Labor Review 2
Suppose 1 in 500 pilots racing in the formula 1 die each year while only 1 in 800 pilots racing in the stock car die each year. Moreover, the average salary of formula 1 pilots is $200,000 while the average salary of stock car pilots is $110,000. Given this information, what is the implied statistical value of a life of a pilot?
$120,000,000
Suppose 30 percent of all potential workers are highly skilled and contribute $70,000 to the firm each year. The remaining 70 percent of potential workers are less skilled and contribute only $40,000 to the firm each year. When schooling is not used as a signaling device, how much is the firm willing to pay a worker chosen at random?
$49,000
The firm is better off by offering a risky environment given
(W_1 - W_0) < θ, where W_1 - W_0 is the reservation wage and θ is the per worked productivity gain
The firm is better off by offering a safe environment given
(W_1 - W_0) > θ, where W_1 - W_0 is the reservation wage and θ is the per worked productivity gain
The average salary of the workers hired by the firm is:
(W_LP)q + (W_HP) times (1 - q)
Value of Life (VOL)
(Wy - Wx)/ (ρy - ρy), where x is a safe job while y is a risky
Gini Coefficient
Increases as inequality increases. Summarizes the entire income distribution with a single number between 0 (perfect equality) and 1 (perfect inequality).
Cross-sectional analysis of age-earnings profiles of natives and immigrants in the United States tends to reveal that immigrants earn
Lower wages on average than natives at young ages but earn about 10% more than natives by age 45 and thereafter
Why might people choose to go to college?
1. college education signals to firms that the worker is highly motivated B A college education increases one's productivity, which will be rewarded in the labor market with higher wages. C Someone enjoys the process of becoming educated. D One cannot find employment
Newly hired workers tend to leave their jobs within _ months
24
Employee Discrimination
A second hypothesis is that discrimination comes from employees. Now let's assume all white workers dislike working alongside black workers. They receive a wage w W but act as if they receive only W_w(1−d). Assume a white worker receives two job offers. Both firms pay a wage of $20 per hour. But one company has a completely white workforce, while the other one has an integrated workforce. As a result, integrated firms will have to pay more than $20 per hour if they wish to attract prejudiced white workers.
In the standard Becker model of discrimination, each firm is associated with a discrimination coefficient of d > 0 and acts as if the wage paid to blacks is wB(1 + d) where wB is the actual hourly wage paid to blacks. Assume whites and blacks are equally productive. The going wage for whites is $16 per hour while the going wage for blacks is $10 per hour. Which of the following will characterize the labor market equilibrium when some employers have discriminatory preferences against hiring black workers?
An employer with a discrimination coefficient of 0.8 will hire only white workers.
What is an example of specific job training?
B learning how to use the firm's payroll system
Internal migration in the U.S.
Correlation with: employment conditions (+), distance (-), educational attainment (+), and age (-)
Economic theory suggests that discriminating employers will be driven from the marketplace when the output market is competitive. Why?
Discrimination imposes an additional cost on the employer, and high-cost firms are eventually driven out of a competitive output market.
What is the main theoretical implication regarding the standard employer-based discrimination model?
Discrimination is not profitable.
How do you find the number of years a high productivity worker goes to school?
Earnings for LP < Earnings for HP - cy, where c = school cost and y - years of school
How do you find the number of years a low productivity worker goes to school?
Earnings for LP > Earnings for HP - cy, where c = school cost and y - years of school
Signal model
Education reveals a level of attainment which signals a worker's qualifications or innate ability to potential employers. Information that is used to allocate workers in the labor market is called a signal
Wage differentials across individual workers are determined in part by:
Effort, productivity, luck, and social capital are determinants of wage differentials.
_ discrimination generates a wage gap between equally skilled black and white workers
Employer
Discrimination does not pay because
Employers hire the wrong type of worker and/or they hire the wrong number of workers. In both cases firms have lower profits! Free entry and exit of firms ensure that firms in the market do not earn excess profits. Discriminatory employers must then pay for the right to discriminate out of pocket -> lose business
In order for the compensating differential associated with a risky job to be negative (so that a risky job pays less than a nonrisky job), it must be that:
there is a small demand for labor in the risky job.
Firms provide general training when
they do not have to pay for it.
The equilibrium hedonic wage function is most likely:
upward sloping as firms that offer riskier jobs usually pay higher wages.
The wage-schooling locus is:
upward sloping because education is generally productive.
age-earnings profile properties
upward-sloping and concave
Discrimination occurs
when the marketplace takes into account such factors as race and sex when making economic exchanges
When can indifference curves intersect
when they are for unique people
Having the government regulate workplace safety would most likely improve economic efficiency if:
workers are unable to correctly judge the risk associated with a particular job.
In order to use schooling as a signal,
The signal must be costlier for low-skilled workers than for high-skilled workers. The cost of purchasing the signal must not be so costly that high-skilled workers do not value obtaining it. Firms must be able to easily verify each worker's amount of schooling. Some people must choose to not complete schooling.learning how to use a forklift
Why is it that a firm will typically not pay for general training?
The skills gained from the general training are transferable to other firms.
Why do workers typically pursue their education while young?
There is more time to benefit from the higher wages that are typically associated with more education.
What does not enter into the present value calculation of a college degree?
all of the above should be included the present value calculation of a college degree
In the standard theory of compensating differentials, a worker's reservation price is the:
amount of money it takes to entice the worker into accepting a risky job.
Risk-averse workers:
are willing to accept large wage decreases in exchange for a safer work environment.
Statistical Discrimination
based on treating an individual on the basis of membership in a group and knowledge of that group's history.
The old normally have higher earnings
because they invest less in human capital and because they are collecting the returns from earlier investments The rate of growth of earnings slows down over time because workers accumulate less human capital as they get older.
Roy model
considers the skill composition of workers in the source country. Positive selection: immigrants who are very skilled do relatively well in the U.S. ("brain drain") Negative selection: immigrants who are unskilled do relatively well in the U.S. The relative return to skills determines the skill composition of the immigrants from different source countries.
There is a restaurant that employs only males to serve guests, only females to tend the bar, and a mix of male and female cooks and dishwashers. The dishwashers and cooks never come in contact with the customers. This hiring pattern is most indicative of ________ discrimination.
customer
Suppose the distribution of innate ability is distributed symmetrically throughout a population but that the wage distribution is positively skewed. What most likely explains this?
differences in human capital accumulation
The slope of the wage-schooling locus provides an estimate of the:
economic return to an additional year of schooling.
What is the stopping rule for choosing one's years of schooling?
end one's schooling when the rate of return to one more year of schooling equals the worker's rate of discount
Twin studies were thought to be helpful, producing an unbiased estimate of the returns to schooling. It happened because researchers thought twins were likely to:
have similar abilities.
the discrimination coefficient d is
he "markup" in the cost of hiring a black worker attributable to the employer's prejudice
Properties of the wage-schooling locus:
he wage-schooling locus is upward sloping. The slope of the wage-schooling locus indicates the increase in earnings associated with an additional year of education. The wage-schooling locus is concave, reflecting diminishing returns to schooling
The data suggest that wages increase more with age for the highly educated compared to the less educated. This is evidence that:
highly educated people also invest more in postschooling human capital compared to the less educated.
The supply curve of labor to risky jobs reveals.
how many workers are willing to offer their labor to the risky job as a function of the wage differential between the risky job and the safe job.
A worker decides to move
if the net gain from moving is positive. Migration occurs when there is a good chance the worker will recoup his investment in the move.
Negative selection in a migration model means that:
immigrants from the source country are not highly skilled relative to labor in the destination country.
Discrimination in the workforce:
leads to inefficiency.
The discount rate depends on
market interest rate. time preferences: how a person feels about giving up today's consumption in return for future rewards
The cost of offering safe versus risky jobs in the highway construction industry vary across firms. In the end, we would expect the market equilibrium to:
match workers who dislike risk to firms that find it cheapest to offer safe jobs.
repeat migration
migrate again
There is a strong correlation between a worker's age and the probability of job separation.
negative its with the hypothesis that labor turnover can be an investment in human capital. Older workers have a smaller payoff period to recoup the costs associated with job search. Thus, they are less likely to search (or move)
If ability is positively related to schooling, then estimating the returns to education directly from the wage-schooling profile will likely:
overestimate the return to schooling.
The family unit will move if the net gains to the family are
positive: ∆ Husband's PV + ∆ Wife's PV > 0
Present value calculations allow one to determine the
present-day costs and/or benefits of various option
Present value calculations allow one to determine the:
present-day costs and/or benefits of various options.
Young people who quit often experience substantial _ in their wages, while Workers who are laid off often experience wage _ .
raises, cuts
return migration
return to the location of origin
Why is MU_risk < 0?
risk is a "bad".
Tied mover:
someone who moves with the partner even though his or her employment outlook is better in the current location.
Tied stayer
someone who sacrifices better income opportunities elsewhere because the partner is better off in the current location
An actual Lorenz curve shows:
the cumulative share of income earned by quintiles of households.
Holding all else fixed, the greater is one's discount rate,
the fewer years of schooling one completes.
The rate of job loss is highest among
the least educated workers
A standard hedonic wage function might show what relationship?
the relationship between the wage and the probability of injury faced by the worker
People decide how much schooling to receive based on:
their discount rate the marginal rate of return to schooling, the present value of expected future earnings, and their ability to succeed in education programs.
If one looks at U.S. Census data and finds that the average male salary is $43,000 while the average female salary is $38,000, which of the following is likely to be a significant cause of this difference given U.S. labor market demographics?
A. Women are more inclined than men to work part-time. B. Women and men prefer different kinds of jobs. C Discrimination exists in the labor market. D On-the-job experience varie
Abby's reservation price for working in a risky job is $5 per hour while Rudy's reservation price for working in a risky job is $8 per hour. Characterize Abby and Rudy's job selections if safe jobs pay $12 per hour and risky jobs pay $18 per hour.
Abby works a risky job while Rudy works a safe job.
When graphing a worker's indifference curves in Probability of Injury (x-axis) versus Wage (y-axis) space, Al's indifference curves are steeper than Pete's indifference curve. In this case,
Al requires a greater wage increase than Pete in order to willingly take on more risk.
The market-clearing wage differential between a safe and risky job is $5000. Which of the following is not true?
All but the marginal worker in safe jobs require a wage differential above $5000 to accept a risky job.
Schooling model problem
Assumes that workers select their level of education to maximize the present value of lifetime earnings. However, once a choice is made, we cannot observe the earnings associated with the non-choice.
Immigration Impact of a Decline in U.S. Incomes
Fewer workers migrate to the U.S. The type of selection (positive vs. negative) does not change Increases in moving costs have the same effect as a decrease in the U.S. net income.
Suppose there are two types of jobs-safe and risky. Safe jobs currently pay $10 per hour. Risky jobs currently pay $20 per hour. The government intervenes in the market, mandating that all firms offer safe jobs and pay a wage of $10 per hour. Which of the following is true?
Firms that originally offered risky jobs are hurt by the policy.
Three important properties of age-earnings profiles:
Highly educated workers earn more than less educated workers. Earnings rise over time at a decreasing rate The age-earnings profiles of different education cohorts diverge over time. Earnings increase faster for more educated workers
Which statement about human capital is false?
Human capital has a low rate of return.
Wage differentials exist due to:
Human capital investments that vary from worker to worker. Age differences. (Young workers are still accumulating human capital, while older workers are collecting returns from earlier investments.)
Implication of the Becker model:
If blacks and whites are perfect substitutes , employers have a segregated work force. Even non-discriminating employers have a segregated work force, as they employ all black workers (when wB < wW).
Customer Discrimination
If customers discriminate, their perceived price of a good is utility-adjusted with a discrimination coefficient:p(1 +d). When a firm cannot hide black workers, customer discrimination can have an adverse effect on black wages.
Which of the following is not a property of isoprofit curves graphed in Probability of Injury (x-axis) versus Wage (y-axis) space?
Isoprofit curves going up along the y-axis yield higher profits.
Which one of the following statements about the Gini coefficient is not true?
It must fall when the amount of income in an economy increases.
What is an example of general job training?
Learning how to use a forklift Learning how to weld Reading a book on techniques for managing large groups of workers involved on team projects Attending an industry convention on "best practices"
Assume that the market-clearing wages are $10 per hour in a safe job and $18 per hour in a risky job. Then, at the completion of a war, many ex-soldiers who enjoy risky ventures enter the labor market. Which of the following is not a likely outcome of this change?
Many firms that currently offer risky jobs will begin offering safe jobs.
Race and Gender in the Labor Marke
Men earn more than women, and whites usually earn more than nonwhites. Differences in educational attainment between whites and nonwhites account for a portion of the gap
Which of the following statements about migration is not true?
Migration is greater among married couples compared to single-person households because migration costs are less for married couples.
What does it mean for the U.S. economy to have a positively skewed wage distribution?
Most workers earn below the average wage.
If a two-person household moves from Miami to Atlanta, which of the following can describe the household?
Neither member of the household is a tied stayer.
Suppose all 18-year-olds are identical in every way except that some have easy access to credit (i.e., they face a low interest rate when borrowing money) while others have a difficult time accessing credit (i.e., they face a high interest rate when borrowing money). Which of the following statements is not true?
No one without easy access to credit will go to college.
A couple is considering moving to Tampa from Chicago. The cost of moving for Crystal is $300 while the cost of moving for Amelia is $600. Crystal earns $500 in Chicago and $550 in Tampa. Amelia earns $200 in Chicago and $1000 in Tampa. Will they move as a couple?
No, because neither person would choose to move to Tampa on their own.
PV formula
PV = y/(1+r)^t
marginal revenue of of an efficiency unit of human capital
R + R/(1+r) ... + R/(1+r)^age
Why Did Wage Inequality Increase?
Supply shifts. International trade. Skill-based technological change. Institutional changes in the U.S. labor market. E.g: Decline in union
Implications of employee Discrimination
Work places will be segregated (similar as in employer discrimination). Employee discrimination does not generate a wage differential between equally skilled black and white workers. Employee discrimination does not affect the profitability of firms.
Compared to hiring a white worker, a discriminatory employer is $5 less happy when he hires a black worker and is $6 less happy when he hires a Hispanic worker. The firm faces hourly wage rates of $20 for whites, $16 for blacks, and $14 for Hispanics. Which of the following describes the firm's hiring decision?
The firm hires a mixture of white and Hispanic workers.
Which of the following is the most likely explanation for why Mexican immigrants earn 46% less than native workers while Canadian immigrants earn 36% more than native workers in the United States?
The immigrant flow is negatively selected from Mexico but positively selected from Canada.
Suppose there is currently positive selection of immigrants to the United States. What would happen to immigration to the United States if the return to skills were to fall in the United States?
The selection would remain positive, but the average skills of immigrants would increase.
Assuming that workers are fully aware of their working conditions, which of the following will not happen when the government mandates pollution control to protect workers' health?
Worker utility will increase.
What is implied when the wage-schooling profile is drawn as a concave (i.e., increasing at a decreasing rate) function?
The marginal return to schooling is positive but falling as years of schooling increases.
Efficient turnover
The mechanism by which workers and firms correct matching errors and obtain a better and more efficient allocation of resources.
Labor mobility
The mechanism labor markets use to improve the allocation of workers to firms.
What is the main selection issue researchers must address when trying to estimate the effectiveness of government training programs?
The most motivated unemployed workers are the ones who are also most likely to take advantage of government training programs.
properties of isoprofits
Upward sloping because the production of safety is costly. Concave because production of safety is subject to the law of diminishing returns. The closer to origin they are the more profit they yield
Hedonic wage functions
Upward sloping because workers dislike working in risky firms and because it is expensive to provide safety slope is the reservation price of workers.\ Name of the observed relationship between wages and job characteristics
Utitilty function for compensating wage differentials
Utitilty = f(w, ρ), where w = wage and ρ = risk of injury. ρ = 0 for safe jobs and 1 for risky ones.
What is a possible explanation as to why workers who have been on the job for a long time earn more than newly hired workers?
Workers in long-lasting job matches accumulate specific training over time, which increases the workers' productivity
Wage gap formula
Wage ratio between different percentile: (W_greater percentile - W_lower)/W_lower percentile. Ex: 90-10: (W_90 - W_10)/W_10