work to sort good from bad workers if
A) the signal is as costly to good workers as to bad workers.
B) bad workers are more risk-averse than good workers.
C) the signal is excessively expensive to bad workers.
D) good workers are more productive than bad workers.
Q4) Joe is paid a wage of $12 per hour.What are the advantages and disadvantages to the employer of paying Joe on the basis of time worked?
Q5) How does the payment of an efficiency wage affect worker productivity?
Q6) What is the firm-size effect? What accounts for the firm-size effect?
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Chapter 12: Gender,Race,and Ethnicity in the Labor Market
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Q1) There are one hundred supervising jobs and one hundred male supervisors in a competitive job market.In addition,each supervisor supervises one line worker.There are one hundred line jobs and one hundred line workers.The supervisor of job one dislikes supervising female line workers by $1 a week.The supervisor of job two dislikes female line workers by $2 a week,and so forth,such that the supervisor of job hundred dislikes supervising female line workers by $100 a week.There are 60 female and 40 male line workers.Supervisors of male line workers are paid $400 a week and male line workers are paid $200 a week.Which of the following is NOT true in the short-run equilibrium?
A) The female line worker working for the supervisor in job 60 will get paid $140 a week.
B) The female line worker working for the supervisor in job 20 will get paid $140 a week.
C) The employer of the supervisor in job 80 must pay the supervisor $460.
D) The employers of male line workers could increase profits by hiring females instead.
Q2) What does the employment-to-population ratio measure? What has happened to the employment-to-population ratio of African American males over time? Of white males over time?
Q3) What is the dual labor market explanation of discrimination?
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Chapter 13: Unions and the Labor Market
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Q1) What is interest arbitration?
Q2) Suppose a study finds that union wages are 10% higher than nonunion wages.This will likely overstate the true advantage of working in the union job when
A) the nonunion job has better skilled workers.
B) the union job has poorer working conditions.
C) workers losing union jobs seek out non-union jobs.
D) unemployment is high.
Q3) A vertical contract curve implies that
A) both firm and workers are receiving economic rents.
B) union wage increases will cause large losses in employment.
C) the firm's output will increase when wages rise.
D) the firm operates in a perfectly competitive product market.
Q4) Increases in the minimum wage can help unions by
A) increasing the welfare of non-union workers.
B) increasing the demand for labor.
C) increasing costs faced by employers.
D) increasing the cost of substituting non-union labor for union labor.
Q5) Do unions increase worker productivity?
Q6) What is a right-to-work law?
Page 15
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Chapter 14: Unemployment
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Q1) A worker who is laid off because his or her company chooses to move from Wisconsin to North Carolina is counted as ________ unemployment.
A) frictional
B) wait
C) structural
D) cyclical
Q2) An increase in an individual's reservation wage
A) will increase the duration of the individual's unemployment but not affect the expected wage.
B) will increase the individual's expected wage but not affect the duration of unemployment.
C) will not change the individual's duration of unemployment.
D) will increase both the individual's duration of unemployment and expected wage.
Q3) In reemployment bonus experiments,bonuses to workers who found new jobs quickly
A) increased the average duration of unemployment.
B) decreased the average duration of unemployment.
C) did not change the average duration of unemployment.
D) decreased the number of spells of unemployment.
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Chapter 15: Inequality in Earnings
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Q1) Identify the major changes in earnings inequality in the U.S.since 1980.
Q2) During the 1980s,inequality increased.While the wages of high school graduates remained unchanged,the wages of college graduates increased dramatically.Which of the following (if true)could explain why this occurred? (Note that the "quality" of education includes the value of what is being taught.)
A) The quality of education at the high school level (and below) fell.
B) The quality of education at the college level (and above) rose.
C) The relative number of college graduates increased.
D) The quality of education at the high school level (and below) rose.
Q3) What institutional forces might account for the increase in earnings inequality observed since 1980? Explain.
Q4) Technological change
A) is the equivalent of a decrease in the price of capital.
B) is the equivalent of an increase in international trade.
C) will always decrease the demand for less-educated workers.
D) will always decrease the demand for well-educated workers.
Q5) What are the dimensions along which changes in the earnings distribution have occurred since 1980?
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Chapter 16: The Labor-Market Effects of International Trade and
Production Sharing
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Q1) The size of the substitution effect when companies substitute foreign labor for domestic labor,will be greater (on domestic labor)when
A) the supply of domestic labor is more elastic.
B) the goods produced are easily transported between nations.
C) the ability to produce the goods are shared by all nations.
D) all of the above
Q2) Mr.X works in the warehouse of a large textile firm located in the United States.The firm outsources the production of its textiles to another nation.Which of the following is an example of the possible substitution effect of this event on Mr.X?
A) The lower price of the textiles causes his firm to sell more textiles, increasing its demand for warehouse workers.
B) The outsourcing of production reduces the company's demand for warehouse workers in the United States and increases its demand for warehouse workers in the other nation.
C) Both of the above.
D) Neither of the above.
Q3) What is the Trade Adjustment Assistance program?
Q4) What is production sharing?
Page 18
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