Labor Economics
Exam Materials
Course Introduction
Labor Economics examines the functioning and dynamics of labor markets, exploring how labor is supplied and demanded, how wages are determined, and the role of institutions, such as unions and government policies. The course delves into key topics such as human capital investment, income inequality, wage differentials, labor mobility, and unemployment. Students analyze the impact of labor market policies and demographic changes on employment outcomes, combining theoretical models with empirical evidence to understand real-world labor issues and to evaluate policy responses.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 12th Edition by Ronald G. Ehrenberg
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Page 2
Chapter 1: Introduction
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Q1) Which of the following is NOT a distinguishing characteristic of the labor market?
A) Labor services can only be rented.
B) Unlike in commodity markets, non-pecuniary factors are generally unimportant in employment transactions.
C) There are numerous institutions and regulations applicable to employment relationships that do not exist in other markets.
D) Non-pecuniary factors loom larger in employment transactions than they do in markets for commodities.
Answer: B
Q2) Which of the following is NOT a characteristic of a typical positive economic model?
A) realistic assumptions
B) makes predictions that can be proven false
C) the assumption that people weigh the costs and benefits of their various alternatives
D) makes assumptions that ignore the complexity of behavior
Answer: A
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3
Chapter 2: Overview of the Labor Market
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Q1) Economic rent is
A) the value of a worker's labor services.
B) a worker's wage rate.
C) the income a worker receives from his or her labor.
D) the amount by which a worker's wage exceeds his or her reservation wage.
Answer: D
Q2) Given the data in Table 2.1,the labor force participation rate is
A) 54%.
B) 65%.
C) 70%.
D) 80%.
Answer: C
Q3) If a union negotiates an industry-wide agreement to set wages above the equilibrium level,
A) the industry's demand curve for labor will shift inward.
B) there will be a surplus of labor in the industry.
C) there will be a shortage of labor in the industry.
D) there will be neither a shortage nor a surplus of labor in the industry.
Answer: B
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Page 4
Chapter 3: The Demand for Labor
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Q1) If the firm operates in a competitive labor market,
A) it faces a positively sloped labor supply curve, and the marginal expense of labor is less than the market wage.
B) it faces a horizontal labor supply curve, and the marginal expense of labor equals the market wage.
C) it must compete against other employers by offering a generous compensation package.
D) it faces a vertical labor supply curve, and it competes against other employers by moving to the lowest attainable point on the labor supply curve.
Answer: B
Q2) If a firm hires another unit of labor,output goes up by 12 units.The wage rate for the unit of labor is $6.What is the firm's cost of producing another unit of output using labor?
A) $18
B) $9
C) $1.50
D) $0.50
Answer: D
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Chapter 4: Labor Demand Elasticities
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Q1) Moving from the upper to the lower portion of a straight labor demand curve,the elasticity
A) changes from elastic to inelastic.
B) changes from inelastic to elastic.
C) stays the same.
D) could change from inelastic to elastic, or from elastic to inelastic.
Q2) When the minimum wage increased 10 percent,the demand for skilled workers increased by 3 percent.What cross-wage elasticity would you calculate here? Explain.Is the cross-wage elasticity indicative of input categories that are gross substitutes or gross complements? Explain.
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.
Q4) The minimum wage is a relatively ineffective means by which to reduce poverty.Agree or disagree.Explain your reasoning.
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Chapter 5: Frictions in the Labor Market
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Q1) Discuss how the use of credentials in the hiring process can represent an efficient investment by the firm.
Q2) Members of certain groups have the right to sue employers if discriminated against.Other things the same,then according to the model of quasi-fixed costs,this right will tend to
A) increase the wage rate of the group.
B) reduce the employment of the group.
C) increase the turnover rate of the group.
D) reduce the unemployment rate of the group.
Q3) 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.
Q4) "An employer will not invest in general training for its employees." Agree or disagree with the statement and justify your response.
Q5) What is the overtime pay premium? Discuss its origin and who it covers.
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Chapter 6: Supply of Labor to the Economy: The Decision to Work
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Q1) If an individual's income effect is stronger than the individual's substitution effect,a wage increase will cause that individual to
A) increase hours worked, and this increase will be larger than if the same change in wealth were caused by a change in non-labor income.
B) decrease hours worked, but this decrease will be smaller than if the same change in wealth were caused by a change in non-labor income.
C) decrease hours worked, and this decrease will be larger than if the same change in wealth were caused by a change in non-labor income.
D) increase hours worked, but this increase will be smaller than if the same change in wealth were caused by a change in non-labor income.
Q2) If Gene receives a raise in his hourly wage and decides he would like to increase his hours of work,we know that
A) his income effect is greater than his substitution effect.
B) his substitution effect is greater than his income effect.
C) his income and substitution effects are equal.
D) his income and substitution effects reinforce each other.
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Page 8
Chapter 7: Labor Supply: Household Production, the Family,
and the Life Cycle
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Q1) Suppose that during an economic boom,workers get higher wages.They do not expect the boom to last,and expect wages to return to their usual level.As a result,during the boom (compared to usual times),
A) they are likely to want to work more hours.
B) they are likely to work less hours.
C) they are likely to work the same hours as usual.
D) the answer is uncertain: it depends on which is stronger, the income or substitution effect.
Q2) Suppose that a married woman decides to increase her hours worked outside of the home.What impact on her husband's labor supply is predicted by theory?
Q3) Which of the following events would encourage an older worker to retire at a later age (for example,at 64 instead of 62)?
A) a decrease in social security benefits paid to the worker
B) adjusting social security payments so that the implicit penalty for delaying retirement is increased
C) a shortening of the worker's life expectancy
D) an unexpected increase in the wage paid to the worker
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Page 9
Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) What is a compensating wage differential? What socially desirable ends does a compensating wage differential serve?
Q2) On a graph of wage rates versus risk of injury,indifference curves are convex because
A) risk of injury decreases workers' utility.
B) each additional dollar of pay increases utility more than the previous dollar.
C) utility is constant on indifference curves.
D) at low levels of risk, a worker is less willing to give up wages for increased safety.
Q3) Along an isoprofit curve,
A) the difference between total costs and total revenues is constant.
B) the firm's level of safety is constant.
C) the firm's level of wages is constant.
D) the firm's safety costs are constant.
Q4) What are the major insights of the hedonic model of compensating wage differentials?
Q5) The theory of compensating wage differentials rests on three assumptions.State and briefly explain each of the assumptions.
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Chapter 9: Investments in Human Capital: Education and Training
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Q1) Plot an age/earnings profile for a "typical" college graduate.How does human capital theory explain the shape of the age/earnings profile?
Q2) Suppose the wages of both high school and college graduates decrease by $2,000 per year.In response to the opportunity cost,the number of people attending college will consequently ________,while in response to the earnings differential between high school and college graduates,college enrollments will ________.
A) increase; decrease
B) increase; increase
C) increase; remain unchanged
D) decrease; remain unchanged
Q3) Workers with relatively high levels of natural ability are quite likely to attend college.This can cause ________ bias when estimating educational returns because
A) an upward; ability increases earnings
B) a downward; ability increases earnings
C) an upward; other benefits of college are ignored
D) a downward; other benefits of college are ignored
Q4) Age/earnings profiles "fan out" by education level.Agree or disagree? Explain your reasoning.
Page 11
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) 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.
Q2) The most important determinant of migration is
A) education.
B) race.
C) age.
D) experience.
Q3) Within each age group,people with ________ are most likely to migrate.
A) a large amount of education
B) a large amount of experience
C) young children
D) no current employment
Q4) How does illegal immigration to the United States occur? What are the dimensions of the illegal immigrant population in the United States?
Q5) 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) The best way to align the interest of corporate executives and company owners is probably to pay executives
A) based on annual profit.
B) a fixed salary.
C) based on the stock market value of the company.
D) based on sales of the firm.
Q2) Efficiency wages are
A) designed to increase profits through reduced turnover and increased morale.
B) thought to decrease unemployment.
C) not profit-maximizing for employers because they are paying more than the market wage.
D) the lowest wages at which a firm can hire workers.
Q3) Which of the following makes a promotion tournament (where the winner gets a large prize,such as a promotion)an effective method for motivating workers?
A) Contestants must cooperate with each other to make the firm productive.
B) The person who wins gets a prize equal to how much better they are than others.
C) It is uncertain as to who will win.
D) There are many persons competing for the prize.
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Chapter 12: Gender,Race,and Ethnicity in the Labor Market
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Q1) Racial occupational dissimilarities are ________ and have fallen ________ over time than gender-related occupational dissimilarities.
A) smaller; faster
B) smaller; slower
C) larger; faster
D) larger; slower
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 is 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 daycare and other amenities favored by women.
D) All of the above
Q3) What are the dimensions of gender discrimination in the labor market?
Q4) How much of the pay gap between full-time male and female workers does the empirical evidence suggest is explained by differences in observed characteristics related to productivity?
Q5) 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 are the two types of unions operating in the United States? What do unions do?
Q2) The efficient contract model implies that
A) the union and the employer are both better off than they would be in a monopoly union model.
B) the union maximizes a utility function, subject to the firm's labor demand function. C) the union negotiates only on wage levels, not on employment levels.
D) firms have more negotiating power than unions.
Q3) A union cares both about what its members are paid and the number of jobs held by its members.Suppose that the union sets a wage level that maximizes its utility level subject to the constraint that the resulting wage/employment combination must lie on the labor demand curve (call this the monopoly union outcome).Is the monopoly union outcome efficient? Why or why not? Illustrate your answer graphically.
Q4) What has happened to the percentage of union membership in the private sector since the 1970s? What are the demand-side factors that would account for the trend you identified? What are the supply-side factors accounting for the trend you identified?
Q5) What is interest arbitration?
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Chapter 14: Unemployment
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Q1) Does the unemployment insurance payroll tax encourage layoffs? Why or why not?
Q2) If the unemployment rate increases,
A) the employment rate must decrease.
B) the employment rate must increase.
C) the employment rate will generally decrease by the same amount.
D) the employment rate may either increase or decrease.
Q3) The largest source of unemployed workers is ________ and the second largest is
A) job losers; new entrants
B) job losers; reentrants
C) job leavers; new entrants
D) job leavers; reentrants
Q4) 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.
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Chapter 15: Inequality in Earnings
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Q1) The Gini coefficient in a society where all families have equal incomes would be
A) 0.
B) 0.5.
C) 1.0.
D) 2.0.
Q2) Which of the following could NOT increase the earnings gap between highly-educated and less-educated workers?
A) a faster increase in the demand for highly-educated workers than for less-educated workers
B) a faster increase in the supply of highly-educated workers than of less-educated workers
C) a decrease in the demand for less-educated workers
D) a decrease in the average strength of unions
Q3) If all incomes were to double (due to inflation,for example)then the coefficient of variation of income will
A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease.
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Page 17
Chapter 16: The Labor-Market Effects of International Trade and
Production Sharing
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Q1) What is the Trade Adjustment Assistance program?
Q2) The wages of workers displaced by international trade will fall less when
A) the substitution effect is larger.
B) the scale effect is larger.
C) workers are close substitutes with foreign workers.
D) unemployment benefits are made less generous.
Q3) A nation is more productive when
A) more jobs are needed to produce any given level of output.
B) workers stay in their current job.
C) it takes fewer jobs and resources to produce a given amount of goods.
D) consumers cannot change which goods they buy when this results in the loss of some jobs.
Q4) What is production sharing?
Q5) Studies have shown that government retraining programs
A) usually cost more than the benefit they create or, at best, have benefits modestly above costs.
B) have been cost effective methods of retraining workers.
C) are cost effective methods of retraining younger workers, but not workers over age 45.
D) work best when training workers in firm-specific skills .
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