Questions and Answers of Contemporary Labor Economics

What is the added worker effect? What is the discouraged worker effect?
The table below reports the unemployment rate, labor force participation rate, and (working-age) population for the United States in January 2008, 2011, and 2016. Using the data, answer the following
Charlie and Larry both face the same budget line for consumption and leisure. At every possible consumption-leisure bundle on the budget line, Charlie always requires marginally more leisure than
Cindy gains utility from consumption C and leisure L. The most leisure she can consume in any given week is 110 hours. Her utility function is U(C, L) = C × L. This functional form implies that
Currently a firm pays 10% of each employee’s salary into a retirement account, regardless of whether the employee also contributes to the account. The firm is considering changing this system to a
Why does a profit-maximizing firm hire workers up to the point where the wage equals the value of marginal product? Show that this condition is identical to the one that requires a profit-maximizing
What mix of inputs should be used to produce a given level of output?
Suppose the firm is hiring labor and capital and that the ratio of marginal products of the two inputs equals the ratio of input prices. Does this imply that the firm is maximizing profits? Why or
Suppose the wage increases. Show that in the long run, the firm will hire fewer workers. Decompose the employment change into substitution and scale effects.
What is the capital-skill complementarity hypothesis?
Explain how and why the method of instrumental variables allows us to estimate the labor demand elasticity.
Show how the minimum wage creates unemployment in a competitive market.
Discuss the impact of the minimum wage when there are two sectors in the economy:the covered sector (which is subject to the minimum wage) and the uncovered sector(which is not).
Summarize the evidence regarding the impact of the minimum wage on employment.
Consider each of the following and explain why it is or is not a valid instrument for estimating the labor supply elasticity and/or labor demand elasticity in the United States. (1) Variation in
Several states set their minimum hourly wage above the federal minimum wage. To offset higher minimum wages, many of these states offer firms tax incentives that lower the cost of borrowing and/or
Many large cities have recently enacted living wage ordinances that require paying a minimum wage that is higher than the state or federal minimum wage. Moreover, sometimes living wage ordinances
What is the producer surplus? What is the worker surplus? Show that a competitive market equilibrium maximizes the gains from trade.
Discuss the implications of equilibrium for a competitive economy containing many regional markets when labor and firms are free to enter and exit the various markets.Why is the resulting allocation
Show what happens to producer surplus, worker surplus, and the gains from trade as workers migrate from a low-wage to a high-wage region.
Describe the impact of a payroll tax on wages and employment in a competitive industry.Why is part of the tax shifted to workers? What is the deadweight loss of the payroll tax?
Why does the payroll tax have the same impact on wages and employment regardless of whether it is imposed on workers or on firms?
How do mandated benefits affect labor market outcomes? Why do these outcomes differ from those resulting from a payroll tax? What is the deadweight loss arising from mandated benefits?
What is the short-run impact of immigration on the wage of native workers? What is the long-run impact?
What is the immigration surplus and how is it affected by human capital externalities?
Describe the trends in wages and employment implied by the cobweb model for the engineering market. What would happen to the cobwebs if a consulting firm sold information on the history of wages and
Describe the hiring decision of a perfectly discriminating monopsonist and of a nondiscriminating monopsonist. In what sense do monopsonists “exploit” workers?
Show how the imposition of a minimum wage on a monopsony can increase both wages and employment.
. Let total market demand for labor be represented by ED = 1,000 − 50w where ED is total employment and w is the hourly wage.(a) What is the market clearing wage when total labor supply is
Let total market demand for labor be represented by ED = 1,200 − 30w where ED is total employment and w is the hourly wage. Suppose 750 workers supply their labor to the market perfectly
Figure 4-6 shows that a payroll tax will be completely shifted to workers when the labor supply curve is perfectly inelastic. In this case, for example, a new $$2$ payroll tax will lower the wage
. A monopsonist’s demand for labor can be written as VMPE = 40 − 0.005ED. Labor is supplied to the firm according to w = 5 + 0.01ES. Thus, the firm’s marginal cost of hiring workers when it
Suppose the economy’s labor market is competitive and that labor demand can be written as w = 50 − 0.3E while labor supply can be written as w = 8 + 0.2E where E is the total amount of employment
Suppose there are two types of jobs in the labor market: “safe” jobs and “risky” jobs. Describe how the worker decides whether to accept a safe job (where she cannot be injured) or a risky
Describe how the firm decides whether to offer a safe working environment or a risky environment.
How is the market-compensating wage differential between safe jobs and risky jobs determined? Which type of job will offer a higher wage?
Describe how workers and firms “marry” each other in the labor market when there are many types of jobs offering various levels of risk to their workers.
What is the hedonic wage function? What does the slope of the hedonic wage function measure?
What is the impact of health and safety regulations on the utility of workers and on the profits of firms?
Show that the competitive labor market compensates workers for the probability that they will be laid off.
Explain how the method of instrumental variables can be used to estimate the compensating differential associated with employer-provided health benefits.
In 2019, 163.5 million workers were in the U.S. labor force, of which 6.0 million were unemployed. In view of these facts, how can economists say that labor is a scarce resource?
Indicate whether each of the following statements pertains to microeconomics or macroeconomics:a. The unemployment rate in the United States was 3.7 percent in 2019.b. Workers at the Sleepy Eye grain
The tax cuts of the Trump administration presumed that income tax cuts would stimulate incentives to work and thereby increase economic growth. Demonstrate this outcome with a work–leisure diagram.
Steve Slacker is age 25, has an MBA degree, but is not working. Instead he is living at a major ski area, using the $$3$,000 per week he gets from his wealthy family. The family, however, seeing
In 2018 the United States had a population of 327 million, of which 68 million were either under 16 years of age or institutionalized. Approximately 162 million people were either employed or
Floyd is now working in a job that pays $$28$,000 per year. He is contemplating a one-year automobile mechanics course that costs $$1$,000 for books and tuition. Floyd estimates that the course
The U.S. Office of Management and Budget has estimated that the tax-exempt status of fringe benefits such as pensions and group insurance reduced tax revenue to the Treasury by about $460 billion in
List and discuss factors that help explain why public sector employment rose faster than private sector employment between 1950 and 2018. At what levels of government has public sector employment
Examine critically this statement: “Unemployment in the United States can be resolved quickly and efficiently. The government should simply provide jobs for everyone who wants to work who cannot
Do you expect the natural rate of unemployment to(a) Increase,(b) Decrease,(c) Remain at the present level over the next decade? Explain your reasoning.
Why are nominal wages inflexible downward? What is the implication of this characteristic for the ability of involuntary demand-deficient unemployment to persist for a considerable length of time?
Suppose you are an economic adviser to the president, who has asked you to design a program to reduce the amount of unemployment associated with displaced workers. What major elements would your plan
Define the term structural unemployment and distinguish it from frictional and demand-deficient unemployment. Why might structural unemployment fall when demand-deficient unemployment declines?
Use the basic model shown in Figure 18.5 to illustrate graphically each of the following:(a) Demand-deficient unemployment(b) Temporary increases in output and employment beyond their natural, or
What factors tend to understate the extent to which the official unemployment rate accurately measures the degree of economic hardship in the nation? What factors lead some observers to conclude that
U.S. productivity growth accelerated in the second half of the 1990s. How do you account for this speedup? Why is it still impossible to know if this speedup is the start of a long-term trend or
Comment on each of the following statements:a. “Although most highly productive companies are profitable, not all profitable companies are highly productive.”b. “Increased public demand for
Describe and explain the cyclic changes that occur in labor productivity. Of what significance are these changes?
Briefly comment in quantitative terms on the long-term trend of labor productivity in the United States; cite the three primary factors that contributed to that growth, and indicate the relative
Discuss the relationship between aggregate productivity growth and price inflation.Draw a diagram (similar to Figure 17.8), putting average annual productivity growth on the horizontal axis and
Explain this statement: “High wage rates are both an effect and a cause of high labor productivity.”
How do you account for the close correlation between changes in the rate of productivity growth and changes in real wage rates for the economy as a whole?Does this relationship also hold true on an
How is labor productivity defined? Comment on the shortcomings and advantages of the Bureau of Labor Statistics index of labor productivity.
In light of the information presented in this chapter, answer Question 11 at the end of Chapter 4. Question 11 Chapter 4 As the following diagram indicates, the distribution of ?ability? (here
Which two of the text’s possible explanations for increasing wage and salary inequality seem least consistent with the following fact? The distribution of earnings has become more unequal within
What has happened to the location of the Lorenz curve of annual earnings over the past 35 years? Make a case that the Lorenz curve will shift leftward over the next 35 years. Make a case that it will
Explain how both ability and family background can directly influence earnings, independently of education and training. How do ability and family background indirectly determine earnings through the
Critically evaluate this statement: “Lifetime earnings are less equally distributed than annual earnings.”
Why do people who have more formal education than others also in general tend to receive more on-the-job training during their careers? What is the implication of this fact for the distribution of
Speculate about why a given Gini coefficient is compatible with more than one particular Lorenz curve. Illustrate graphically.
Do you think internal labor markets enhance or detract from efficiency? How might one argue that the realization of dynamic efficiency is more important than achieving static efficiency? Do you agree?
Explain the following statement: “Unions are both a consequence and a cause of internal labor markets.” Why might the presence of internal labor markets in a firm encourage unionization?
How does a worker search for a better job in an internal labor market? What is the employer’s search process within internal labor markets?
How do you explain the existence of internal labor markets? What are their advantages to employers? To workers?
What is meant by the term acceptance wage? How does a job seeker determine his or her acceptance wage? Why might the acceptance wage for one new college graduate differ from that of another new
What are the benefits and costs of job search? Why don’t job seekers endlessly search for a higher wage offer?
Although the labor market opportunities for women have improved greatly over the past 30 years, poverty has become increasingly concentrated among women. How can you reconcile these two developments?
Critically evaluate each of the following statements:a. “Affirmative action plans have not worked; there is no evidence that they have increased African-American or female employment and
Some economists have argued that the unemployment effects associated with the minimum wage have been greater for African-Americans than for whites. Explain why this might be the case.
“Wage differences between men and women reflect not discrimination but rather differences in job continuity and rational decisions with respect to education and on-the-job training.” Explain why
It has been argued that to correct the inequalities of past discrimination, African-Americans and females should be given preference in employment and promotion. Do you agree? In the famous Bakke
There has been considerable controversy over the fact that certain pension plans into which males and females make equal contributions pay smaller monthly benefits to women than to men on the grounds
Table 14.2 reveals significant earnings differences by gender and race at each level of education. What nondiscriminatory factors might explain part of the earnings differences between females and
Is the following statement true or false? If it’s false, explain why. “The unemployment rates for white females and African American men are considerably higher than the rate for white men.”
Explain the following statement: “In the taste for discrimination model, discrimination is practiced even though it is costly to do so. But in the statistical discrimination model, it is clear that
What is statistical discrimination and why does it occur? The theory of statistical discrimination implies that discrimination can persist indefinitely, whereas the taste for discrimination model
Women have increased the amount of education they have achieved relative to men, and average years of schooling completed are now approximately the same for males and females. Human capital theory
How might each of the following be interpreted as an example of rent provision by government?a. State laws require that out-of-state big-game hunters be accompanied by one of a limited number of
Evaluate this statement: “Profit-maximizing firms lack an incentive to provide job safety, and consequently, the federal government must intervene legislatively to protect workers against the
Show graphically how an increase in the minimum wage might affect employment in(a) A competitive labor market(b) A labor market characterized by monopsony.
Explain each of the following statements:a. “The Wagner Act of 1935 reduced the costs of providing union services and thereby increased the number of union members.”b. “The Wagner Act of 1935
Explain why a draft system might cause the U.S. military to overemploy labor and underemploy capital (from society’s perspective). Speculate about why the army increasingly contracts out
Speculate about the reason(s) for each of the following facts about public sector pay:a. The pay premium received by federal employees declined in the middle and late 1980s.b. Local governments tend
Comment on this statement: “In general, federal government employees are underpaid compared to similar private sector workers. This is due to the monopsony power of government.”
List and discuss factors that help explain why public sector employment rose faster than private sector employment between 1950 and 2014. At what levels of government has public sector employment
What has been the impact of deregulation on the relative wages and employment of unionized workers in the airline and trucking industries? What factors help explain the difference in outcomes between
Would our economy function better if it were union-free? Explain your answer. Provide a counterargument to your position.
Describe the various avenues through which unions might alter the distribution of earnings. On balance, do unions enhance or mitigate wage dispersion?
In what specific ways might the presence of a union raise productivity within a firm? Use the exit mechanism and voice mechanism concepts in your response.

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