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contemporary labor economics
Questions and Answers of
Contemporary Labor Economics
AB Consulting and DF Partners are two identical consulting firms in all aspects except that AB Consulting fires all new hires who don’t bring in at least \($5\) million in revenue during their
Suppose everyone is highly productive, college educated, hard-working, etc. People still differ in their preferences for jobs—while some would prefer to be doctors than lawyers, others prefer to be
When trying to quantify the compensating differential associated with a desirable fringe benefit such as health insurance, it is important to try to collect data on an equally productive set of
Discuss how the wage–schooling locus is determined in the labor market, and why it is upward sloping and concave.
Derive the stopping rule for investments in education.
Why does the percentage gain in earnings observed when a worker gets one more year of schooling measure the marginal rate of return to education?
Discuss how differences in discount rates or in ability across workers lead to differences in earnings and schooling. Under what conditions can the rate of return to school be estimated?
Discuss the relationship between ability bias in the estimation of the rate of return to school and selection bias in tests of the hypothesis that workers choose the level of schooling that maximizes
Discuss how empirical studies estimate the rate of return to school and the methods used to avoid the problem of ability bias.
Show how education can signal the worker’s innate ability in the labor market. What is a pooled equilibrium? What is a perfectly separating equilibrium?
How can we differentiate between the hypothesis that education increases productivity and the hypothesis that education is a signal for the worker’s innate ability?
Consider a model with two periods—the first time period is the four years after high school and the second time period is the next 40 years. A person without a college education receives
One policy objective of the federal government is to provide greater access to college education for those who are less able to afford it. Recently many state governments have passed budgets that
The textbook discusses in Section 6–5 some strategies for correcting for ability bias when trying to estimate the rate of return to education.(a) What is the main argument for why using data on
Peter lives for three periods. He is currently considering three alternative education-work options. He can start working immediately, earning \($100,000\) in period 1, \($110,000\) in period 2 (as
Discuss the difference between general training and specific training. Who pays for and collects the returns from each type of training?
Discuss the implications of general and specific training for the worker’s age–earnings profile.
Why are experimental methods now commonly used to evaluate the impact of training programs? Discuss how and under what conditions we can use the results of an experiment to estimate the rate of
Why is the wage distribution positively skewed?
Describe how to calculate a Gini coefficient.
Describe how the relative number of skilled workers and the increase in the relative demand for skilled workers helps determine the shape of the wage distribution.
Describe the key changes that occurred in the U.S. wage distribution during the 1980s and 1990s.
Why did the U.S. wage distribution change so much after 1980?
What factors determine how much parents invest in their children’s human capital?
Discuss why there is regression toward the mean in the correlation between the earnings of parents and children.
Discuss the implications of regression toward the mean for the changing shape of the wage distribution across generations.
(a) What is the difference between income inequality and wealth inequality?(b) Most policies that target inequality either target it at the low end of the income distribution by trying to increase
Before 1990, the 80–50 and the 50–20 log wage gap was higher for women than for men (see Figure 7-7). What are some possible reasons for this? Gini Coefficient 0.5 0.48- 0.46- 0.44- All Workers
Consider an economy with 10,000 individuals. Of them, 5,000 each earn \($25,000;\) 3,000 each earn \($40,000;\) and 2,000 each earn \($100,000\).(a) What is the Gini coefficient for this economy?(b)
Show how workers who wish to maximize the present value of lifetime earnings calculate the net gains to migration. And discuss how the net gain depends on incomes in the states of origin and
Show how one can use the human capital framework to obtain an estimate of migration costs for the marginal person.
Why is there a difference between the private gains to migration and the family’s gains to migration? Discuss how this difference generates tied stayers and tied movers. Can both the husband and
Describe how the immigrant flow is chosen from the population of the country of origin. Why are some immigrant flows positively selected and other flows negatively selected?
Show how cohort effects in the immigrant population affect the interpretation of the cross-sectional age–earnings profiles of immigrants.
How do quits and layoffs help improve labor market efficiency?
How should one interpret the fact that—all other things equal—workers with a lot of seniority earn more than newly hired workers?
Consider a household consisting of four college friends. The friends have committed to live together for the next five years. Presently they live in Milwaukee where Abby will earn \($200,000,\)
One trend in the U.S. labor market in the 2100s is telecommuting or working at home. More and more firms allow working from home, and many firms even allow employees to live and work in one city for
In addition to it being illegal to enter the U.S. without a visa or to over-stay one’s visa, it is also illegal for U.S. employers to hire undocumented or “illegal” immigrants. Meanwhile,
Under 2001 tax legislation enacted in the United States, all income tax filers became eligible to deduct from their total income half of their expenses incurred when moving more than 50 miles to
(a) According to standard migration theory, how will skill selection (positive versus negative) change on average as the distance between the source country and the destination country increases?(b)
Discuss the implications of employer discrimination for the hiring decisions of the firm, for the profitability of the firm, and for the black–white wage ratio in the labor market.
Can the wage of blacks exceed that of whites if most firms in the labor market discriminate against blacks?
Derive the implications of employee discrimination for the employment decisions of firms and for the black–white wage differential.
Discuss the implications of customer discrimination for the employment decisions of firms and for the black–white wage differential.
What is statistical discrimination? Why do employers use group membership as an indicator of a worker’s productivity? What is the impact of statistical discrimination on the wage of the affected
Derive the Oaxaca measure of discrimination. Does this statistic truly measure the impact of discrimination on the relative wage of the affected groups?
Discuss the factors that might explain why the black–white wage ratio rose significantly in the past few decades.
Discuss why part of the female–male wage differential might be attributable to “supply-side” factors, such as a woman’s decision to work and acquire human capital.
Cindy, a tenured, full professor of French literature at a large university, is paid \($60,000.\) The university reports median salaries by gender and rank as a new initiative on faculty
What factors account for the decline in private-sector unionism in the United States since the mid-1960s? What factors account for the rapid increase in public-sector unionism during the same period?
What does it mean to say that a union has a utility function? How exactly is this utility function derived from the preferences of the workers?
Describe the wage–employment outcome in a model of monopoly unions. Explain why (and in what sense) this wage–employment outcome is inefficient.
Describe how we calculate the percentage decline in national income resulting from the misallocation of labor in a model of monopoly unions. What is the dollar value of this allocative inefficiency
Discuss how both unions and firms can be better off if they move off the demand curve. Derive the contract curve.
What is the Hicks paradox?
Describe how employers “choose” the optimal length of a strike in a model where there is asymmetric information.
Define the union wage gain and the union wage gap. Why should we care about the magnitude of the union wage gain? Why should we care about the magnitude of the union wage gap? Under what conditions
Consider a two-sector economy with homogeneous labor and jobs in both sectors. Two million workers supply their labor perfectly inelastically. Labor demand in both sectors can be written as:E1 =
Several states recently passed laws restricting bargaining rights for public employees. Most notably the changes tended to restrict the union’s right to negotiate over fringe benefits such as
Consider the following data on union versus nonunion wage and fringe benefit compensation.Calculate the union effect for hourly wages, hourly fringe benefits, and total hourly compensation. What
Discuss how workers who differ in their innate abilities sort themselves across piecerate and time-rate jobs. Also describe how the two compensation systems elicit different levels of effort from the
If piece rates elicit more effort from workers, why do firms not use this method of compensation more often?
Show how a large prize spread in a tournament elicits a higher level of work effort from the participants.
Why is the principal–agent problem relevant to understanding how CEOs should be compensated?
Discuss how upward-sloping age–earnings profiles can elicit more effort from workers.
Why is there mandatory retirement in many countries?
Describe how the firm sets an efficiency wage above the competitive level. Why are there no market forces forcing the profit-maximizing firm to reduce the wage to the competitive level?
What factors create the link between wages and productivity that is at the heart of efficiency wage models?
What is the bonding critique of efficiency wage models?
Suppose a firm’s technology requires it to hire 100 workers regardless of the wage level or market demand conditions. The firm, however, has found that workerproductivity is greatly affected by its
A firm can hire as much labor as it wants at \($5\) per hour. In return, each worker produces 10 units of output per hour. The firm can sell up to 2,500 units of output each day at \($2\) per unit,
Consider the following four tasks (all of which require significant time and/or effort): (1) trekking through a forest carrying a trowel and 40 saplings, and every quarter of a mile kneeling to the
What are the differences between frictional and structural unemployment? Should we be equally concerned with all types of unemployment? Would the same policies help alleviate both frictional and
Derive the steady-state rate of unemployment. Show how it depends on the transition probabilities between employment and unemployment.
Discuss how it is simultaneously possible for “most” unemployment to be due to short spells and for “most” unemployment to be accounted for by a few persons in very long spells.
Should a job seeker pursue a nonsequential or a sequential search strategy? Derive a job seeker’s asking wage. Discuss why the asking wage makes a worker indifferent between searching and not
Discuss the impact of the UI system on a job seeker’s search behavior. Discuss the impact of the UI system on the firm’s layoff behavior.
What is the intertemporal substitution hypothesis? Does this argument provide a convincing account of the cyclical trend in the unemployment rate?
What is the sectoral shifts hypothesis?
Why do efficiency wages generate involuntary unemployment? What factors prevent the market from clearing in efficiency wage models?
Why is the Phillips curve vertical in the long run?
The previous question concerned the unemployment rate and the distribution of weeks of unemployment immediately prior to the Great Recession. Looking at the Great Recession, the data show roughly
A labor market has 50,000 people in the labor force. Each month, a fraction p of employed workers become unemployed (0 < p < 1) and a fraction q of unemployed workers become employed (0 < q < 1).(a)
During the Great Recession, many news stories focused on a rising number of discouraged workers. The implication of many of these stories is that the unemployment situation was worse than indicated
Reread “Theory At Work: Cash Bonuses and Unmployment” from the text and answer the following questions.(a) What is the general research question? What is the difference between the control group
There are two reasons why the immigration surplus exists when immigration is accompanied by human capital externalities. Both reasons are evident in Figure 4-16. The first is represented by triangle
In the Cobweb model of labor market equilibrium (Figure 4-19 ), the adjustments in employment can be small with adjustment being fast, or the adjustments in employment can be large with adjustment
What is labor economics? Which types of questions do labor economists analyze?
Who are the key actors in the labor market? What motives do economists typically assign to workers and firms?
Why do we need a theory to understand real-world labor market problems?
How does a typical worker decide how many hours to allocate to the labor market?
What happens to hours of work when nonlabor income decreases?
What happens to hours of work when the wage rate falls? Decompose the change in hours of work into income and substitution effects.
What happens to the probability that a particular person works when the wage rises?Does such a wage increase generate an income effect?
Does a correlation between hours of work and nonlabor income measure the income effect?
Why do welfare programs create work disincentives?
Why does the earned income tax credit increase the labor force participation rate of targeted groups?
Why did the labor force participation rate of women increase so much in the past century?
Why does a worker allocate his or her time over the life cycle so as to work more hours in those periods when the wage is highest? Why does the worker not experience an income effect during those
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