ECO361: LABOR ECONOMICS

FINAL EXAMINATION

December 8, 2014

Prof. Bill Even

DIRECTIONS.

The exam contains a mix of short answer and essay questions. Your answers to
the 18 short answer portion of the exam (3 points each) should be listed on the
first page of your bluebook. Your answers to the essay questions (61 points total)
should be placed, in order, in the remainder of the bluebook.

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1. Which of the following would increase the after-tax internal rate of return on a college
degree?
a. an increase in the expected age of retirement.
b. a decrease in the wages received by a high school graduate.
c. a switch from a progressive tax system to a flat tax.
d. all of the above
e. only b and c.

2. Which of the following is TRUE?

a. using twins to estimate the returns to education instead of a random sample of
people increases the estimated return.
b. evidence suggests that the earnings of high school graduates in a city rises as
average education in the city rises.
c. evidence suggests that the earnings of workers with below average levels of
education in a firm falls as average education in the firm rises.
d. all of the above.

3. It is well established that the return to a college education rose since the 1980s. Based
on empirical evidence discussed in class, which of the following has contributed to this?
a. a decrease in the supply of college graduates relative to high school graduates
b. a decline in private sector unionism
c. increased restrictions on trade with other countries
d. all of the above
e. only b and c

4. Based upon the economic model of migration, we would predict that interstate migration
would be greater
a. when interest rates are higher
b. for younger workers
c. for single workers
d. all of the above
e. only b and c

5. Suppose that the U.S. increases the number of immigration visas for foreign born medical
doctors. This should cause the employment of native medical doctors to fall more if the
demand for doctors is more (elastic, inelastic) or if the supply of doctors is more (elastic,
inelastic).
a. elastic; elastic
b. elastic; inelastic
c. inelastic; inelastic
d. inelastic; elastic

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6. Suppose that the U.S. increases the number of immigration visas for foreign born medical
doctors. This should lead to a
a. a scale effect that increases the demand for nurses, and a substitution effect that
decreases the demand for nurses.
b. a scale effect that increases the demand for nurses, and no substitution effect.
c. no scale effect, but a substitution effect that increases the demand for nurses
d. none of the above.

7. Suppose that the U.S. allows more immigrant farm labor. This farm labor can be
employed in a variety of farm types. At vineyards, the production process is very labor
intensive and little machinery is used. In orchards, the production process is much more
capital intensive. Based on this information, we would expect that the new immigration
policy would cause a (larger, smaller) decrease in the wages of workers in orchards than
vineyards, and a (larger, smaller) decrease in the employment of native workers in
orchards than vineyards.
a. larger; larger
b. larger; smaller
c. smaller; smaller
d. smaller; larger

8. George Borjas criticized the David Card study of the effects of immigration by arguing
that Card would (underestimate, overestimate) any negative effect of immigration on
native earnings because:
a. underestimate; natives would tend to leave cities where there was a large influx
of immigrants.
b. overestimate; natives would tend to leave cities where there was a large influx of
immigrants.
c. overestimate; natives would be drawn to cities where earnings growth was
highest.
d. a and c
e. b and c

9. An efficiency wage
a. is more effective at reducing shirking by a worker who is closer to retirement
b. is a wage that exceeds a worker’s best alternative
c. is more likely to be offered by firms that have difficulty monitoring their
workers
d. all of the above
e. only b and c

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10. According to our discussion in class, Henry Ford’s Five Dollar day
a. was a deferred pay contract
b. increased worker effort on the assembly line
c. created a queue of workers that Ford could draw from to replace workers quickly
d. all of the above
e. only b and c

11. Suppose that a firm pays type A and B workers the same wage, but it has discovered that
type A workers have more elastic labor supply than type B workers. More elastic labor
supply among A workers could be due to their (higher, lower) mobility costs. The firm
could reduce its labor costs by paying A workers a (higher, lower) wage and B workers a
(higher, lower) wage.
a. Higher; higher; lower.
b. Higher; lower; higher
c. Lower; lower; higher
d. None of the above.

12. According to our discussion in class, worker turnover is greater at (smaller, larger) firms
and this can be explained by the fact that
a. Larger firms; larger firms have greater difficulty monitoring workers and are
therefore more likely to defer pay.
b. Larger firms; larger firms have greater difficulty monitoring workers and are
therefore less likely to pay piece rates.
c. Smaller firms; smaller firms have less difficulty monitoring workers and are
therefore more likely to pay efficiency wages.
d. Smaller firms; smaller firms have less difficulty monitoring workers and are
therefore less likely to pay efficiency wages.

13. According to our discussion in class, which of the following is TRUE?

a. The wage gap between men and women narrowed in the 1980s and 1990s, but
has been stagnant since 2000.
b. According to empirical research discussed in the 2000 Economic Report of the
President, over one-half of the wage gap between men and women can be
accounted for by gender differences in education and experience.
c. Among college professors, the academic departments with a higher percentage of
women tend to have knowledge that becomes obsolete at a slower rate
d. All of the above
e. Only a and b

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 14. According to the article on discrimination by NBA teams in the 1980s,
a. Black players receive higher pay, on average, than white players
b. Holding player ability constant, black players receive less pay than white players
c. Holding other things constant, game attendance increased when a black player
was replaced by a white player.
d. All of the above
e. Only b and c

To answer the next 3 questions, consider the following hypothetical wage equation that was
estimated using data for men.

W = 3.5 + .2*EXP + 1.2*SCHOOL

Where W is the hourly wage rate, EXP is a person’s years of experience and EDUC is a person’s
years of education. Also, consider the following hypothetical sample means for working men
and women:

Experience Years of School Wage rate

Women 10 13.0 18
Men 12 12,0 20.8

15. As seen in the above table, women earn $2.80 less per hour than men. Based on
differences in experience and education, how much more or less should women earn than
men. Be sure to give a dollar figure and indicate whether women should earn more or
less than men.

16. Based on the Blinder-Oaxaca decomposition, how much of the $2.80 gap in earnings
between men and women is due to “discrimination”?

17. There is empirical evidence that women select into occupations that have lower job risk
(fatality, injury) than men. Given what we know about how job risk affects wages
(theory of compensating differences), the lack of control for job risk in the wage equation
will cause the estimate of discrimination against women to be
a. overstated
b. understated
c. misstated, but it is impossible to know which way without additional information.

18. According to the theories promoted by Gary Becker, which type(s) of employer
discrimination would improve a firm’s profits?
a. statistical discrimination
b. monopsonistic discrimination
c. customer discrimination
d. all of the above
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 Answer 3 of the next 4 questions.

1. Cameras and video equipment have become much less expensive over the past decade and
many firms have purchased such equipment to monitor their workers.
a. Among firms who purchase video equipment for monitoring, how would you
expect this to affect the structure of pay? Provide the economic rationale for your
predictions.
b. Given the changes in the structure of compensation, how would you expect the
adoption of video monitoring would affect the turnover of workers at such firms?
Justify your answer.
c. With the change in the structure of compensation, would firms be more or less
willing to hire older workers? Explain.

2. Suppose that you own a vineyard and pay workers $10 per hour to pick grapes. The
average worker can pick 10 pounds of grapes per hour. You are considering
incentivizing your workers by switching to a piece rate. Competing employers in the
area also pay $10 per hour.
a. If you switch to the piece rate, how much should you pay per pound of grapes?
Keep in mind that you must compete with other employers who pay $10 per hour.
b. If you switch to the piece rate, what do you consider to be the advantages?
Provide the most complete list possible.
c. If you switch to the piece rate, what do you consider to be the disadvantages?
Provide the most complete list possible.

3. Suppose that a car dealership currently pays all its employees 50% of the difference
between a car’s sale price and the cost to the dealer. On average, this results in pay of
$4,000 per month for a salesperson. The car dealership is considering changing the
compensation structure to a 40% commission rate and a monthly prize for the person who
has the largest sales volumne (i.e. dollars of sales). The monthly prize will be financed
by the reduced commission. That is, the average sales person would take an $800
reduction in commissions and this will finance the first place prize. Thus, if there are N
salesmen, the first place prize will be N*800. Explain how and why adjusting the pay
structure this way would affect
a. the type of people who are willing to work for the dealership?
b. The behavior as the end of the month approaches (remember – the tournament is
based on monthly sales)
c. the level of “sabotage” among co-workers. Be sure to describe activities that
might be considered sabotage.

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 4. A corporation is considering two alternative methods for paying its CEO. Method A is
$1 million in annual salary and 5,000 shares of stock. The price of the stock is currently
$100 per share. Method B also includes $1 million of annual salary, but the option to
purchase up to 50,000 shares of the stock at $100 per share.
a. Draw a graph comparing the total compensation from method A and B (vertical
axis) to the price of the stock (horizontal axis). Be sure to indicate key
numerical on your graph.
b. Would the CEO be more inclined to take on “risky” projects under compensation
method A or B? Explain.
c. Do you think the CEO would prefer compensation method A or B? Explain.

Answer 2 of the next 3 questions (8 points each).

5. Suppose that men prefer male doctors and women prefer female doctors. Both men and
women, however, are willing to see a doctor of the opposite sex – but would be willing to
pay some premium to see a doctor of their own sex. Explain how this is likely to impact
the wages of male doctors relative to female doctors.

6. Draw labor supply and demand curves to illustrate how the effect of increased
immigration on the wages and employment of natives will vary depending on the elasticity
of labor demand. Be sure to explain how your graph supports your conclusions.

7. In class, we discussed a study of discrimination based on attractiveness of applicants.

Briefly describe the results of the study. Also, do you think the discrimination observed
is the result of employer or customer discrimination? Explain.

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 Put your answers to the first 18 questions below.

1. D

2B

3B

4E

5D

6A

7A

8A

9E

10E

11D

12D

13D

14D

15 $.80 MORE

16 $3.60

17 A

18 D

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