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 how employment levels are set. The course analyzes the roles of workers, employers, and government, considering topics such as labor force participation, wage differentials, human capital investment, discrimination, unions, and unemployment. Students will gain insight into theoretical models and empirical evidence, applying microeconomic principles to real-world labor market issues and policies.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 12th Edition by Ronald G. Ehrenberg
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Chapter 1: Introduction
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Q1) Economic rationality
A) implies that people have an objective and pursue it in a consistent fashion.
B) implies that people's behavior does not adapt when incentives change.
C) implies that there is no such thing as a free lunch.
D) can be directly proven.
Answer: A
Q2) 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
Q3) In a world without scarcity,
A) there would be no costs.
B) there would be no benefits.
C) goods would have no value.
D) there would be no wants.
Answer: A
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3
Chapter 2: Overview of the Labor Market
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Q1) Given the data in Table 2.1,the labor force participation rate is
A) 54%.
B) 65%.
C) 70%.
D) 80%.
Answer: C
Q2) Which of the following events could explain why wages and employment could fall in a competitive labor market?
A) The demand curve shifts right and up.
B) The demand curve shifts left and down.
C) The supply curve shifts left and up.
D) The supply curve shifts right and down.
Answer: B
Q3) If the salaries of accountants increase and other conditions remain the same,then
A) a firm will move to the left along its labor demand curve for accountants.
B) a firm will move to the right along its labor demand curve for accountants.
C) the labor demand curve for accountants will shift to the left.
D) the labor demand curve for accountants will shift to the right.
Answer: A
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Page 4
Chapter 3: The Demand for Labor
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Q1) If employers are paid a subsidy of $0.75 per hour for hiring teenaged workers,then
A) the teenagers' wage rate will usually increase by less than $0.75 per hour.
B) the teenagers' wage rate will usually increase by more than $0.75 per hour.
C) the teenagers' wage rate will usually increase by exactly $0.75 per hour.
D) the teenagers' wage rate will usually decrease.
Answer: A
Q2) 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
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5
Chapter 4: Labor Demand Elasticities
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Q1) If the quantity of steel workers demanded falls from 30,000 to 20,000 when the equilibrium wage increases from $9.00 per hour to $11.00 per hour,then the own-wage elasticity of demand for these workers is
A) -2.0.
B) -0.5.
C) -0.4.
D) -0.2.
Q2) 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.
Q3) What does the own-wage elasticity of labor demand measure? What do empirical estimates suggest the elasticity of labor demand is in the short run? In the long run? Explain what accounts for the difference.
Q4) The minimum wage is a relatively ineffective means by which to reduce poverty.Agree or disagree.Explain your reasoning.
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Page 6
Chapter 5: Frictions in the Labor Market
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Q1) A reserve clause binds a professional athlete to a sports franchise even if the player does not have a contract with the team that retains the rights to the player.In other words,the player can only play for a single team and other teams may not bid for the player's services even in the absence of a contract.Major League Baseball was forced to outlaw reserve clauses in 1975.As a result of the ban,we would expect that
A) major league teams would have less incentive to train minor league players. B) minor league players would be paid more.
C) players in the major leagues would be paid less than their marginal product.
D) players in the major leagues would be paid more than their marginal product.
Q2) Suppose that mobility costs incurred by workers are low.In this circumstance,the best way to provide incentives for on-the-job training is for
A) employees to bear all of the costs of the investment.
B) employers and employees to share the costs of the investment.
C) employers to force workers to accept a below market wage during the training period.
D) employers to bear all of the costs of the investment.
Q3) Under what conditions would an employer invest in training its employees? Explain.
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Page 7
Chapter 6: Supply of Labor to the Economy: The Decision to Work
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Q1) A worker is indifferent between job one lasting 4 hours a day,job two lasting 8 hours a day,and job three lasting 12 hours a day.Job two pays $10 an hour and tangency between the indifference curve and the budget constraint occurs at 8 hours.One can conclude that
A) job one pays less per day but more per hour.
B) job three pays more per day and more per hour.
C) both A and B are true.
D) neither A nor B is true.
Q2) Fixed costs of working will cause ________ the number of people choosing to work zero hours.
A) an increase in
B) a decrease in
C) no change in
D) an ambiguous change in
Q3) 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.
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Chapter 7: Labor Supply: Household Production, the Family, and
the Life Cycle
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Q1) 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.
Q2) If someone enjoys household production (such as raising children)this A) would be shown by a shift in his budget constraint.
B) will make his household production isoquant curves flatter than otherwise.
C) is the same as being more productive in household production.
D) will make his household production isoquant curves steeper than otherwise.
Q3) John,a bachelor,after reading a book on homemaking,suddenly becomes twice as productive in doing household chores.This will likely make his indifference curves (between income on the vertical axis and household time on the horizontal axis)become
A) flatter.
B) steeper.
C) more bowed in.
D) less bowed in.
Q4) What is the distinction between the added worker effect and the discouraged worker effect? Which effect tends to dominate quantitatively?
Page 9
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) A risk-averse worker gains ________ utility from a job with possible layoffs than from one with no layoffs when the two jobs have the same number of expected hours of work and wage rate.
A) more
B) less
C) at least as much
D) the same amount of
Q2) 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.
Q3) What are the major insights of the hedonic model of compensating wage differentials?
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Chapter 9: Investments in Human Capital: Education and Training
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Q1) Age/earnings profiles "fan out" by education level.Agree or disagree? Explain your reasoning.
Q2) Which of the following is NOT an expense of acquiring human capital?
A) purchase of textbooks
B) anxiety caused by final exams
C) any wages foregone to attend school
D) cost of food and housing while attending school
Q3) 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.
Q4) Human capital is
A) any machinery owned by individuals.
B) any investment in a worker's skills.
C) capital used for training workers.
D) a small portion of all capital in existence.
Q5) Plot an age/earnings profile for a "typical" college graduate.How does human capital theory explain the shape of the age/earnings profile?
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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) The most important determinant of migration is
A) education.
B) race.
C) age.
D) experience.
Q3) An increase in his or her expected career length will make a worker
A) more likely to change jobs.
B) less likely to change jobs.
C) exactly as likely to change jobs.
D) either more or less likely to change jobs.
Q4) How does the quit rate behave over the business cycle?
Q5) How does illegal immigration to the United States occur? What are the dimensions of the illegal immigrant population in the United States?
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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 $175,000.
D) If they break up, the employer makes $25,000 and the worker $125,000.
Q2) Joe is paid a wage of $12 per hour.What are the advantages and disadvantages to the employer of paying Joe on the basis of time worked?
Q3) In a promotion tournament model,the salary of the winner will be higher when
A) the cost of the extra effort of the losers is lower.
B) there are many qualified participants.
C) it is easy for participants to sabotage the efforts of others.
D) participants are more diverse in their ability and effort levels.
Q4) What is the firm-size effect? What accounts for the firm-size effect?
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) What is the dual labor market explanation of discrimination?
Q2) 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.
Q3) Comparable worth
A) sets salaries in the most efficient manner possible.
B) implies that all professions are underpaid.
C) ignores market conditions.
D) depends on supply and demand factors.
Q4) How does racial discrimination in the workplace lower wages among disfavored groups?
Q5) Women over the age of 24 who worked full-time earned an average of 62 percent of what males earned in 2011.What factors account for this stunning difference in rate of pay of the two groups?
Q6) What are the dimensions of gender discrimination in the labor market?
Q7) What is affirmative action?
Page 14
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Chapter 13: Unions and the Labor Market
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Q1) 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.
Q2) If one sector of the economy becomes unionized and there is a spillover effect then
A) wages will increase in both sectors.
B) wages will increase in the unionized sector, but may either increase or decrease in the non-union sector.
C) wages will stay unchanged in both sectors.
D) wages will increase in the unionized sector, but decrease in the non-unionized sector.
Q3) What is a right-to-work law?
Q4) Do unions increase worker productivity?
Q5) Strikes are more likely and of longer duration in periods of relative prosperity.Use the Hicks Bargaining Model to account for this empirical observation.
Q6) What is interest arbitration?
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Page 15
Chapter 14: Unemployment
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Q1) 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.
Q2) 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
Q3) A worker who has quit one job to have time to search for a similar position is counted as what type of unemployment?
A) frictional
B) occupational
C) regional
D) cyclical
Q4) What is structural unemployment? How does structural unemployment arise on a geographic basis?
Q5) Does the unemployment insurance payroll tax encourage layoffs? Why or why not?
Page 16
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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) In an economy,employers cover the cost of health insurance by the difference between what the worker produces and what the worker gets in wages.If the cost of health insurance goes up by $5000 for all workers,what will happen to earnings inequality (as measured by the 80:20 ratio)?
A) Earnings inequality will go up.
B) Earnings inequality will go down.
C) Earnings inequality will remain unchanged.
D) Uncertain: it depends upon who gets sick more.
Q3) How can skill-biased technological change account for increased earnings inequality?
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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) When Canada and the United States moved to reduce tariffs,which of the following occurred?
A) Canada's overall employment rate fell.
B) Canadian workers displaced by U.S. trade found it difficult finding new jobs.
C) Employment fell in the Canadian industries most directly competing with imports from the United States.
D) All of the above
Q3) Training subsidies may not represent a wise use of societal resources for many workers displaced by international trade.Why not?
Q4) What is production sharing?
Page 18
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