Labor Economics
Study Guide Questions
Course Introduction
Labor Economics explores the functioning and dynamics of labor markets, focusing on the behavior of employers and employees, wage determination, employment, and the impact of government policies. The course examines labor supply and demand, human capital investment, discrimination, income inequality, and unions, integrating theoretical models with empirical evidence to analyze real-world labor market issues. Students will gain insights into the factors that influence job choice, wage structures, and the role of institutions in shaping labor market outcomes.
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) 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) 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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3
Chapter 2: Overview of the Labor Market
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Q1) Suppose that there are 254 million people in the population aged 16 and over.Further suppose that 150 million people have jobs and that 10 million people are unemployed.What is the unemployment rate? How many people are not in the labor force?
Answer: The unemployment rate is \(\frac { U } { E + U }\) × 100 = 6.25%.The labor force consists of the employed plus the unemployed,totaling 160 million people.The number of people not in the labor force therefore is 254 - 160 = 94 million people.
Q2) It has been said that teaching assistants to professors are underpaid.Which of the following would be evidence (if true)that they are underpaid?
A) There is a surplus of teaching assistants.
B) Teaching assistants are paid far less than professors, even though they are doing similar work.
C) Teaching assistants are made to work more than other workers in their job.
D) Professors have a hard time finding qualified teaching assistants.
Answer: D
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4
Chapter 3: The Demand for Labor
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Q1) Declining marginal product of labor
A) is needed if competitive firms are to stop hiring workers at some point.
B) allows firms to make the most profit.
C) mainly exists because workers get tired after many hours of work.
D) implies workers get more productive as more of them are hired.
Answer: A
Q2) Suppose that the marginal revenue product function for the firm is MRPL = 40.75L.Assume that the firm hires labor in a competitive labor market at a wage of W = $10 per hour.Explain why employment of L = 20 is not profit maximizing (show exactly how profit could be increased).What is the profit maximizing level of employment for this firm?
Answer: L = 20 is not profit maximizing because MRP > W at this employment level.Given L = 20,MRP = $25 while W = $10.Hence the marginal worker contributes considerably more to revenue than to cost at L = 20.The firm should expand employment as long as MRP > W = $10,as employment of all such workers is profit increasing.The profit maximizing level of employment occurs where MRP = W,which is at L = 40 in this problem.
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Chapter 4: Labor Demand Elasticities
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Q1) Empirical estimates of cross-wage elasticities show that A) well-educated labor is more likely to be complementary with capital than is unskilled labor.
B) the extent of substitution in production between immigrant and native workers is very high.
C) labor and energy are complements in production.
D) labor and raw materials are complements in production.
Q2) Other things equal,the own-wage elasticity of demand for a category of labor is higher when
A) the price elasticity of demand for the product being produced is low.
B) other factors of production can be easily substituted for the category of labor.
C) the supply of other factors of production is highly inelastic.
D) the cost of employing the category of labor is a small share of the total costs of production.
Q3) How is the own-wage elasticity of labor demand for unskilled workers affected by the elasticity of supply of other factors of production (such as skilled labor and capital equipment)? Explain.
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Chapter 5: Frictions in the Labor Market
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Q1) If a firm offers specific training to its workers,when the training is over,
A) workers will most likely be paid a wage that is equal to their marginal product.
B) workers will most likely be paid a wage that is greater than their marginal product, to compensate for the training.
C) workers will most likely be paid a wage that is less than their marginal product.
D) workers will most likely be paid a wage that is less than their wage before training.
Q2) A firm could profitably pay for a worker's general training if
A) the worker could change jobs easily.
B) the worker was nearing retirement.
C) the training program would also serve as a screening device.
D) the training increased the quasi-fixed costs of hiring the worker.
Q3) Specific training is paid for by
A) the employer.
B) the employee.
C) both the employer and the employee.
D) neither the employer nor the employee.
Q4) 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) The average workweek in U.S.manufacturing plants
A) has dropped steadily since 1960 from about 60 hours per week to 35 hours per week currently.
B) has increased from about 35 hours per week in 1970 to about 45 hours per week by 2010.
C) fluctuates significantly over the business cycle, averaging about 50 hours per week at business cycle peaks and 32 hours per week at business cycle troughs.
D) dropped from about 55 hours per week in the early part of the 20th century to approximately 40 hours per week by 1950 and since 1950, aside from small variation over the business cycle, has remained at about 40 hours per week with no trend in either direction.
Q2) 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.
Q3) "When a worker's wage rate changes,there are two opposing effects-an income effect and a substitution effect." Explain the meaning of the quote.
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Page 8
Chapter 7: Labor Supply: Household Production, the Family,
and the Life Cycle
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Q1) How does a life cycle model of labor supply account for the high labor force participation rate of males 25 to 50 years old?
Q2) 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.
Q3) Suppose the XYZ Company wants to incentivize older workers to retire in their early 60s.How could the XYZ Company accomplish this objective using its defined benefit pension plan? Illustrate your discussion graphically.
Q4) Suppose that Sally has 112 hours of time per week to allocate between market work and household time,earns a wage of $12 per hour if she works,and receives $30 per week in non-labor income.Graph Sally's budget constraint.If Sally's market wage were $15 per hour,how would that affect Sally's budget constraint? Show graphically.
Q5) 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?
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) High-paying jobs are also associated with generous benefits because
A) benefits which cost $100 generally increase utility by more than $100 in cash.
B) high-paid workers can benefit from the tax advantages given to benefits.
C) employers know how to spend money better than their employees.
D) high-paid workers are risk neutral.
Q2) 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.
Q3) 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) Nina (age 19)would be more likely to obtain a college education if
A) her discount rate were lower.
B) the supply of others with a college education were greater.
C) she expected to retire at a younger age.
D) she were older.
Q2) Employees tend to obtain on-the-job training
A) at an increasing rate during their careers.
B) all at once, early in their careers.
C) only at the end of their careers.
D) over a number of years, at a declining rate over their careers.
Q3) Which of the following is NOT an investment in human capital?
A) buying stock in a company that publishes textbooks
B) attending college
C) learning how to operate new computer software
D) moving to another state in search of better job opportunities
Q4) In the labor market,signals are
A) any personal characteristic viewed as an indicator of productivity.
B) any acquired characteristic viewed as an indicator of productivity.
C) any personal characteristic which is proven to increase productivity.
D) any acquired characteristic which is proven to increase productivity.
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) An increase in the number of immigrants causes
A) the labor demand curve to shift to the left.
B) the labor supply curve to shift to the left.
C) the labor supply curve to shift to the right.
D) the labor demand curve to become flatter.
Q2) Young workers are more likely to quit their jobs than older workers for all of the following reasons EXCEPT
A) younger workers have a longer period over which to collect the benefits of a job change.
B) younger workers have lower psychic costs from mobility.
C) younger workers have better job matches.
D) younger workers have less firm-specific training.
Q3) Which of the following does NOT explain why people are less likely to move long distances than short distances?
A) information costs
B) psychic costs
C) monetary costs
D) differences in available salaries
Q4) How does the quit rate behave over the business cycle?
Page 12
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Chapter 11: Pay and Productivity: Wage Determination
within the Firm
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Q1) Students in a 100 person class agree beforehand to answer all 20 multiple choice questions with B.Under which of these grading methods is this likely to prove an effective agreement that does not produce cheating on the agreement (for example,by a few students answering the questions correctly)?
A) The professor gives the top five papers a 100, the next five best an 80, and the rest a 50.
B) The professor gives the highest score a grade of 100 and starts reducing scores by 5 points for every one wrong.
C) The professor subtracts 5 points from 100 for every question wrong.
D) The best paper gets an A, the rest an F.
Q2) Which of the following assumptions are we making for the first time in this Chapter ?
A) Workers maximize utility.
B) Employers maximize profits.
C) The marginal product of labor of two workers may be different.
D) The productivity of two workers may differ in ways that are hard to measure.
Q3) What is the firm-size effect? What accounts for the firm-size effect?
Q4) How does the payment of an efficiency wage affect worker productivity?
Q5) Discuss the concept of an implicit contract in the context of employment.
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Chapter 12: Gender,Race,and Ethnicity in the Labor Market
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Q1) In the personal prejudice model of employer-based discrimination,show and explain how an increase in the supply of the discriminated against group affects the relative wage of the group.Show and explain how the relative wage of the discriminated against group is affected by an increase in the number of non-discriminating employers.
Q2) Federal antidiscrimination programs appear to A) have made no difference in raising relative earnings of black workers. B) have made little difference raising relative earnings of black workers, probably because individual programs have had only small effects. C) have helped to raise relative earnings of black workers. D) have hurt the relative earnings of black workers.
Q3) Between 1990 and 2010,which group did NOT experience growth in their share of the civilian labor force?
A) women
B) whites
C) Hispanics
D) Asians
Q4) What is affirmative action?
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) The potential gains to a union in terms of wages and employment will be greatest if the firm's demand for labor is
A) elastic.
B) inelastic.
C) of unit elasticity.
D) horizontal.
Q2) The ________ Act established the National Labor Relations Board and required employers to bargain with unions representing the majority of their employees.
A) Norris-LaGuardia
B) National Labor Relations
C) Taft-Hartley
D) Landrum-Griffin
Q3) Threat effects are
A) increases in union wages from threats to strike.
B) increases in non-union wages from threats to unionize.
C) decreases in union wages from management threats to use replacement workers during a strike.
D) decreases in non-union wages from the threat of replacement by unemployed union members.
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Page 15
Chapter 14: Unemployment
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Q1) Paying efficiency wages to reduce turnover may be profit-maximizing for companies,but it also contributes to ________ unemployment.
A) frictional
B) regional
C) cyclical
D) structural
Q2) Does the unemployment insurance payroll tax encourage layoffs? Why or why not?
Q3) What is the wage curve? What is the efficiency wage explanation of the wage curve?
Q4) What is the replacement rate of unemployment insurance in the United States? Does an increase in the replacement rate of unemployment insurance increase the duration of spells of unemployment? Using search theory,what would the rationale be for increasing the replacement rate or,for that matter,for even having unemployment insurance in the first place?
Q5) If all employers pay an efficiency wage,then
A) more employees would shirk.
B) unemployment would be higher.
C) firms would be better able to monitor their employees productivity.
D) all of the above
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Chapter 15: Inequality in Earnings
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Q1) 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.
Q2) Changes in labor demand can result from changes in either product demand or the capital-labor mix.During the 1980s, A) changes in product demand were more influential due to changes in import-export ratios.
B) changes in product demand were more influential due to changes in income levels. C) changes in capital-labor mixes were more important.
D) changes in both areas were of roughly equal importance.
Q3) What are the dimensions along which changes in the earnings distribution have occurred since 1980?
Q4) Identify the major changes in earnings inequality in the U.S.since 1980.
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Page 17
Chapter 16: The Labor-Market Effects of International Trade and
Production Sharing
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Q1) Training subsidies may not represent a wise use of societal resources for many workers displaced by international trade.Why not?
Q2) When companies outsource jobs to foreign countries,the price of the outsourced inputs is effectively reduced.The cross-wage effect on the demand for other workers will be positive
A) if the substitution effect dominates the scale effect.
B) only if the substitution effect is positive.
C) if the scale effect dominates the substitution effect.
D) only if the reduction in prices increases the real wage of all workers.
Q3) 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.
Q4) Which of the following is NOT a common effect of more trade in the United States?
A) The relative wages of skilled workers are increased a significant amount.
B) The wages of low-skilled workers are decreased by a significant amount.
C) Overall employment remains unchanged or increases.
D) Recessions are common after an increase in trade.
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