Labor Economics
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Course Introduction
Labor Economics explores the functioning and dynamics of labor markets, examining how workers, employers, and government policies influence employment, wages, and working conditions. The course covers key topics such as labor supply and demand, wage determination, human capital investment, discrimination, unions, and unemployment. Students will analyze both theoretical foundations and empirical evidence to understand real-world labor market issues, including migration, labor market regulations, and the impact of globalization and technology on work.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 11th Edition by Ronald G. Ehrenberg
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Chapter 1: Introduction
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Sample Questions
Q1) Which of the following best illustrates an externality?
A) A worker agrees to work in a dangerous job because it is the best job the worker can get .
B) A job is so dangerous that the employer cannot attract workers, resulting in a good not being produced despite the fact that it is valued by consumers.
C) Parents, weighing the costs and benefits to their child of going to school versus working, choose to make the child work in a local factory.
D) An employer and worker agree to produce a good with a production method that emits pollutions on the nearby community
Answer: D
Q2) Multiple regression analysis uses
A) several dependent variables.
B) several independent variables.
C) data from several time periods.
D) several error terms.
Answer: B
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3
Chapter 2: Overview of the Labor Market
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Q1) When wages increase, the substitution effect implies that employment will ________ and the scale effect implies that employment will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: D
Q2) 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
Q3) If every worker wants ten dollars more per hour to work, then wages will
A) go up by $10.
B) go up by more than $10.
C) go up by less than $10.
D) go down as employment falls.
Answer: C
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Page 4
Chapter 3: The Demand for Labor
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Q1) When a competitive firm hired nine workers, its profits were $100. When it hired 10 workers, its output was went from 9 to 11 units. Each unit of output sold for $10 while the wage of each worker was $12. What is the firm's new profit level?
A) $20
B) $8
C) $108
D) $12
Answer: C
Q2) Referring to Table 3.1, which is of the following answers is INCORRECT? If pots sell for $20 each then
A) the marginal revenue product of labor of the second worker is $260.
B) the marginal product of the third worker is five pots.
C) the marginal revenue from selling the eighteenth pot is $20.
D) the marginal revenue product of labor equals the marginal product of labor multiplied by the additional revenue that is received per unit of output.
Answer: A
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5
Chapter 4: Labor Demand Elasticities
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Sample Questions
Q1) If the labor market is competitive and coverage is complete, then legislation to enact a minimum wage above the equilibrium wage level would
A) increase both wages and employment.
B) decrease both wages and employment.
C) decrease wages and increase employment.
D) increase wages and decrease employment.
Q2) If two inputs are gross complements, the cross-wage elasticity of demand for the two inputs will be
A) zero.
B) one.
C) positive.
D) negative.
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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Page 6
Chapter 5: Frictions in the Labor Market
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Q1) When a firm hires a fourth worker, its wage rate goes from $80 a worker to $90. The marginal revenue product of the fourth worker is $100. If the firm hires the fourth worker, its profits
A) will increase by $10.
B) will increase by $20.
C) will decrease by $10.
D) will decrease by $20.
Q2) General training is usually paid for by
A) the employer.
B) the employee.
C) both the employer and the employee.
D) neither the employer nor the employee.
Q3) Use of temporary-help agencies
A) increases employees' costs associated with searching for and applying for available temporary openings.
B) increases the quasi-fixed costs of hiring temporary workers.
C) is more common when firms can build up inventories.
D) requires employers to pay more per hour than if they hired the worker directly.
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Chapter 6: Supply of Labor to the Economy: the Decision to Work
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Q1) 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
Q2) Studies of the hours of work of older men have found that the substitution effect dominates the income effect. This suggests that, other things the same,
A) that an increase in non-work expenses will cause older men to work shorter hours.
B) that an increase in the tax rate on income will cause older men to work longer hours.
C) show that tax changes have no effect on their labor supply.
D) that older men will retire earlier in those careers where wages fall more as they get older.
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8
Chapter 7: Labor Supply: Household Production, the Family,
and the Life Cycle
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Q1) Most people travel more and enjoy more leisure when they are elderly than when they are middle-aged. This can be explained by
A) income effects due to decreasing wages.
B) substitution effects due to increasing wages.
C) life-cycle considerations.
D) the fact that their time is relatively expensive.
Q2) If a family's budget constraint shifts because of an increase in non-labor income, then a member of the family who works outside of the home will
A) choose to decrease his or her hours of work.
B) choose to increase his or her hours of work.
C) not change his or her hours of work.
D) either increase or decrease his or her hours of work, depending on the size of the substitution effect.
Q3) Household production consists of
A) any commodities which are produced at home and then sold.
B) any commodities which are produced at home and yield utility to the family.
C) any time spent at home by any family member.
D) any commodities purchased for use in the home.
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) Firm A's isoprofit curves are flatter than those of firm B. Therefore,
A) firm A will be willing to pay a larger compensating differential than firm B.
B) firm B will be willing to pay a larger compensating differential than firm A.
C) both firms will pay the same compensating differential, but firm B will have higher profits than firm A.
D) risk is more costly to reduce in firm A than in firm B.
Q2) If comparable workers are paid an extra $1.00 per hour to work outdoors, then
A) the value of indoor work is at least $1.00 per hour to all workers.
B) the value of indoor work is more than $1.00 per hour to all workers.
C) the value of indoor work is worth at least $1.00 per hour to some workers.
D) the value of indoor work is $1.00 per hour to all workers.
Q3) If a worker does not have good information and thinks that risks are lower than they actually are, then OSHA regulations which increase safety standards in the workplace
A) decrease utility for the worker.
B) increase utility for the worker.
C) could increase or decrease utility for the worker.
D) move the worker to his highest possible utility level.
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Page 10
Chapter 9: Investments in Human Capital: Education and Training
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Q1) Since 1980, the college enrollment rate of both male and female recent high school graduates has ________, while the ratio of earnings of college to high-school graduates has ________.
A) increased; increased
B) increased; decreased
C) decreased; decreased
D) decreased; increased
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
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) In an industry, a unit of output can be produced by 3 unskilled workers or by 1 skilled worker. From this information, skilled and unskilled workers are
A) gross complements.
B) substitutes-in-production.
C) complements-in-production.
D) gross substitutes.
Q2) Suppose that by moving, one could increase one's income by 20%. Which of these events will reduce the likelihood a person will move
A) wages in the person's profession, nationwide, fall dramatically.
B) the person becomes better educated.
C) markets for the person's skill become less localized.
D) the person has no children, making a good fit less important.
Q3) In the past, China limited the movement of workers from rural to urban areas. When it got rid of these limits, one would expect
A) urban wages to rise in order to attract rural workers.
B) rural wages to fall as workers leaving depress the rural area.
C) national output to rise as workers are better matched with employers.
D) national output to fall due to higher total mobility costs.
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Chapter 11: Pay and Productivity: Wage Determination
Within the Firm
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Q1) An employer and a worker, if both are honest and work hard, together produce $200,000 a year, of which the employer gets $50,000 and the worker $150,000. If either one is dishonest and lazy, they break up, the employer employs someone else and the worker gets another employer. The following shows what they might earn if they broke up. In which case is it likely that both the employer and the worker will be honest and hard working?
A) if they break up, the employer makes $60,000 and the worker $80,000
B) if they break up, the employer makes $20,000 and the worker $175,000
C) if they break up, the employer makes $75,000 and the worker $175,00
D) if they break up, the employer makes $25,000 and the worker $125,000
Q2) In a competitive labor market, Firm X pays a higher wage than other firms. The only reason it pays a higher wage is to attract a larger labor pool and get the better workers. Which of the following would we expect to observe about Firm X (as compared to the other firms in the industry)?
A) Firm X makes about the same rate of profit (as other firms).
B) Firm X will have a higher quit rate.
C) Firm X will set up its retirement package so workers retire early.
D) Firm X's wage will continually rise with seniority.
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Chapter 12: Gender, Race, and Ethnicity in the Labor Market
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Q1) Empirical studies of wage differentials between young black males and young white males estimate that
A) almost all of the wage differential is due to discrimination.
B) about half of the wage differential is due to discrimination.
C) differences in cognitive abilities explain most of the wage gap.
D) occupational discrimination explains most of the wage gap.
Q2) In general, women in low-paying jobs tend to earn ________ of male earnings (for those males in low-paying jobs) than women in high-paying jobs.
A) a higher percentage
B) a lower percentage
C) about the same
D) about the same, but subject to many major exceptions
Q3) Employee-based discrimination along racial lines implies all of the following EXCEPT
A) workers will be paid more when working in racially integrated work places.
B) some work place segregation will occur.
C) workers wish to maximize utility rather than wages.
D) profit-maximizing employers will seek to hire employees with a preference for 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) Large union wage increases in declining sectors can be explained by A) industries' inability to substitute capital for labor while product demand is falling.
B) unions' decision to make wage gains more important than employment guarantees.
C) industries' unwillingness to negotiate with unions.
D) industries' ability to sell used capital if necessary.
Q3) If attitudes change and unions are perceived as dangerous to American companies' ability to compete in the world market, then
A) the demand curve for union services will shift to the left.
B) the demand curve for union services will shift to the right.
C) we will move to the left along the demand curve for union services.
D) we will move to the right along the demand curve for union services.
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Chapter 14: Unemployment
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Q1) The wage curve
A) shows that with higher regional rates of unemployment, wages for otherwise comparable workers are higher.
B) is evidence that most national economies have regionally integrated labor markets.
C) may exist because efficiency-wage premiums can be smaller in areas of high unemployment.
D) is evidence that wages are always at equilibrium.
Q2) 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.
Q3) Advance notice of lay-offs should help to reduce
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment and frictional unemployment.
D) frictional unemployment and structural unemployment.
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Page 16
Chapter 15: Inequality in Earnings
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Q1) If the fraction of the people in the middle of the income distribution decreases by 20 percent with half of these moving to the lower end and the other half to the upper end, then income inequality will A) increase.
B) decrease.
C) be unaffected.
D) uncertain.
Q2) The increase in wage inequality has been more rapid in the United States than in other industrialized countries for all the following reasons EXCEPT
A) the supply of skilled workers has grown less quickly in the United States.
B) wage determination is more decentralized in the United States.
C) unskilled workers are retrained more quickly in the United States.
D) unemployment rates among unskilled workers have risen more rapidly in other countries.
Q3) According to Table 14.1, in which period is the Gini coefficient lowest?
A) 1
B) 2
C) 3
D) 4
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Page 17
Chapter 16: The Labor Market Effects of International Trade and
Production Sharing
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Q1) Which of the following is NOT part of the Trade Adjustment Assistance program?
A) To get aid, it must be shown that the job loss occurred because of increased imports or offshoring.
B) Eligible employers of the displaced workers get up to half of the worker's first year salary paid for by the government.
C) Eligible workers can get up to 104 weeks of training or remedial education.
D) Eligible workers can get up to a certain amount of dollars to reimburse then for job search costs.
Q2) Wage convergence is an example of
A) the law of one price.
B) the compression of wage rates across skill levels within a firm.
C) the propensity of wages to converge to marginal productivities.
D) all of the above
Q3) Which of the following has NOT usually been found to occur when international trade increases?
A) wages of low skilled workers are dramatically reduced.
B) relative wages of high skilled workers are significantly increased.
C) total employment increases or, at a minimum, does not fall.
D) poorer nations become even more poor.
Page 18
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