Second Exam: Economics 463, Labor Economics Spring 2006 in R. Butler’s section
YOUR NAME:______
Section I (30 points) Questions 1-10 (3 points each)
Section II (30 points) Questions 11-12 (5 points each)
Questions 13-14 (10 points each)
Section III (40 points) Questions 15-16 (20 points each)
Section I. Define or explain the following terms (3 points each)
1. internal rate of return in comparing wage streams--
2. deadweight loss--
3. invisible hand theorem--
4. hedonic wage function--
5. efficiency units--
6. signal model of schooling--
7. selection bias--
8. superstar phenomenon--
9. positively skewed wage distribution--
10. rank order tournaments--
Section II. Miscellaneous.
True, False or Uncertain Questions (11&12)—you are graded for your explanation.
11. “Suppose that a firm is a perfectly discriminating monopsonist. The government imposes an effective minimum wage on this market. Then wages will rise, but employment may also rise depending on supply and demand conditions.” (assume that demand curves slope downward and supply curves slope upward)
12. "If workers underestimate the amount of job risk, government regulation that forces the level of risk to be revealed makes workers better off.”
13.An economy consists of two regions, the North and the South. The short-run elasticity of labordemand in each region is –0.5. The within-region labor supply is perfectly inelastic. The labormarket is initially in an economy-wide equilibrium, with 600,000 people employed in the North and400,000 in the South at the wage of $15 per hour. Suddenly, 20,000 people immigrate from abroadand initially settle in the South. They possess the same skills as the native residents and also supplytheir labor inelastically.
(a) What will be the effect of this immigration on wages in each of the regions in the short run
(before any migration between the North and the South occurs)?
(b) Suppose 1,000 native-born persons per year migrate from the South to the North in response toevery dollar differential in the hourly wage between the two regions. What will be the ratio of wagesin the two regions after the first year native labor responds to the entry of the immigrants?
(c) What will be the effect of this immigration on wages and employment in each of the regions inthe long run (after native workers respond by moving across regions to take advantage of whateverwage differentials may exist)? Assume labor demand does not change in either region.
14. What effect will each of the following proposed changes have on wage inequality?
(a) Indexing the minimum wage to inflation.
(b) Increasing the benefit level paid to welfare recipients.
(c) Increasing wage subsidies paid to firms that hire low-skill workers.
(d) An increase in border enforcement, reducing the number of illegal aliens entering the country.
15. To check for discrimination against females, we run the following regressions for those working full time:
WageM =M + M EducationM + M ProfessionalM for males, and
WageF =F + F EducationF + F ProfessionalF for females.
We measure discrimination as the unexplained percent difference in wages, due to differences in coefficients, using the Oaxaca wage decomposition for the wagedifference WageM-WageF, given the following sample means (and estimated regression parameters):
WageM = 600 M = 125
M = 25 EducationM = 15 (on average, males have 15 years of schooling)
M = 1000 ProfessionalM =.10 (10 percent of male workers are professionals)
WageF = 400 F = 115
F = 20 EducationF = 13
F = 500 ProfessionalF = .05
a) Using the Oaxaca decomposition (and explicitly showing the formulas you use, or else no credit), how much of the wage difference is discriminatory?we get:
b) Does this measure employer discrimination, fellow worker discrimination, or could it explain some of both (suppose the sample comes from a single, very large firm in answering this part of the question)? Why?
c) What are weaknesses of this empirical strategy?
16. The compensating wage problem in the market for risky jobs. SUPPLY: Assume that the compensating variation for risk (Z, just as in class) varies across workers following a uniform distribution:
G(ΔW) = ΔW/ where ΔW
giving the fraction of workers choosing risky jobs (N1) as a function of the compensating wage differential, ΔW. The compensating differential ΔW is larger than that required (namely z) to induce them to work.
DEMAND: To keep the analysis simple, we also assume that the Benefit from allowing risk (B) is also uniformly distributed so that
3) F(ΔW) = ΔW/α where ΔWα
is the number of firms for whom B is less than the compensating wage ΔW so that it is cheaper (in terms of lost output) to have a safe production environment than it is to pay the extra wages associated with risky work.
a) Show that supply curves slope upward and demand curves slope downward (where the relative employment of risky to safe workers (N1/N0) is a function of the wage differential, ΔW).
b) In a well labeled diagram, show the rents accruing to the workers in this equilibrium, and the rents accruing to the firms. (you don’t have to solve the integration, graphical presentation will be enough)
c) What happens to the relative number of risky workers and the compensating wage when risk aversion increases (i.e.,increases)? (be sure to show your analytical reasoning)
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