Final Exam Open Questions Flashcards
What are the potential effects of a recession on the labor supply decision of a primary
earner? secondary earner?
In a recession, wages are likely to go down (in real terms).
Added worker effect: worker enters the labor market if the income effect dominates.
Discouraged worker effect: worker leaves the labor market or reduces hours is substi-
tution effect dominates. Primary earners are more likely to experience the discouraged
worker effect whereas secondary earners are more likely to be added workers
What is the impact of an increase in the minimum wage on employment and unemploy-
ment?
An increase in minimum wage cannot decrease unemployment. In a compet-
itive market an increase in minimum wage can lead to an increase to unemployment
if minimum wage is binding and this would correspond to a decrease in employment.
In some non-competitive setting things could be different. if the firm is a monopsonist,
minimum wage could lead to increase in employment, although this would happen only
if unemployment is zero, i.e. the firm hires on the labor supply curve
If children are a normal good why has fertility (per family) decreased in the last decades?
Individuals are wealthier: positive income effect. Female wages are higher and chil-
dren require time : negative substitution effect. The substitution effect dominated and
households have fewer children now. Partial credit to those talking about quantity qual-
ity trade-off and decreased child mortality
Is the EITC (Earned Income Tax Credit) likely to achieve the goal of an increased
participation rate in the labor market among those to benefit from it?
The EITC will
encourage people to work because it increases the wage rate for those with low levels
of earnings. For those not working, if the higher per hour pay rate is higher than
reservation wage, it moves them into working.
What happens to total employment if the minimum wage goes up and the market is
competitive?
If the minimum wage is above the equilibrium wage, an increase would
decrease employment level and increase unemployment
What happens to total employment if the minimum wage goes up and there is only one
firm in a particular labor market (monopsonist)?
If the minimum wage is above equi-
librium wage but below what would be competitive market employment will increase. If
the minimum wage is high enough (aka above the equilibrium wage), MW will still lead
to unemployment.
What is the effect of EITC on single-earner versus dual-earner household members
?
Because EITC eligibility is determined based on household not individual earnings,
single earners are more likely to be on the phase-in segment of the EITC, where the
substitution effect of EITC outweights income effect and increases labor supply. Dual-
earners are more likely to be on phase out, meaning the EITC will actually incentivize
them to work less (similar to TANF)
A certain number of immigrants enters in the UK labor market. Assume these immi-
grants are perfect substitutes to native workers. What happens to wages in the short
run? And in the long run? Why?
In the short run, the labor supply curve shifts to
the right implying that the total number of workers increases and the wage decreases
(but the number of employed natives goes down). Because the ratio capital/labor goes
down, the marginal product of capital is likely to increase, making it optimal to increase
the investment level in the economy. The increase in capital will increase the demand
for labor as well, shifting the labor demand to the right as well. Assuming constant re-
turns to scale, In the long run this shift will perfectly offset the increase in labor supply,
so that the wage goes back to the pre-immigration level
Suppose that natives and immigrants are substitutes in the production of goods. If we
are hit by a large wave of immigrants, what will happen to the wages of natives in the
long run?
Assuming a CES utility function as described in class, wages will remain
constant because the scale of the production and the amount of capital would adjust
in such a way that the whole economy will just increase by the same percentage of the
increase of the labor supply
If natives and immigrants are complements in the production of goods, what will hap-
pen to the wage of natives in the short run?
More immigrants will boost the productivity
of natives and therefore the demand for them will go up. There will be more employ-
ment and higher wages for natives
Why are wages and (good) job amenities normally positively correlated in the data?Give
an example of a research study that dealt with this spurious correlation to find the
true causal relationship between amenities and wage.
Compensating differentials are
masked by strong ability biases. More able workers have larger wages and with their
larger income they also buy job amenities, creating a spurious correlation in the data.
One example of a study that addressed ability bias was the study that used the expan-
sion of the ACA where it allowed people to stay on their parents’ health insurance until
age 26. They compared outcomes for workers who were just under and over 26 pre-
and post- ACA expansion and showed that people selected into jobs and education
that didn’t have health insurance, but were beneficial in other ways (e.g., more likely to
become entrepreneurs)
Suppose that the average worker dislike dangerous jobs and suppose that the average
wage for a dangerous job is lower than the average wage for a safe job. What might
explain this ‘inconsistency’?
The wage paid in the risky job is determined by the valuation of risk of the marginal
worker (i.e., the last person hired into the risky job), not the average worker in the
population. If only a small number of workers are needed in the risky job and there
are some workers who are risk lovers, the group of workers hired will take a wage cut
to accept the job even though the typical worker in the economy would need a wage
premium.
Bad job characteristics should be associated with high wage rates, yet the data does
not support this statement frequently. Can you explain why?
Ability bias and hetero-
geneity of preferences could explain this. In particular the first as more productive
workers tend to elect into better jobs with better job characteristics.
True or False and explain why: The risk premium is the average price workers are
willing to accept the risk for.
In general this is not true. the risk premium is the marginal
price workers are willing to accept the risk for, i.e. the premium that the marginal
worker, the last worker to be hired, needs to receive in order to accept the job. In
general therefore the average price workers are willing to accept would be lower as the
most risk adverse worker is the last one to enter in the market.
What is the statistical “value of life”? How does the US government use this statistic?
SVL is the cost of reducing the average number of deaths by one. for example we
can estimating it by calculating how much more we have to pay all workers in a firm for
them to accept a riskier environment such that on average there will be one more death
in the workplace. In many cost-benefit analysis, the value of life is useful to evaluate
different scenarios and whether a safety-increasing measure is worth the cost. For
example, the government might use it to decide how much to invest in road safety
Explain one possible theory that can generate a concave wage profile over the life-
cycle.
One explanation for the concave wage profile is the human capital investment
has more value early in life due to having more years to realize gains from more years
of education/training, so people invest more early years. This results in fast growth in
earnings early on, that slow down over time
Who pays for general training? Who pays for firm-specific training?
If the training is
general the firm has no incentives to pay for training as the worker might leave the firm
and the firm will loose the investment, therefore the worker is likely to pay, one way or
another, for the training. If the training is specific firm and worker are likely to share the
cost of the training because both sides might terminate the working relationship with
non-zero probabilities and therefore neither part want to pay for the whole cost. this
may lead to a sharing of the training expenses.
Compare one 25 years-old unemployed worker with one 55 years-old unemployed
worker. Assume they have the same skills, face the same wage offer distribution and
have the same search costs. Can search theory explain why the expected unemploy-
ment duration may be larger for the former?
A 25 year-old still has more to learn about
the quality of jobs available, so they may be less willing to accept a job under the (likely
incorrect) assumption that something better will arrive. Older workers are more aware
of what opportunities exist and will have a more realistic search profess.
Does the difference in average wages of high school graduates and college graduates
identify the return to schooling? Explain fully.
Better students might be ex-ante more
productive workers and tend to acquire more schooling creating a possibly spurious
correlation between wages and years of education. This is the standard argument for
ability bias, where the unobservables in a wage regression might be correlated with
right hand side variables, like education
We discussed two types of models of schooling in class: the stopping model of school-
ing and the signalling model of schooling. Discuss how each model relates productivity
of a worker to schooling. Which of these models is supported by the Murnane et al.
paper on the difficulty of passing a GED and wages?
In the stopping model, each addi-
tional year of schooling increases a worker’s productivity, resulting in higher earnings.
A worker continues to get schooling until the additional return to schooling is equal to
their discount rate. In the signalling model, worker productivity is unrelated to amount
of schooling, other than that the schooling acts as signal of whether the worker is high
productivity or low productivity. Education is too costly of a signal for low-types, so it
is only completed by high types but it doesn’t actually increase their productivity. The
GED paper is a paper in favor of the signalling model; when a test is harder to pass,
workers who are high scorers get higher wages to similarly high scorers in a setting
where the test is easy to pass
We can think of migration as a human capital investment, but what can explain the
existence of return or repeat migration?
Uncertainty of career concerns. Migrant might
be ex-ante optimizing by moving but ex post the choice might be not optimal leading
to either return migration or repeat migration. Worker might choose to move in a place
where his human capital can increase faster in order to come back to the original labor
market with higher human capital (e.g., chef that trains in NYC and goes back to open
a restaurant in her home town)
Why does the probability of job turnover decline with seniority (time spent with the
same employer)? Give 3 explanations.
Heterogeneity in types of workers – stayers
versus job-hoppers: The concentration of stayers is higher among those workers that
have stayed long in a job.
Job-specific human capital: the more job-specific human
capital is acquired, the less optimal it is for the firms and for the workers to terminate
the relationship.
Job matching: long term relationships are the result of a search
process where employers and employees are well matched and those relationships
are more likely to survive
What is the impact of taste-based discrimination on firms’ profits? Statistical discrim-
ination?
We need to distinguish between different types of discrimination. Statistical
discrimination is a tool that employer might use to predict a worker productivity and
therefore it potentially increases firms’ profits. Taste based employer discrimination
reduces profits because either leads to lower employment or employment of more ex-
pensive and equally productive workers
What distinguishes employee taste-based discrimination, employer-based taste dis-
crimination, and customer-based taste discrimination?
Employee taste-based discrim-
ination is when a worker is prejudiced against and doesn’t want to work with a certain
type of person and must be paid more if the firm is not segregated.
Employer taste-
based discrimination is when the firm/owner is prejudiced against a certain type of
worker and therefore gets less utility from them as an employee, reducing their per-
ceived marginal productivity of the worker and paying them less.
Customer-based
taste discrimination is when customers of the firm dislike interacting with a certain type
of worker and will only buy goods or services from that type of worker if the price is low
enough to offset this distaste.
What factors can explain the increase in inequality that many labor markets have ex-
perienced in the last 30 years?
Supply side stories: inflow of low skill immigrants.
Demand side stories: international trade, skilled biased technical change, capital skill
complementarities.
Institutional stories:
Decline in unionisation, relaxation of minimum
wage policies
Explain how each of these potential channels might have affected inequality in the last
decades:
(a) Trade
(b) Skilled biased technological change
(c) Deunionization
Trade: Increased inequality due to increased imports in industries that are more likely
to hire low-skill workers;
SBTC: Increased inequality due to a “hollowing” out of the
middle. Technological change was a complement to high skill workers, but middle
school workers whose jobs could be automated were no longer in as much demand;
De-unionization: Increased inequality. Unions flatten the wages offered, keeping wage
high for lower skill workers
What effect will each of the following proposed changes have on wage inequality?
(a) Increasing the benefit level paid to welfare recipients.
(b) Increasing wage subsidies paid to firms that hire low-skill workers.
Benefits: Wage inequality measures the dispersion of wages in the working population.
An increase in welfare benefits would likely induce less-skilled workers out of the labor
force and would reduce measured wage inequality by effectively eliminating the bottom
of the wage distribution.
Subsidies: Wage subsidies would increase the demand for
workers with a HS degree or less. Because workers with less education tend to on
average earn less, this would primarily increase demand for workers at the bottom of
the earnings distribution, reducing wage inequality.
In which type of sectors are unions more likely to emerge/survive?
Unions are more
likely in sectors with inelastic demand for workers – aka industries in which there are
not close substitutes for the skills of the workers.
Are unions always causes of inefficiency? Under which conditions are this not the
case?
No – not in monopsonistic markets and not if the firm and the union are able to
bargain along the contract curve. Any outcomes along the contract curve are pareto
efficient
What might happen to the wages of non-union sectors as a result of the existence of
unions?
In perfect competition, wages of non-union sectors will go down due to lower
labor demand by the unionized sector. This is an example of the spill-over effect. Al-
ternatively, concerns about workers leaving or unionizing themselves may cause non-
unionized firms to raise wages (threat effect).
What are the implications of this for the observed wage gap and how it relates to the
unobserved wage gain?
The observed wage gap includes both the gains from working
in a unionized sector and selection into the union, which is likely to be positive. The
unobserved wage gains for an individual are likely smaller than the observed gap.
Under which conditions can a strike be a rational behavior?
Strikes are rational when
there are information asymmetries. The union uses the strike to learn more about what
the firm is willing to give up/it’s profitability. The firm chooses optimal duration
What could be the impact of increasing the coverage of the unemployment insurance
from 26 weeks to 99 weeks?
Increasing coverage will cause some workers to search
for longer than they would have in the absence of longer insurance (aka moral hazard).
This may result in them finding a better quality job, but may also result in human capital
depreciation while out of the labor market reducing their job opportunities when the
insurance does finally run out.
What is the relationship between unemployment rate and unemployment insurance,
according to the job search theory?
Higher unemployment benefits reduce search ef-
fort as the relative gains from searching are lower. Also for the same reason, the reser-
vation wage is higher. Both effects lead to longer unemployment spells and therefore
higher unemployment rate
The replacement rate is around 40% but is capped and therefore higher income in-
dividuals have lower replacement rates. What is the implication of this fact for the
different unemployment rate across different education groups?
Because higher ed-
ucated workers are likely to be receiving a lower percent of working income due to the
cap, they are more motivated to find a new job and have shorter unemployment spells,
contributing to a lower unemployment rate.
