Labor Econ Test 2
explain why the marginal revenue product of labor is the basis for short-run labor demand
(MRP), which is the increase (change) in total revenue resulting from the employment of each additional labor unit. The MRP curve is the firms short-run demand curve for labor.
explain how the wage-fringe trade-off can be represented by indifference curves and isoprofit curves; graphically depict the wage-fringe optimum
(p205) An isoprofit curve portrays the various combinations of wages and fringe benefits that yield a specific level of profits. We assume that competition will result in a normal profit. Thus, WF shows the various combinations of wages and fringes the firm can afford to provide, given the "prices" of the alternative forms of compensation. (p204) Each indifference curve shows the combinations of wages and fringe benefits that yield a specific level of total utility. Indifference curves farther to the northeast in the indifference map represent higher levels of total utility; therefore, they are preferred by the worker.
The principal-agent problem arises primarily because
. agents pursue some of their own objectives that may conflict with the objectives of the principals
The long-run labor demand curve incorporates
. both the substitution effect and the output effect
The slope of a wage-fringe isoprofit curve reflects
. the relative "price" of fringe benefits compared to wages
explain the effects of the major labor laws on union bargaining power, especially with respect to labor market wage and employment levels
1 Limitation on the Use of the Injunction: The Norris-LaGuardia Act of 1932 limited the use of court-issued injunctions to enjoin picketing, striking, and related union activities. This prohibition clearly strengthened union bargaining power. 2 Prohibition of Secondary Boycotts Secondary boycotts are actions by one union to refuse to handle, or to get one's employer to refuse to buy, products made by a firm that is party to a labor dispute. This increased bargaining power.
Explain the relationships between total, marginal, and average product curves
As labor is added to a fixed amount of capital, total product will eventually increase by diminishing amounts, reach a maximum, and then decline as shown in (a). Marginal products in (b) reflect the changes in total product associated with each additional input of labor. The relationship between marginal product and average product is such that MP intersects AP where AP is at its maximum. The yz segment of the MP curve in stage II is the basis for the short-run labor demand curve. (p133)
Elasticity of Labor Demand
Because the demand for labor is a derived demand, the elasticity of demand for labor's output will influence the elasticity of demand for labor. Other things being equal, the greater the price elasticity of product demand, the greater the elasticity of labor demand
explain, with reference to the principal-agent and free-rider problems, some of the benefits and difficulties of implementing an effective bonus, profit-sharing, or equity compensation plan.
Bonuses: Advantages: Their advantage to the firm is that they may elicit extra work effort. Another advantage is that they do not permanently raise base salaries or hourly wages, as do raises, promotions, or other forms of merit pay Disadvantages: Although this pay system may increase individual effort, it may channel the effort toward behavior that is counter to the employer's overall goals. For example, a basketball player who receives bonuses for assists may tend to pass the ball rather than take wide-open shots. But it is difficult to structure bonuses, so they do not create other principal-agent problems. free-rider problem: As the size of the unit or team increases, the effect of each worker's efforts on achieving the goals of the firm diminishes.
explain the advantages and disadvantages associated with commissions and royalties
Commssions and Royalties: commissions and royalties tie pay to the value of sales Advantages: Commissions and royalties are efficient where work effort and work hours are difficult to observe. Disadvantages: Time rates in these situations would bring forth attendant shirking problems for the firm because observing the worker would be very expensive Time wage rates: pay based on units of time such as hours, months, or years. Disadvantages: would bring forth shirking problems because observing the worker would be very expensive.
explain, with reference to the principal-agent and free-rider problems, some of the benefits and difficulties of implementing an effective bonus, profit-sharing, or equity compensation plan.
Equity Compensation Plan: Advantages: Workers have the incentive to work hard and increase the firm's profits. Greater profits will raise the market price of the firm's stock and thus raise the value of the workers' stock options. Disadvantages: stock options suffer from the free-rider problem because the value of the stock options is tied to group rather than individual performance.
explain why a market labor supply curve slopes upward and to the right even though individual labor supply curves are normally backward bending
Even though specific individuals normally have backward-bending labor supply curves, labor supply curves generally are positively sloped over realistic wage ranges. Higher relative wages attract workers away from household production, leisure, or their previous jobs. The height of the market labor supply measures the opportunity cost of using the marginal labor hour in this employment. The shorter the time period, the less elastic this curve.
distinguish between "complements in production" and "gross complements"
If, on the other hand, labor and capital are gross complements, a decline in the price of capital will increase the demand for labor. Gross complements are inputs such that when the price of one changes, the demand for the other changes in the opposite direction. pure complements in production, meaning they are used in direct proportion to one another in producing the output. An example would be crane operators and cranes; more cranes require more operators on a one-for-one basis. The decline in the price of capital in this instance will unambiguously increase the demand for labor. Pure complements in production are always gross complements because there is no substitution effect
Which of the following is given as a justification of the health and safety standards established by OSHA?
Information and occupational mobility are imperfect, so the wage premium for job safety provides inadequate incentive for firms to provide safety
Which of the following best exemplifies a piece-rate compensation scheme?
Jose's pay is proportional to the number of wiring harnesses he assembles each day
distinguish between "substitutes in production" and "gross substitutes"
Normally labor and capital are substitutes in production, meaning that a given quantity of output can be produced with much capital and little labor or much labor and little capital. If labor and capital are gross substitutes, the decline in the price of capital will decrease the demand for labor. Gross substitutes are inputs such that when the price of one changes, the demand for the other changes in the same direction. This correctly implies that here the substitution effect outweighs the output effect.
Of the following laws, which one contributed most to union membership?
Norris-LaGuardia Act
list the determinants of labor supply and demand; for a change in any one, predict the impact on the equilibrium wage rate and employment level
P.178 major determinants of labor demand are product demand, productivity, the number of employers, and the prices of other resources. . Assuming no change in employment by other firms, a change in the number of firms employing a particular type of labor will change the demand for labor in the same direction. major determinants of labor supply include other wage rates, non wage income, preferences for work versus leisure, non wage aspects of the job, number of qualified suppliers
For a firm hiring labor and selling its output in perfectly competitive markets,
PL = MWC and VMP = MRP
Which one of the following is not a valid explanation for why workers may prefer an extra dollar's worth of fringe benefits to an extra dollar's worth of cash?
People generally prefer in-kind benefits to cash
explain the advantages and disadvantages associated with piece rate wages
Piece rate wages: Advantages: Evidence indicates that workers who are paid piece rates earn 10 to 15 percent more pay than comparable hourly paid workers in the same industry Disadvantages: 1.) in industries where technological change is rapid, it can be very difficult for employers to find the profit-maximizing piece rates. 2.) piece rates increase the likelihood of weekly, monthly, and even yearly income variability for workers. Thus to attract workers to piece-rate jobs, firms may have to pay wage premiums (Chapter 8) to compensate workers for this risk of earnings variation. 3.) where production is complex and team-oriented, it is difficult to ascribe units of output directly to the performance of individuals. 4.) close cooperation among workers is required for successful team performance. Piece rates reward independent work effort and therefore do little to promote this needed cooperation. 5.) piece rates suffer from their own advantage: The rapid production pace they elicit often results in poor product quality.
explain, with reference to the principal-agent and free-rider problems, some of the benefits and difficulties of implementing an effective bonus, profit-sharing, or equity compensation plan.
Profit Sharing: Advantages: Proponents of profit sharing contend that it transforms workers into minicapitalists who work harder to reap a share of the firm's profits. The extra effort creates extra output and profits, thus making the plan self-financing. Disadvantages: profit sharing is tied to group performance. This tie creates the free-rider problem that we identified in our discussion of bonuses. The larger the organization, the greater the possibility that the free-rider problem will short-circuit the profit sharing-productivity link.
Which of the following gave states the option to pass so-called "right-to-work" laws?
Taft-Hartley Act
identify the major pieces of U.S. labor relations legislation and state the impact each has had on the growth of unions and union membership
The Norris-LaGuardia Act of 1932 1. Increased the difficulty for employers to obtain injunctions against union activity 2. Declared that yellow-dog contracts were unenforceable. These contracts required employees to agree as a condition of continued employment that they would not join a union. The Wagner Act of 1935 1. Guaranteed the "twin rights" of labor: the right of self-organization and the right to bargain with employers engaged in interstate commerce. 2. Listed a number of "unfair labor practices" on the part of management. 3. Established the National Labor Relations Board 4. Made strikes by federal employees illegal and grounds for dismissal The Taft-Hartley Act of 1947 1. Established "unfair labor practices" on the part of unions. 2. Regulated the internal administration of unions 3. Outlawed the closed shop but made union shops legal in states that do not expressly prohibit them (state "right-to-work" laws). 4. Set up emergency strike procedures allowing the government to stop for up to 80 days a strike that imperils the nation's health and safety. 5. Created the Federal Mediation and Conciliation Service to provide mediators for labor disputes. The Landrum-Griffin Act of 1959 1. Required regularly scheduled elections of union officers and excluded Communists and people convicted of felonies from holding union office. 2. Held union officers strictly accountable for union funds and property. 3. Prevented union leaders from infringing on individual workers' rights to participate in union meetings, vote in union proceedings, and nominate officers.
Which of the following best describes the substitution effect of a wage increase?
The cost of labor is relatively higher, causing the firm to use relatively less labor.
Which of the following best describes the output effect of a wage increase?
The firm's marginal cost increases, the firm desires to produce less output, and therefore less labor is required.
explain the difference between short-run and long-run labor demand
The long-run demand curve for labor is more elastic than the short-run curve because in the long run there are both output and substitution effects; only an output effect occurs in the short run.
using the "output effect" and "substitution effect" concepts, explain why a firm's long-run demand for labor is more elastic than its short-run demand
The long-run demand curve for labor is more elastic than the short-run curve because in the long run there are both output and substitution effects; only an output effect occurs in the short run. The output effect of a wage rate change is the change in employment resulting from a change in the employer's costs of production; the substitution effect is the employment change caused by the altered price of labor relative to the price of capital. The market demand curve for labor is less elastic than the simple summation of the labor demand curves of individual employers; by inducing all firms to hire more labor and produce more output, the lower wage increases product supply, reduces product price, and lowers each firm's MRP.
describe the principal-agent problem as it applies to the employer-employee relationship
The principal-agent problem occurs when agents (workers) pursue some of their own objectives in conflict with achieving the goals of the principals (firms). the relationship between principals (firms) and agents (workers) is based on mutual self-interest; the employment relationship benefits both firms and workers. But to say that principals and agents share common interests is not to say that all their interests are identical.
The Law of Diminishing Returns and how it affects labor demand curves
This law states that as successive units of a variable resource (labor) are added to a fixed resource (capital), beyond some point the marginal product attributable to each additional unit of the variable resource will decline. It is not because the quality of labor declines as more of it is hired; remember that all workers are assumed to be identical. Rather, the reason is that the fixed capital at first gets used increasingly productively as more workers are employed but eventually becomes more and more burdened. Imagine a firm that possesses a fixed amount of machinery and equipment. As this firm hires its initial workers, each worker will contribute more to output than the previous worker because the firm will be better able to use its machinery and equipment. Time will be saved because each worker can specialize in a task and will no longer have to scramble from one job operation to another. Successively greater increases in output will occur because the new workers will permit capital equipment to be used more intensively during the day. As units of variable input (Labor) are added to a fixed input, total product would increase first at a decreasing rate, then at a decreasing rate.
Value of marginal product (VMP) differs from marginal revenue product (MRP) in that
VMP measures the value society places on the next worker's output, while MRP measures the value the firm places on the next worker's output.
Which one of the following conditions is required for allocative efficiency?
Value of marginal product is the same in all alternative employments of a given type of labor.
Which of the following established unfair labor practices by employers?
Wagner Act
determine and show graphically the profit-maximizing level of employment for a firm hiring labor from a perfectly competitive labor market
Where MRP=MWC Figure 6.6 on p. 184
Consider a proposed law to deregulate the hair care industry. Barbers would be allowed to do work previously confined to stylists, and the latter would no longer be required to pass strict licensure exams. Which outcome would you expect to result from this deregulation?
a decrease in economic rent to current stylists
explain why a firm may choose to pay its workers more than the market-clearing wage
a firm may find that it can lower its wage cost per effective unit of labor service by paying a higher wage rate. Employers may increase wages to reduce costly labor turnover, the rate at which workers quit their jobs, necessitating their replacement by new workers Ex: p.223
Which of the following can be predicted to increase the demand for labor?
an increase in product demand
All else equal, which of the following will increase the demand for labor in a particular market?
an increase in the number of employers
The short run is defined as a period in which
at least one resource is fixed
Royalties would most likely be received by a(n)
author.
Compensation paid in proportion to the value of sales best describes
commissions.
Because there is a _______ marginal rate of substitution of fringe benefits for wages, a worker's wage-fringe indifference curves are typically _______.
diminishing; convex to the origin
"To find the market demand curve for a particular type of labor, simply sum the labor demand curves of all employers of that type of labor." This statement is
false-although the price of output for any individual firm may be constant, this may not be the case for all firms taken collectively.
show, with reference to indifference curves and isoprofit curves, why there has been growth in fringe benefits relative to wages
fringe benefits entail a large tax advantage to workers. For example, workers do not pay taxes on the deferred income benefits embodied in private pension plans until those benefits are actually received. Also, because the worker's earned income will likely fall to zero at retirement, the income provided by the pension plan might be taxed at a lower marginal tax rate (say, 15 percent) than the same amount paid as wages during the worker's active work life (for example, 28 or 35 percent). In short, pensions are a means of deferring income to achieve lower tax rates Second, workers may be willing to substitute fringe benefits for part of their wages to guard against their own tendency to purchase goods that provide more immediate gratification than, say, health insurance or pension annuities. the indifference curves not only slope downward but are convex to the origin (as was the case in our income-leisure diagrams in Chapter 2). Stated technically, the marginal rate of substitution of fringe benefits for wages falls as more benefits are added. When a person has few fringe benefits, he or she is willing to trade off a large amount of wages for an additional unit of fringe benefits. But as the amount of fringe benefits rises, the marginal utility of still more fringe benefits falls, and the person is less willing to sacrifice wage payments to attain still more units of them Isoprofit curves: p.207 figure 7.6
The proportion of total compensation paid out as fringe benefits tends to be larger in
high-paid industries compared to low-paid industries.
A net increase in people's preferences for work relative to leisure in a particular market will
increase labor supply, reducing the wage rate
The prohibition of secondary boycotts
increased management's bargaining power by increasing the union's cost of disagreeing.
Derived demand
is derived from the demand for product or service that the labor is helping to produce. ex: the demand for hamburgers leads to the demand for hamburger workers
The marginal revenue product schedule
is the firm's labor demand schedule, provided the firm is operating in the zone of production.
A monopsonist's marginal wage cost curve is positively sloped because
it must pay a higher wage to attract additional workers, and it must pay this higher wage to all workers.
identify which benefits are legally required benefits and which are voluntary
legally required benefits comprise 7.7 percent of total compensation. These benefits include Social Security, railroad retirement and supplemental retirement, federal and state unemployment insurance, workers' compensation, and state temporary disability insurance benefits
A firm will obtain its profit maximizing level of employment where
marginal revenue product equals marginal wage cost.
All profit-maximizing firms hire labor up to the point where
marginal revenue times marginal product equals the marginal wage cost
define and use correctly the terms "marginal wage cost" and "allocative efficiency"
marginal wage cost (MWC), defined as the change in total wage cost resulting from the employment of one more labor unit. Thus, we can abbreviate our rule by saying that the profit-maximizing firm should hire units of labor up to the point at which MRP = MWC An efficient allocation of labor is realized when workers are being directed to their highest-valued uses. Labor is being allocated efficiently when society obtains the largest amount of domestic output from the given amount of labor available
Tournament pay
may help to rationalize why some ineffective senior executives continue to be employed by a firm
Which one of the following is generally considered a characteristic of a perfectly competitive labor market?
numerous firms hiring labor from the same pool of qualified workers
explain why a firm with monopoly power hires less labor than if it sold its output in a competitive market
other things being equal, the greater the monopoly power an individual firm possesses in the product market, the less elastic is its demand for labor the employers hiring labor in a perfectly competitive labor market are price takers in the product market; that is, they do not possess monopoly power. But if a firm is a monopolist in the sale of its product, it will face a downward-sloping product demand curve. This means that increases in its output will require price reductions, and because the lower prices will apply to all the firm's output, its marginal revenue (MR) will be less than its price
use graphical analysis to explain why salaried workers may have an incentive to shirk and how the firm's compensation plan can be structured to minimize this activity
p. 214 Figure 7.7 the number of hours the person actually works while on the job is not easily observed. The worker now can achieve a higher level of utility by shirking. That is, the worker has an incentive to reduce work hours from h1 to, say, h2, allowing the worker to reach higher indifference curve I2 at b. At the extreme, the worker can achieve a still higher level of utility by working zero hours (c on I3). In both cases, the annual salary ensures that the income level remains at Y1
Raises and promotions are used by employers as a device to
reduce shirking by salaried workers
. Prior to the 1930s, union membership growth was relatively
slow, due to the use of blacklisting, injunctions, and yellow-dog contracts.
contrast the labor demand curves of firms which operate in perfectly competitive versus imperfectly competitive output markets
the MRP or labor demand curve of the purely competitive seller falls for a single reason—marginal product diminishes as more units of labor are employed. But the MRP or labor demand curve of the imperfectly competitive seller declines for two reasons—marginal product falls as more units of labor are employed and product price declines as output increases The labor demand curve for an imperfectly competitive seller will not be as strong as for a perfectly competitive seller because the former must lower its product price on all units of output as more output is produced (MR < P).
Marginal Product (MP)
the change in total product associated with the addition of one more unit of labor. MP= (change in)Q/(change in)L
Skilled labor will benefit from an increase in the wage rate paid to unskilled labor if
the substitution effect outweighs the output effect
Average Product (AP)
the total product divided by the number of units of labor AP= Q/L
Compared to the allocatively efficient amount, a monopsonist tends to hire
too few workers because marginal wage cost exceeds the wage rate.
Market labor supply curves are generally
upward sloping, as higher wages attract workers away from their next best alternatives
"The extra output, measured in dollars, that accrues to society when an additional unit of labor is employed" best describes
value of marginal product.
"Total compensation" includes
wages and salaries and all fringe benefits
"Yellow-dog contracts"
were used by employers to restrict union membership.
explain why the payment of efficiency wages may result in nonclearing labor markets
when there is an excess of labor, the market is non-clearing, even with the efficiency of wages. Ex: p. 226 figure 7.8
Chapter 6 Key Concepts
• Large number of firms trying to hire an identical type of labor • Numerous qualified people independently offering their services • Neither firms nor workers have control over the market wage • Perfect, costless information and labor mobility
