Employment and Compensation
Textbook Exam Questions
Course Introduction
This course explores the fundamental principles and practices of employment and compensation within organizations. It examines the theoretical frameworks and legal considerations that underpin wage and salary administration, pay equity, incentive plans, and employee benefits. Students will analyze job evaluation methods, compensation strategies, and recent trends in total rewards, with a focus on aligning compensation systems to organizational goals and employee motivation. Practical case studies and current examples are integrated to illustrate the complexities of managing compensation in a diverse and dynamic workforce.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 11th Edition by Ronald G. Ehrenberg
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Page 2
Chapter 1: Introduction
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Q1) The most widely used method of estimating a regression line for a data set involves selecting the line
A) on which all data points will fall.
B) which minimizes the sum of the vertical distances between the line and the individual data points.
C) which minimizes the sum of the squared vertical distances between the line and the individual data points.
D) which minimizes the sum of the absolute value of the vertical distances between the line and the individual data points.
Answer: C
Q2) Which of the following is a positive statement?
A) mutually beneficial trade is good
B) minimum wage laws are not Pareto efficient
C) all workers should earn, at a minimum, a living wage
D) all persons who cannot produce enough to earn a living wage should not be allowed to work
Answer: B
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Chapter 2: Overview of the Labor Market
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Q1) 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
Q2) 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
Q3) If more people enter the labor market for architects, then
A) both the wage rate and the employment level will increase.
B) both the wage rate and the employment level will decrease.
C) the wage rate will increase and the employment level will decrease.
D) the wage rate will decrease and the employment level will increase.
Answer: D
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Page 4
Chapter 3: The Demand for Labor
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Q1) For two substitutes in production, if the substitution effect dominates
A) then the inputs are gross complements.
B) then the inputs are gross substitutes.
C) then the inputs could be either gross complements or gross substitutes.
D) then the inputs can not be used at the same time.
Answer: B
Q2) Studies show that most of a payroll tax is paid by workers in the form of lowered wages. If true, these studies imply
A) the supply of labor curve is very steep.
B) the supply of labor curve is very flat.
C) it would be better if employers were made to pay all of the tax.
D) the demand for labor curve is very steep.
Answer: A
Q3) If an increase in the cost of labor causes the firm to use less capital, then
A) the scale effect has dominated over the substitution effect.
B) the substitution effect has dominated over the scale effect.
C) the firm has moved along an isoquant curve.
D) the firm has moved onto a higher isoquant.
Answer: A
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Page 5
Chapter 4: Labor Demand Elasticities
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Q1) An increase in the minimum wage will decrease employment more when A) the supply of labor is more elastic.
B) the uncovered sector is small.
C) the demand for labor is inelastic.
D) all of the above will cause the minimum wage to decrease employment more.
Q2) Output is produced with capital and labor. If the price of capital goes up A) the price of output will fall.
B) output will be increased.
C) the firm will more labor per unit output.
D) none of the above will result when the price of capital goes up.
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) A firm employs 10 workers at a weekly wage of $500. If it employs an eleventh worker, it has to raise all of its workers wage to $520. The eleventh worker adds $750 a week to revenues. If the firm hires the eleventh worker, its weekly profits will
A) go up by $230.
B) go up by $30.
C) go up by $23.
D) go down by $270.
Q2) A public school currently it pays all teachers the same, regardless of their area of expertise. At $70,000, it hires good teachers in all areas except science. Because science is a field in demand, the school can only hire poor science teachers. It would have to pay science teachers $90,000 to hire good science teachers. If one out of five teachers is a science teacher, what is the marginal expense of getting a good science teacher instead of a poor one?
A) $90,000
B) $100,000
C) $20,000
D) $450,000
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Page 7
Chapter 6: Supply of Labor to the Economy: the Decision to Work
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Q1) Through the substitution effect, a decrease in the wage rate will cause ________ in the quantity of leisure desired.
A) an increase
B) a decrease C) no change
D) an ambiguous change
Q2) An increase in the fixed cost of working will ________ labor force participation and ________ hours of work (of those working before and after the increase in the fixed cost of working).
A) increase; increase
B) increase; decrease C) decrease; decrease D) decrease; increase
Q3) The property tax goes up $4000 a year. This will cause those who are working to work ________ hours and their annual income to go by ________ $4000.
A) more, up by more than B) more, up by less than C) decrease, down by less than D) decrease, down by more than
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Chapter
Life Cycle
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Q1) The "added worker" effect would tend to make the size of the labor force ________ during a recession.
A) increase
B) decrease
C) remain unchanged
D) either increase or decrease
Q2) If two partners enjoy each other's company, then if one partner increase in their leisure time (while still earning the same income), then the other partner's leisure time will likely
A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease.
Q3) If the slopes between income and leisure on all indifference curves varies only by the level of income but remains unchanged by the hours of leisure, then
A) the substitution effect of a wage increase will be large.
B) the substitution effect of a wage increase will be small.
C) the income effect of a wage increase will be large.
D) the income effect of a wage increase will be small.
Page 9
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) Mothers with young children work fewer hours than mothers with older children. Which of the following could explain this?
A) Young children cost more in real goods and services.
B) Mothers with young children have husbands that make less.
C) Mothers with young children have flatter utility isoquants (where household time is on the horizontal axis).
D) Mothers with young children have steeper utility isoquants (where household time is on the horizontal axis).
Q2) If workers on the third shift make $1 per hour more than workers on the first shift, then
A) working during the day is worth less than $1 per hour to all workers.
B) working during the day is worth exactly $1 per hour to all first shift workers.
C) working during the day is worth more than $1 per hour to all third shift workers.
D) working during the day is worth at least $1 per hour to all first shift workers.
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Chapter 9: Investments in Human Capital: Education and Training
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Q1) In the signaling model, assume high school graduates are paid a stream of income whose present value is $200,000. College graduates are paid a stream of income whose present value is X. College education costs higher-productivity workers $50,000 and lower-productivity workers $150,000. What value of X will cause higher-productivity workers to go to college and lower-productivity workers to not go to college?
A) $225,000
B) $475,000
C) $700,000
D) $275,000
Q2) A nation shifts from a very progressive tax system (with a higher tax rate on higher incomes) to a tax system that tax all wages at the same rate. Both systems collect about the same revenues. This shift is likely to
A) decrease the fraction of the population getting more education.
B) increase the fraction of the population getting more education.
C) have no effect on the fraction of the population getting more education.
D) increase the fraction of the population wanting to work long hours.
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) An economist assumes while educated persons have lower informational costs to moving, younger adults have lower psychic costs of moving. Which of the following observations (if true) would support this assumption?
A) Among people with the same education, we observe younger persons moving only if there is a large wage gain from moving
B) Among people of the same age, we observe less educated persons moving only if there is a large wage gain from moving
C) Both A and B support the assumption.
D) Neither A nor B support the assumption.
Q2) If skilled and unskilled labor are gross substitutes and if an influx of unskilled immigrants drives down the wages paid to unskilled workers, it will also
A) increase the wage of skilled workers.
B) decrease the wage of skilled workers.
C) either increase or decrease the wage of skilled workers.
D) cause no change in the wage of skilled workers.
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Chapter 11: Pay and Productivity: Wage Determination
Within the Firm
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Q1) Which of the following can NOT explain why large firms tend to pay higher salaries?
A) Large firms find monitoring more expensive.
B) Large firms allow less independence and have more rigid discipline.
C) Large firms find job vacancies less costly.
D) Efficiency wages work better in large firms.
Q2) Pay for performance works LEAST well for an employee
A) who works as a counselor for other employees in a company.
B) who is closely supervised.
C) who maximizes utility.
D) whose value added is easily measured.
Q3) A radically more progressive tax system (which taxes workers earning more at a much higher tax rate) will likely have which of these effects?
A) Cause firms to move towards incentive systems that delay wage payments.
B) Encourage workers to seek employers better matched to their skills.
C) Cause firms to pay efficiency wages
D) Cause firms to pay by salary rather than with piece rates.
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Chapter 12: Gender, Race, and Ethnicity in the Labor Market
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Q1) Customer discrimination will cause
A) segregated workplaces.
B) no wage differentials.
C) firms to give up profits to maximize utility.
D) discriminating customers to pay lower prices.
Q2) In a given market, women with the same skills as men earn less. Which of the following would suggest that the main source of the discrimination are the managers that must work with them?
A) Managers working with women must be paid more.
B) Companies with managers who hire more women make a larger profit.
C) Companies hiring women offer more day care and other amenities favored by women.
D) All of the above.
Q3) The index of occupational dissimilarity for women and men
A) would be 100 if all occupations were completely segregated.
B) would be 100 if men and women were randomly assigned to jobs.
C) has risen since 1970.
D) shows the percentage workers who face occupational discrimination.
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Chapter 13: Unions and the Labor Market
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Q1) 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.
Q2) Suppose a study found that union wages were 10% higher than nonunion wages. Unions will have actually raised wages by more than 10% when
A) union workers who lost their jobs found work in the nonunion sector.
B) consumers shifted their demand to the lower priced nonunion goods.
C) nonunion employers raised their wages in response to the threat of being unionized.
D) union workers are more productive workers than nonunion workers.
Q3) Unions tend to
A) increase wages for white-collar and blue-collar members by roughly the same amount relative to non-union workers.
B) increase relative wages more for blue-collar workers.
C) increase relative wages more for white-collar workers.
D) encourage high levels of education and training for their members.
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Page 15
Chapter 14: Unemployment
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Q1) A reservation wage is
A) the lowest wage a worker will accept.
B) the lowest wage a company will offer.
C) the highest wage a company will offer.
D) the wage at which a company's profits are maximized.
Q2) A nation has full employment when
A) wages and prices are stable.
B) unemployment is at its lowest level.
C) unemployment rates are the same across all demographic groups.
D) workers are earning a living wage.
Q3) The natural rate of unemployment
A) is currently about 4%.
B) must be the same for every demographic group.
C) occurs when job vacancies equal the number of unemployed workers.
D) hit bottom in the 1970s.
Q4) Wait unemployment is a form of ________ unemployment.
A) structural
B) frictional
C) cyclical
D) structural and cyclical
Page 16
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Chapter 15: Inequality in Earnings
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Q1) Which of the following best describes the statement "Earnings at the 80th percentile were $20,000"?
A) 80% were earning $20,000 or less
B) 80% were earning $20,000 or more
C) The average earnings of those in the top 80% was $20,000
D) The average earnings of those in the bottom 80% was $20,000
Q2) In nation X, inequality is measured with reported income and does not include welfare benefits. Suppose welfare benefits are increased and those on welfare who continue to work cut slightly back on their hours of work. Measured inequality will ________ and true inequality will likely ________.
A) increase, increase
B) decrease, decrease
C) decrease, increase
D) increase, decrease
Q3) 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.
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Page 17
Chapter 16: The Labor Market Effects of International Trade and
Production Sharing
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Q1) Mr. X values a good at $100 and buys it from Mr. Y at $80 (who produces it at a cost of $70). Mr. Z then offers Mr. X the same good at $60. Mr. X buys the good from Mr. Z, and stops buying it from Mr. Y. Which of the following makes this event to be Pareto optimal
A) Mr. X gives Mr. Y $11.
B) Mr. X gives Mr. Y $30
C) Mr. X pays Mr. Z $80.
D) Mr. X and Mr. Z join to give Mr. Y $70.
Q2) With differing comparative advantages, nations who trade (compared to when they did not trade)
A) get more of the good that they have the comparative advantage in but less of other goods.
B) get less of all goods, but are better off because they can get the mix of goods they want.
C) will only be better off if they export more than they import.
D) can get more of all goods.
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