Labor Economics
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Course Introduction
Labor Economics explores the functioning and dynamics of labor markets, examining how labor is supplied and demanded, how wages are determined, and the role of institutions in shaping employment outcomes. The course covers key topics such as labor force participation, human capital investment, wage differentials, unemployment, and the effects of government policies like minimum wage laws and labor regulations. Through a combination of theoretical frameworks and empirical analysis, students will gain an in-depth understanding of the factors influencing employment and compensation, as well as contemporary issues such as income inequality, labor market discrimination, and the impact of globalization and technological change on the workforce.
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) A regression shows how the ________ is affected by the ________.
A) dependent variable; independent variable
B) independent variable; cross-section
C) independent variable; dependent variable
D) independent variable; error term
Answer: A
Q2) A government contractor hires a worker to help build a road for an annual wage of $50,000.The worker's annual output is worth $60,000.If the worker did not have this job,the worker would have produced $40,000 a year in an alternative job and would have been paid $30,000 a year.The real cost of using this worker to build the road is
A) $30,000.
B) $40,000.
C) $50,000.
D) $60,000.
Answer: B
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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) 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) Diminishing marginal returns occur because
A) hiring more employees means that each has less capital with which to work.
B) it is more difficult to manage a firm as the size of the workforce and capital stock both grow.
C) the best employees will always be hired first.
D) hiring more employees means that they will subdivide tasks and therefore become more efficient.
Answer: A
Q2) If the firm hires to a point where the marginal expense of labor is greater than the marginal revenue product of labor,then
A) profits could be increased by increasing employment.
B) profits could be increased by reducing employment.
C) profits are maximized.
D) total cost must be greater than total revenue.
Answer: B
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Chapter 4: Labor Demand Elasticities
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Q1) Cross wage elasticities of demand are
A) always positive in magnitude.
B) always negative in magnitude.
C) either positive or negative in magnitude.
D) positive for gross complements, negative for gross substitutes.
Q2) Own-wage elasticity of labor demand tends to A) increase with skill level.
B) decrease with skill level.
C) be unrelated to skill level.
D) remain unchanged with skill level.
Q3) 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.
Q4) 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) Is an employer's unemployment insurance payroll-tax liability a quasi-fixed cost of employment? Why or why not?
Q2) A quasi-fixed cost of labor is a cost that A) is expected to change over time. B) is proportional to the number of hours worked. C) is proportional to the number of workers hired. D) is proportional to the amount of capital used.
Q3) A firm is currently employing 10 workers.To hire an 11th worker,it must raise its weekly pay by $5 and pay the 11th worker $100.What is the marginal expense of the hiring the 11th worker?
A) $100
B) $150
C) $105
D) $5
Q4) The use of an internal labor market implies that
A) workers in lower-level jobs will become less motivated and less dependable. B) workers at the firm have no firm-specific training. C) most upper-level jobs will be filled by promoting current workers.
D) the firm relies exclusively on credentials.
Q5) What is the overtime pay premium? Discuss its origin and who it covers.
Page 7
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Chapter 6: Supply of Labor to the Economy: The Decision to Work
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Q1) A wage increase creates a substitution effect which leads the worker to desire ________ leisure,and an income effect which leads the worker to desire ________ leisure.
A) more; less
B) less; more
C) less; less
D) more; more
Q2) 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
Q3) Jack currently works 38 hours per week at a wage rate of $15 per hour.His marginal rate of substitution is $20 per hour.Is Jack's utility maximized? If yes,explain why.If no,explain why not and discuss what Jack should do in order to further increase utility.
Q4) Other things equal,the less convex is an individual's indifference curve,the greater will be the substitution effect of a wage change.Explain why.
Page 8
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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) Empirically,the "added-worker" effect is ________ in magnitude than the "discouraged-worker" effect.
A) larger
B) roughly equal
C) smaller
D) roughly double
Q3) In a life-cycle model,expected wage changes cause ________,while unexpected wage changes cause ________.
A) income and substitution effects; income and substitution effects
B) only substitution effects; income and substitution effects
C) income and substitution effects; only substitution effects
D) only substitution effects; only substitution effects
Page 9
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) With the assumptions made in our model,OSHA standards that decrease risk levels in the workplace should establish the allowable risk levels
A) to ensure the highest degree of health and safety protection for all workers.
B) so that they will not result in higher costs/lower profits for employers.
C) by focusing on jobs currently paying the largest compensating wage differentials.
D) by weighing the costs of safety programs against the value workers or other beneficiaries attached to the benefits of reduced risk.
Q2) What are the major insights of the hedonic model of compensating wage differentials?
Q3) Assume that all workers prefer to work 40 hours a week at a given wage.If real estate jobs asks workers to rotate between working 20 hours a week and 60 hours a week,which of these workers is likely to work for the lowest relative average hourly pay in real estate?
A) workers with large income effects
B) workers with small income effects
C) workers with large substitution effects
D) workers with small substitution effects
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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) Age/earnings profiles "fan out" by education level.Agree or disagree? Explain your reasoning.
Q3) The wages paid by two careers,X and Y,have the same present value.Which of the following increase the likelihood that career X will pay more in wages over time (summed over the lifetime without discounting)?
A) Career X has an earlier retirement age.
B) Career X pays a much steadier wage.
C) Career X has fewer hours of work per year.
D) Career X pays the majority of its wages at a later age.
Q4) Age/earnings profiles for full-time,year-round female workers are flatter than age/earnings profiles for full-time,year-round male workers with comparable education.How does human capital theory account for this phenomenon?
Page 11
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) 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
Q2) When compared to the earnings of political migrants,the earnings of economic migrants
A) start out lower, and increase more slowly.
B) start out lower, but increase more quickly.
C) start out higher, but increase more slowly.
D) start out higher, and increase more quickly.
Q3) 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.
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) Which of the following is NOT an example of an efficiency wage?
A) A firm paying a higher wage has less turnover costs.
B) A firm paying a higher wage has less supervision costs.
C) A firm paying a higher wage employs more educated workers.
D) A firm paying a higher wage gets more effort from its workers.
Q2) Free rider problems tend to be largest when
A) workers are paid by a piece-rate system.
B) workers are paid by group incentives.
C) workers are paid on commission.
D) firms are very small.
Q3) How does the payment of an efficiency wage affect worker productivity?
Q4) Underpayment followed by overpayment is most likely to
A) decrease work incentives due to low wages in the first period.
B) require greater supervision.
C) attract present-oriented workers.
D) increase productivity of workers seeking to qualify for later overpayment.
Q5) How does a firm that employs an underpayment-now,over-payment later compensation scheme sequence the pay of its workers? Illustrate your explanation with the appropriate graph.
Q6) Discuss the concept of an implicit contract in the context of employment. Page 13
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Chapter 12: Gender,Race,and Ethnicity in the Labor Market
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Q1) In the model where employers discriminate against females,those employers that devalue the productivity of the females more than other employers will
A) pay a lower wage to females.
B) still hire females even when they earn the same wage as males.
C) earn a lower profit.
D) do all of the above.
Q2) What is the dual labor market explanation of discrimination?
Q3) What is affirmative action?
Q4) Suppose that females and males are equally productive and that some employers discriminate against females.If some employers begin discriminating against males,which of these CANNOT happen (assuming that nothing else changes)?
A) The relative wages of women will rise.
B) The relative wages of women will fall.
C) The relative wages of women will stay the same.
D) The relative wages of women will rise above that of men.
Q5) 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?
Q6) What are the dimensions of gender discrimination in the labor market?
Page 15
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Chapter 13: Unions and the Labor Market
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Q1) Unionization rates in the United States are highest
A) among white workers.
B) among young workers.
C) in the government sector.
D) in the manufacturing sector.
Q2) Which of the following best describes the economic nature of a union?
A) a monopoly
B) a monopsonist
C) a producer of public goods
D) an agency assuring workers get a wage reflecting their supply price of labor.
Q3) Union membership in the United States is currently ________ other industrialized countries.
A) lower than in
B) higher than in
C) similar to that in
D) around the median of
Q4) What are the two types of unions operating in the United States? What do unions do?
Q5) What is a right-to-work law?
Q6) Do unions increase worker productivity?
Page 16
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Chapter 14: Unemployment
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Q1) 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.
Q2) 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.
Q3) Most workers who are laid off
A) do not return to work with the same employer.
B) return to work with the same employer.
C) stay unemployed for a relatively short duration (one month or less).
D) drop out of the labor force.
Q4) How does demand-deficient unemployment arise? Use a demand/supply diagram to illustrate your answer.
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Chapter 15: Inequality in Earnings
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Q1) In a competitive industry,output is produced with skilled and unskilled labor.Factor-biased technical change that increases the productivity of skilled labor,will,at a given ratio of skilled to unskilled labor,shift any given isoproduct curve ________ the origin and ________ the absolute slope of the isoproduct curve (when the number of skilled workers is measured along the horizontal axis).Pick the best pair of answers.
A) towards; increase B) towards; decrease C) away from; increase D) away from; decrease
Q2) The Gini coefficient is 0.20.What is the area under the Lorenz curve?
A) 0.10
B) 0.20
C) 0.30
D) 0.40
Q3) 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.
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Chapter 16: The Labor-Market Effects of International Trade and
Production Sharing
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Q1) Meta-analysis of Active Labor Market Policies found that the most effective method of helping displaced workers was
A) reducing unemployment benefits when displaced workers do not put sufficient effort into searching for a new job.
B) retraining programs to help workers to find new jobs.
C) laws that make it more costly for employers to fire workers.
D) employment subsidies to employers (and not to displaced workers) to hire displaced workers.
Q2) Nation X can produce with one unit of resource either 8 units of food or 4 units of cloth.Nation Y can produce with one unit of resource either 3 units of food or 2 units of cloth.If Nation X and Y freely trade goods,and if these are the only two goods they consume,Nation X will likely consume ________ food and will consume ________ cloth.
A) more; less
B) more; more
C) less; less
D) less; more
Q3) What is the substitution effect on American labor when lower wage labor becomes available in the rest of the world?
Page 19
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