1. Wage Structure Law of One Price? Observed wage differentials Reasons
Occupational
Industry
Geographic
Reasons
Heterogeneous jobs
Heterogeneous workers
Labor market imperfections

2. Of the following occupational groups, average hourly earnings in 2003 were greatest among
service workers
installation, maintenance, and repair workers
sales workers
managerial, business, and financial workers 1 2 3 4 5

3. Installation, Maintenance, And Repair
Hourly Earnings By Occupational Group, 2003
Occupational Group
Hourly Wage
Management, Business, And Financial
$26.24
Installation, Maintenance, And Repair
17.14
Sales Workers
15.89
Office and Administrative Support
13.73
Service Workers
10.96
Farming, Fishing, And Forestry
9.81

4. Hourly Earnings By Industry Group, 2003
Hourly Wage
Finance, Insurance, Real Estate
$20.99
Public Administration
20.22
Mining
19.81
Transportation and Warehousing
19.27
Manufacturing
18.51
Construction
17.31
Services
16.53
Retail Trade
13.21

5. Private Manufacturing Worker’s Hourly Earnings By State, 2003
Hourly Wage
Connecticut
$23.13
New Jersey
22.91
Massachusetts
21.44
New York
19.09
Pennsylvania
18.26
Ohio
18.12
Texas
17.53
Arkansas
14.77
Mississippi
13.80

6. the wage at Ajax will be higher than at Acme
Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium:
the wage at Ajax will be higher than at Acme
the wage at Ajax will be lower than at Acme
workers will have lower net utility at Acme
employment will be higher at Ajax if demand is the same in both markets 1 2 3 4 5

7. Heterogeneous Jobs Compensating differentials
risky jobs
fringe benefits
job status
job security
Differing skill requirements
Differences based on efficiency wages
Other factors
Union status
Discrimination
Firm size

8. Which of the following research findings would support an efficiency wage explanation of pay differentials?
Firms with higher turnover costs pay lower than average wages
Firms with higher costs of detecting shirking pay higher than average wages
Pay is positively correlated with human capital investments in a given industry
Differences in observable worker characteristics explain most of the variance in pay across industries 1 2 3 4 5

9. Which of the following research findings would support an efficiency wage explanation of pay differentials?
Firms with higher turnover costs pay lower than average wages
Firms with higher costs of detecting shirking pay higher than average wages
Pay is positively correlated with human capital investments in a given industry
Differences in observable worker characteristics explain most of the variance in pay across industries 1 2 3 4 5

10. Heterogeneous Workers
Differing human capital
Non-competing groups
Differing individual preferences
Time preferences
Tastes for nonwage aspects
Married vs Single Males
Married men received 8-40% higher wages
Differing personal attributes
Differing incentives to accumulate HK
Differing costs of acquiring HK

11. Labor Market Imperfections
Imperfect information
Wage rate distributions
Lengthy adjustment periods
6.00
6.20
6.40
6.60
6.80
7.00
7.20
7.40
7.60
7.80
Wage rates

12. Labor Market Imperfections
Immobilities
Geographic
Transportation costs
Family concerns
Institutional
Licensing
Pension plans
Health insurance
Sociological
Discrimination

13. the wage at Ajax will be higher than at Acme
Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium:
the wage at Ajax will be higher than at Acme
the wage at Ajax will be lower than at Acme
workers will have lower net utility at Acme
employment will be higher at Ajax if demand is the same in both markets
D is good also 1 2 3 4 5

14. Government Regulation
Minimum Wage Laws
Occupational Health and Safety Regulation
Occupational Licensing

15. Ohio’s minimum wage went up to $6.85 this January
Minimum Wage Law
Fair Labor Standards Act (1938)
Established federal minimum wage
1938: $0.25
2006: $5.15
Established 1.5 overtime premium
Prohibited child labor
Ohio’s minimum wage went up to $6.85 this January

16. minimum wage in 2006 dollars
The Minimum Wage, 9 8 7 6
minimum wage in 2006 dollars 5
Dollars per hour 4
The trend in the real minimum wage rises until the mid to late 1970s, then falls. This is fairly similar to the trend of the natural rate of unemployment.
The U.S. Department of Labor has lots of good information on the minimum wage, at: 3
minimum wage in current dollars 2 1
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005

17. Minimum Wage Relative to the Average Private Non-supervisory Wage, 1950 - 2005

18. A majority of the workers earning the minimum wage:
are males
are females
work full-time
are teenagers 1 2 3 4 5

19. Characteristics of Minimum Wage Workers, 2004
At or Below $5.15
Total
# Workers
2.0 million
139.2 million
% Employment
1.4%
100%
Gender
Male
Female
33.9
66.1
51.9
48.1
Race
White
Black
Hispanic
83.9
11.3
12.5
69.6
11.1
13.4
Age
16-19
20 +
24.8
75.2
4.7
95.3
Hours of Work
Part-time
Full-time
61.9
37.9
18.6
81.4
Occupation
Sales
Service
12.6
74.6
10.9
16.8
Industry
Retail
Leisure & Hospitality
Manufacturing
8.2
62.0
3.0
11.9
8.7
12.8
Education
Less than HS
HS only
Some college
BA +
28.9
31.6
32.6
6.9
9.9
30.2
27.5
32.3

20. Competitive Model Covered Sector S1 D1 QD Q1 QS B W
Free Market: W1, Q1
no unemployment
Gov’t imposes min. wage at W2
at W2: QD < QS
Unemployment occurs
How can employers offset impact?
Reduce hours of work
Reduce fringe benefits
Raise price
Reduce quality
Hire illegal aliens
Wage
unemployment S1
W2 = $7
W1= $5 D1 QD Q1 QS B W
Labor
layoffs
new entrants
What happens in the uncovered sector?

22. Monopsony Model Monopsony hiring rule: MRP = MWC
Wage S1
Monopsony hiring rule: MRP = MWC
Monopsony outcome: W1, Q1
Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve
Monopsonist will hire Q2 workers at W*
Minimum wage increases employment! W* W1 D1 Q1 Q2
Labor

23. Suppose this labor market is competitive, so that the wage rate is W2
Suppose this labor market is competitive, so that the wage rate is W2. If W* is imposed as the minimum wage, then employment in this market:
will rise
will fall
remain the same
may or may not change; more info is required
Labor $
MRP S
MWC W* W2 W1 Q1 Q3 Q4 Q2 1 2 3 4 5

24. Suppose this labor market is competitive, so that the wage rate is W2
Suppose this labor market is competitive, so that the wage rate is W2. If W* is imposed as the minimum wage, then employment in this market:
will rise
will fall
remain the same
may or may not change; more info is required
Labor $
MRP S
MWC W* W2 W1 Q1 Q3 Q4 Q2 1 2 3 4 5

25. Suppose this labor market is monopsonistic, so that the wage rate is W1. If W* is imposed as the minimum wage, then employment in this market:
will rise to Q2
will rise to Q4
will fall
Remain the same
Labor $
MRP S
MWC W* W2 W1 Q1 Q3 Q4 Q2 1 2 3 4 5

26. Suppose this labor market is monopsonistic, so that the wage rate is W1. If W* is imposed as the minimum wage, then employment in this market:
will rise to Q2
will rise to Q4
will fall
Remain the same
Labor $
MRP S
MWC W* W2 W1 Q1 Q3 Q4 Q2 1 2 3 4 5

27. Empirical Evidence Brown (1982) Card and Krueger (1994)
10% increase in MW reduces employment of teens/low-skilled workers by 1 to 3%
Card and Krueger (1994)
MW had no effect on employment at fast food restaurants in NJ surveyed before and after the increase
Neumark and Wascher (1995)
Rexamined payroll data from NJ fastfood restaurants
MW had negative effects on employment consistent with conventional wisdom
New research is looking at impact on Human Capital and Poverty

29. Workplace Safety Occupational Safety and Health Act (1970)
Rate of Occupational Fatalities by Industry, 2002
Occupational Safety and Health Act (1970)
Permissable exposure levels
Protective equipment
Process safety management

30. Model of Optimal Safety$
MC1
MC slopes upward to reflect the rising opportunity cost of providing safety
MB slopes downward to reflect diminishing returns to safety
Permits paying lower wages
Reduced worker turnover
Lower worker comp rates
MB = MC determines optimal safety
Uninformed workers
MB1
MB2 S2 S*
Safety
If workers possess perfect information about potential risks, then S* is socially optimal
If workers underestimate potential risks, they won’t demand a proper wage premium:
Safety will be less than optimal: S2 < S*

31. The profit-maximizing level of job safety is a probability level of:
0.65
0.75
0.80
0.85 Ps
MBs
MCs
.65 25 8
.70 22 10
.75 19 12
.80 16 14
.85 13
.90 18
.95 7 20 1 2 3 4 5

32. The profit-maximizing level of job safety is a probability level of:
0.65
0.75
0.80
0.85 Ps
MBs
MCs
.65 25 8
.70 22 10
.75 19 12
.80 16 14
.85 13
.90 18
.95 7 20 1 2 3 4 5

33. OSHA Revisited Case for OSHA Case against OSHA Empirical evidence
Imperfect information
Barriers to occupational mobility
Case against OSHA
Workers might overestimate potential risks
Workplace standards often bear no relationship to reductions to job injuries and illness
Empirical evidence
There is mixed evidence that OSHA has reduced occupational injuries.
If OSHA has reduced job risks, wage premiums between hazardous and safe jobs should decline over time.

34. Session
Base Run
Search Costs
Unemp Insurance
Recession
Education
Variation
None
$100 per period
$200 per period for first 10 periods
Probability of receiving wage offer decreases
$1500 per period for two periods
Range
$0-$1000
$0-$1000 (no education)
$0-$1500 (education)
Distribution
Wage
Frequency 10 20
100 1
200 2
300 3
400 4
600
500 1E
1000
800 2E
2 (1E)
1500

35. Job Search External search Internal search Why Search?
Workers search for the best job offer and firms search for employees to fill job vacancies.
Search occurs because:
Workers and jobs are highly heterogeneous.
Information about differences in jobs and workers is imperfect and takes time to obtain.

36. Job Search Model Assumptions
Job searcher is unemployed and seeking work
Job seeker knows distribution of wage offers (mean and variance), but does not know which employer is offering which wage

37. Job Search Model Worker formulates an acceptance wage, wA
If w > wA  accept wage offer
If w < wA  reject wage offer
Benefits of search
Get additional wage offers
Costs of search
Explicit: employment agency fees + transportation
Implicit: foregone earnings

38. Job Search Model: ImplicationswA
If wA = $20,000, what is probability that first offer will be accepted?
.30
Probability = 65%
.20
.10
.05
The higher the acceptance wage, the lower the probability of finding a job (the longer the unemployment duration)
Inflation will shift the distribution of wage offers to the right
Expected inflation will shift acceptance wage
Unexpected inflation will not shift the acceptance wage
Unemployment compensation increases acceptance wage
___
___
___
_____

39. If $8.50 is the acceptance wage, what is the probability of Sally finding her next wage offer acceptable?
0.25
0.30
0.50
0.70 1 2 3 4 5

40. If the rate of inflation increases but Sally mistakenly believes it has not, then:
both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged
the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration
the acceptance wage will shift to the right, thereby reducing excepted search duration
both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged 1 2 3 4 5

41. If the rate of inflation increases but Sally mistakenly believes it has not, then:
both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged
the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration
the acceptance wage will shift to the right, thereby reducing excepted search duration
both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged 1 2 3 4 5

42. Internal Labor Markets
Shipping Department
Loader
Packer
Long-distance driver
Dispatcher
Local Driver
A worker typically enters an internal labor market at the least-skilled port-of- entry job in the job ladder or mobility chain.
Wage rates and the allocation of workers within the internal labor market are governed primarily by administrative rules and procedures.
External
Labor
Market
Port of
Entry

43. Reasons for Internal Labor Markets
Firms use job ladders as method to reduce worker turnover.
The lower turnover increases the return on firm investments in specific training.
Firms can lower recruiting and screening costs since they will have a lot of information about the existing workforce.
The job ladder also provides an incentive for workers to seek new skills and work hard.
Workers get the benefits of increased job security, opportunities for promotion and training, protection from the external labor market.
Also, the formal rules protect workers from arbitrary management decisions.

44. Government as Economic Rent Provider
Economic rent in the labor market is the difference between the wage paid to a particular worker and the wage just sufficient to keep that person in his or her employment.
Government provides economic rents through occupational licensing and trade barriers.

45. the probability of job loss rises in B earnings are more variable in A
Suppose that all other nonwage aspects of the jobs in these two markets are identical. We would expect labor supply in B to increase if:
the probability of job loss rises in B
earnings are more variable in A
job safety improves in A
there are better prospects for advancement in A 1 2 3 4 5

46. The wage rate paid workers at Flow, Inc
The wage rate paid workers at Flow, Inc. will most likely exceed that at otherwise identical Stock Co. if:
Flow, Inc. is a more prestigious firm than Stock Co
earnings are subject to greater variability at Stock, Co.
Stock Co. offers better pension and insurance benefits than Flow, Inc.
the demand for labor at Stock Co. exceeds the demand for labor at Flow, Inc. 1 2 3 4 5

47. make all workers better off
Currently, the minimum wage law does not apply to about 12% of non-supervisory workers. Assuming that all consequently displaced workers find jobs in the uncovered sector, an increase in the minimum wage will:
make all workers better off
cause a migration of workers from the uncovered to the covered sector
create additional output in the uncovered sector of a lower value than the output lost in the covered sector
cause an increase in economic rent to original workers in the uncovered sector 1 2 3 4 5

48. Consider a proposed law to deregulate the hair-care industry
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
A decrease in economic rent to current barbers
An increase in economic rent to beauty school operators
An increase in economic rent to workers in occupations in which displaced stylists find jobs 1 2 3 4 5

49. In addition to their regular unemployment benefits, a recent Washington state program offered an average of $562 to any job loser who became reemployed within 13 weeks of filing for unemployment compensation. Economic theory suggests that such a “bounty” scheme should:
reduce job search duration by shifting the wage offer distribution to the left
reduce job search duration by decreasing the acceptance wage and intensifying job search
reduce job search duration by shifting the wage offer distribution to the right
have no effect on job search duration, as the acceptance wage will decrease to offset the effect of the shifting wage offer distribution 1 2 3 4 5