Labor Market Institutions
Practice Questions
Course Introduction
This course offers a comprehensive examination of the structures, rules, and organizations that shape labor markets across different countries and economies. It covers topics such as wage-setting mechanisms, employment protection legislation, trade unions, collective bargaining, minimum wage policies, and unemployment benefits. Through a blend of theoretical perspectives and empirical evidence, students will analyze how labor market institutions impact employment levels, wage inequality, economic growth, and social welfare. The course also explores the evolution of these institutions in response to globalization, technological change, and shifts in political and economic environments.
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) Omitted variable bias exists if the omitted variable is
A) unrelated to the dependent variable or the independent variable.
B) related to the dependent variable, but unrelated to the independent variable.
C) related to the independent variable, but unrelated to the dependent variable.
D) related to both the independent variable and the dependent variable.
Answer: D
Q2) 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
Q3) 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) The labor force is made up of
A) all members of society.
B) all members of society who are at least 16 years of age.
C) all members of society who are at least 16 years old and are either employed or unemployed.
D) employed workers, unemployed workers, and retired workers.
Answer: C
Q3) Given the data in Table 2.1, the unemployment rate is
A) 3.8%.
B) 5.0%.
C) 7.1%.
D) 7.8%.
Answer: C
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Page 4
Chapter 3: The Demand for Labor
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Sample Questions
Q1) 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
Q2) When the price of capital increases, a firm will
A) employ more labor because labor has become relatively cheaper.
B) employ less labor due to the increase in costs.
C) employ the same amount of labor.
D) employ more, less, or the same amount of labor.
Answer: D
Q3) If the hourly wage is $50 and the price of output is $25 then in the short run
A) the firm should add workers if they add 1/2 or more units to output.
B) the firm should add workers if they add 2 or more units to output.
C) the firm should hire two workers.
D) the firm should reduce employment until the wage falls to $25.
Answer: B
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Page 5
Chapter 4: Labor Demand Elasticities
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Q1) The introduction of new forms of capital generally
A) decreases the own-wage elasticity of labor demand.
B) increases the bargaining power of unions.
C) increases the own-wage elasticity of labor demand.
D) shifts the labor demand curve to the right.
Q2) If an increase in the minimum wage leads to higher aggregate earnings by the workers affected, then the own-wage elasticity of demand is
A) elastic.
B) inelastic.
C) of unit elasticity.
D) uncertain; more information is needed.
Q3) 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.
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Chapter 5: Frictions in the Labor Market
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Sample Questions
Q1) Policies which protect workers against "unjust dismissal" have been shown to cause
A) decreased employment levels and increased hour fluctuations.
B) increased employment levels and decreased hour fluctuations.
C) increased employment levels and increased hour fluctuations.
D) decreased employment levels and decreased hour fluctuations.
Q2) A mandated increase in overtime pay is likely to
A) raise the average costs of labor, even if all overtime hours were eliminated.
B) cause an increase in labor hours due to the scale effect.
C) cause employers to increase straight-time hourly wages to compensate (because of the "package" agreed upon).
D) cause an increase in labor hours due to the substitution effect.
Q3) A mandated increase in overtime pay is likely to
A) cause employers to reduce overtime hours and convert them into added employment.
B) directly reduce the quasi-fixed costs per worker.
C) lead to a reduction in employment if higher costs cause a large scale effect.
D) lead to a reduction in employment if those who work overtime and those who are unemployed are perfect substitutes.
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Chapter 6: Supply of Labor to the Economy: the Decision to Work
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Sample Questions
Q1) If a worker's desired hours of labor do not change after a decrease in his wage rate, then
A) his income effect dominates his substitution effect.
B) his substitution effect dominates his income effect.
C) his income and substitution effects are of equal magnitude.
D) his income and substitution effects are small in absolute value.
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) An increase in the marginal tax rate will cause
A) a pure income effect.
B) a pure substitution effect.
C) both an income and a substitution effect.
D) neither an income nor a substitution effect.
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Page 8
Chapter
the Life Cycle
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Sample Questions
Q1) The government raises taxes on wages by 20% and splits the money evenly across households as "free money" such that the average household gets back what it paid extra in taxes. In a household where the dollars collected by the 20% added tax initially equals the dollars received as free money, their work hours are likely to A) increase.
B) decrease.
C) increase if the income effect dominates the substation effect.
D) remain unchanged.
Q2) If Social Security payments were altered so that a fixed amount was unexpectedly subtracted from lifetime benefits at each retirement age, this would theoretically cause workers to
A) retire earlier.
B) retire later.
C) retire at the same time as before the decline in benefits. D) retire either earlier or later.
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Chapter 8: Compensating Wage Differentials and Labor Markets
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Sample Questions
Q1) 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.
Q2) When talking about compensating wage differentials, we relax our earlier assumption of
A) utility maximization by workers.
B) profit maximization by firms.
C) income maximization by workers.
D) identical non-pecuniary benefits.
Q3) Workers' indifference curves for wage rates versus benefits will be A) downward sloping.
B) upward sloping.
C) downward sloping and concave.
D) upward sloping and convex.
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Page 10
Chapter 9: Investments in Human Capital: Education and Training
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Q1) Before biases are considered, the monetary rate of return to investments in education is
A) lower than that of most other investments.
B) higher than that of most other investments.
C) about the same as that of most other investments.
D) higher for women, but lower for men.
Q2) The psychic costs of college are usually lowest for
A) students with relatively high ability.
B) students from poor backgrounds.
C) students with average or low ability.
D) students who are at the margin in terms of attending college or not.
Q3) If average lifetime earnings of both high school and college graduates double, then the number of people attending college will consequently A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease.
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Page 11
Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) The overall wage ratio of newly arrived male immigrants to native-born men fell substantially from 1960 to 1980. This is probably because
A) these immigrants miscalculated when deciding to come to the United States.
B) these immigrants face considerable discrimination in the American labor market.
C) the relative skill level of immigrants has declined.
D) these immigrants are gross substitutes for native-born workers.
Q2) The deportation of illegal aliens may create jobs on a one-to-one basis for native workers if
A) the minimum wage is above the equilibrium wage.
B) the minimum wage is below the equilibrium wage.
C) the labor supply curve is very steep.
D) the labor supply curve is very flat.
Q3) 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.
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Page 12
Chapter 11: Pay and Productivity: Wage Determination
Within the Firm
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Sample Questions
Q1) Most employment contracts are A) legally enforceable.
B) implicit.
C) formal. D) complete.
Q2) Workers who are paid on a piece-rate basis tend to A) work quickly.
B) have a high regard for quality.
C) require close supervision.
D) work well as members of a team.
Q3) Golf tournaments are promotion tournaments where the person coming in first gets substantially more than the person coming in second. Which of the following would likely decrease the difference in prize money going to the person coming in first (assuming the tournament sponsors want each player to give their best effort to playing good golf)?
A) Variation in playing conditions increase.
B) Players come to dislike the variation in pay more.
C) Players playing hard increases the money the tournament can make.
D) Golf rules are modified to allow players to hit each other with golf clubs.
Page 13
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Chapter 12: Gender, Race, and Ethnicity in the Labor Market
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Q1) Wage discrimination is
A) paying less productive workers lower wages.
B) paying one group more than another, while paying the same price for productive characteristics in both groups.
C) paying one group less than another, although they have the same productive characteristics.
D) paying part-time workers less per hour than full-time workers.
Q2) Employer discrimination implies that
A) some employers give up profits to avoid hiring one group.
B) if the group discriminated against is small, there will be a wage differential in the market.
C) there will be no market wage differential.
D) co-workers and customers prefer one group of workers over another.
Q3) Female earnings as a fraction of male earnings tend to ________ as age increases and tend to ________ as education increases.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
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Page 14
Chapter 13: Unions and the Labor Market
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Sample Questions
Q1) If both parties are risk neutral, then
A) there will be a larger number of possible voluntary agreements that the parties may reach.
B) the parties each prefer a certain outcome to an uncertain outcome, if the expected gains are equal.
C) the contract zone will reach its minimal size.
D) their utility functions will be concave.
Q2) Unions tend to
A) increase wages for white-collar and blue-collar members by roughly the same amount relative to non-union workers.
B) increase relative wages more for blue-collar workers.
C) increase relative wages more for white-collar workers.
D) encourage high levels of education and training for their members.
Q3) 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.
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Page 15
Chapter 14: Unemployment
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Sample Questions
Q1) A construction worker who is not working due to a snow storm would be counted as ________ unemployed.
A) frictionally
B) structurally
C) cyclically
D) seasonally
Q2) 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.
Q3) The stock of unemployed workers at any given time consists mostly of A) people who have short spells of unemployment.
B) people who have long spells of unemployment.
C) people who have been laid off from one employer and become employed by another.
D) people who have searched for jobs, but who have become discouraged.
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Page 16
Chapter 15: Inequality in Earnings
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Q1) Which of the following is not a major cause of the increase in the inequality since 1980?
A) increase returns to investments in higher education
B) increased earnings disparities within human-capital groups
C) the change in female relative to male earnings since 1980
D) increase in the price of high-tech goods
Q2) 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.
Q3) Which of these decades had the greatest increase in inequality?
A) The 80s
B) The 90s
C) 2000-2008
D) Inequality has had about the same increase in each decade.
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17
Chapter 16: The Labor Market Effects of International Trade and
Production Sharing
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Q1) Nation X produces and consumes only one good. This good is produced only with labor and all workers are exactly alike. One worker produces one unit of this good every day. One worker in Nation Y can produce two units of the goods a day (and this is the only good they consume). What will happen if there is open trade between the countries?
A) Nation X will import from Nation Y.
B) Nation X will outsource the production of the good to Nation Y.
C) Nation Y will import the good from Nation X.
D) No trade or outsourcing will take place.
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) Opening a nation to international trade will likely
A) decrease the elasticity of demand for labor.
B) cause the demand for labor in industries not facing international competition to shift leftward.
C) increase the elasticity of demand for labor.
D) cause the wages of all workers to fall.
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