TEST BANK for Labour Market Economics 9th Edition ISBN 9781259654848 By Dwayne

Labour Market Economics 9th Edition ISBN 9781259654848 By Dwayne Benjamin, Morley Gunderson, Thomas Lemieux, Riddell, Schirle

TABLE OF CONTENTS Part 1: Labour Supply Chapter 2: Labour Supply: Individual Attachment to the Labour Market Chapter 3: Labour Supply and Public Policy: Work Incentive Effects of Alternative Income Maintenance Schemes Chapter 4: Labour Supply Over The Life Cycle Part 2: Labour Demand Chapter 5: Demand for Labour in Competitive Labour Markets Chapter 6: Labour Demand, Nonwage Benefits, and Quasi-Fixed Costs Part 3: Labour Demand and Supply Together Chapter 7: Wages and Employment in a Single Labour Market Part 4: The Determination of Relative Wages Chapter 8: Compensating Wage Differentials Chapter 9: Human Capital Theory: Applications to Education and Training Chapter 10: Wage Structures Across Markets

Chapter 11: The Economics of Immigration Chapter 12: Discrimination and Male-Female Earnings Differentials Chapter 13: Optimal Compensation Systems, Deferred Compensation, and Mandatory Retirement Part 5: Unions Chapter 14: Unions and Collective Bargaining Chapter 15: Union Impact on Wage and Nonwage Outcomes Part 6: Unemployment Chapter 16: Unemployment: Meaning, Measurement, and Canada's Experience Chapter 17: Unemployment: Causes and Consequences

Chapter 2: Labour Supply: Individual Attachment to the Labour Market MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

1) Empirical literature on labour supply patterns for married women tends to find all of the following, except: A) Labour market participation rate for married women was highest in the 35-44 age group.

B) Women with children have lower rates of labour force participation.

C) The higher the education level, the higher the labour force participation rate.

D) The strong negative relationship between the husband's income and the labour force participation rate for married women.

E) Participation rate for all married women is around 75 percent.

2)

Which of the following statements concerning the elasticity of labour supply is true?

A) The total wage elasticity of supply tends to be positive and of low magnitude.

B) The income elasticity of supply tends to be positive and of low magnitude C) The compensated elasticity of supply is close to zero D) Overall workers tend to be highly responsive to wage changes E) None of these above statements are true

3) Which of the following statements concerning the elasticity of labour supply is false?

A) The overall labour supply for both sexes is likely to be backward bending.

B) It is generally higher for women than for men.

C) The compensated elasticity (reflecting the substitution effect) tends to be higher in

magnitude than the uncompensated, gross elasticity.

D) The overall labour supply for both sexes is likely to be upward sloping E) The elasticity of labour supply with respect to income is negative.

4) Which of the following statements is false?

A) In periods of high unemployment, discouraged workers tend to withdraw from the

labour force.

B) In periods of low unemployment, discouraged workers tend to re-enter the labour force.

C) Discouraged workers are part of the hidden unemployment phenomenon D) Discouraged workers are considered to be marginally attached to the labour force E) Discouraged workers behave in a similar fashion as added workers.

5) Suppose a worker is observed to be working but is forced to work fewer hours than she really

wants to work. Which of the following statements is true?

A) The indifference curve that she is on is tangent to the budget line.

B) She is on an indifference curve which is lower than the one which is tangent to her budget line.

C) She is on an indifference curve which is higher than the one which is tangent to her budget line.

D) She is on an indifference curve which is lower than the one which passes through the point on the budget line corresponding to zero hours of work.

E) She is not on an indifference curve.

6) The slope of the indifference curve at the lower right-hand corner of the income/leisure

diagram, where zero hours of work are supplied to the labour market, is equal to: A) the prevailing market wage.

B) the reservation wage.

C) the level of non-market income.

D) the slope of the budget constraint.

E) the difference between the market wage and the reservation wage 7) The reservation wage is defined as: A) the wage of the reservation clerk in the tourism industry.

B) the maximum wage that an employer is willing to pay a worker for a given job.

C) the minimum wage that an employee is willing to accept for a given job.

D) the equilibrium wage.

E) the wage rate at which zero hours of labour is supplied by the workers.

8) All of the following patterns of labour market behaviour can be analyzed with the income-

leisure framework, except: A) moonlighting B) overtime work C) labour force participation D) underemployment E) worksharing 9) Consider the situation of a worker who is ‘at the corner equilibrium' i.e., he or she is

supplying zero hours of work and consuming 16 hours of leisure. In context of the incomeleisure framework, which of the following statements is false?

A) The indifference curve is steeper than the budget line.

B) The marginal rate of substitution between income and leisure is greater than the wage rate in absolute value terms.

C) The indifference curve is flatter than the budget line.

D) The rate at which the worker is willing to exchange income for leisure is not equal to the market rate for the exchange of income for leisure.

E) Marginally, the worker values an hour of leisure more than she values an hour's worth of income.

10) Which one of the following regarding to an individual's budget constraint is correct?

A) The slope of the budget constraint is determined by the market wage rate.

B) The level of non-labour income determines the intercept of the budget constraint.

C) The slope of the budget constraint is determined by the reservation wage rate D) The slope of the budget constraint is equal to the marginal rate of substitution

between income and leisure E) The slope of the budget constraint is higher for a full-time worker than for a part-time worker.

11) In the neo-classical model of labour supply, which of the following is always true?

A) If leisure is a normal good, a wage increase causes an increase in hours worked.

B) If leisure is a normal good, a wage increase causes a decrease in hours worked.

C) The income effect and the substitution effect work in the same direction.

D) The substitution effect causes the worker to work more hours if wages increase.

E) None of these options

12) Over the backward bending portion of the labour supply curve, A) The substitution effect of a wage change dominates the income effect.

B) Leisure becomes an inferior good.

C) The wage elasticity of labour demand is inelastic.

D) There is no longer a trade-off between income and leisure.

E) The wage elasticity of labour supply is negative.

13) For a worker who is deciding how many hours of labour to supply, all of the following are

true except that: A) The marginal rate of substitution between income and leisure is equal to the wage rate.

B) The rate at which she is willing to exchange leisure for income equals the rate at which the market allows her to do it.

C) The slope of the budget line equals the slope of the indifference curve.

D) The income effect of a wage change equals the substitution effect.

E) The worker cannot increase total utility by working more or fewer hours.

14) Which of the following statements most closely applies to the labour force participation

decision?

A) It consists of the choice to allocate a portion of one's time to labour market activities as opposed to non-market activities.

B) It occurs when one accepts an employment position and is working.

C) It occurs when one is actively seeking work.

D) It includes paid and unpaid work.

E) It doesn't include unemployed workers.

15) The portion of the population that is surveyed as potential labour force participants consists

of: A) B) C) D) E)

the civilian non-institutional population. the unemployed plus the employed population. the entire civilian population that is 15 years of age or older.

Individuals who do hold jobs the entire population of Canada.

16) Which of the following statements applies to the unemployed population?

A) They are either unable to work, or are on strike.

B) They are jobless.

C) They are jobless but are actively seeking work.

D) They are working fewer hours than they would like to.

E) They are working but are underpaid.

17) Which of the following groups of workers are considered to be part of the labour force?

A) Full-time students B) The hard-core unemployed C) Discouraged workers D) Members of the Canadian military E) Homemakers 18) What is an approximate figure for the labour force participation rate in Canada?

A) 40% B) 50% C) 65% D) 80% E) It cannot be determined, as there are no reliable data available.

19) When examining cross-national data on labour force participation rates, which of the

following phenomena are apparent?

A) That higher income countries tend to have higher rates than do lower-income countries B) That these rates for women tend to be higher than they are for men C) That higher income countries tend to have lower rates D) That men in higher income countries have much higher rates than men in lowerincome countries E) That women in higher income countries have much higher rates than women in lower-income countries 20)

The expression for the unemployment rate (UR) is: A) UR = (employed−unemployed)/unemployed B) UR = (employed−unemployed)/labour force C) UR = unemployed/labour force D) UR = (unemployed/employed) E) UR = (unemployed/population)

21) Data on the distribution of the usual number of hours worked per week indicates that: A) almost all workers work about 40 hours B) there is greater variation among women than among men C) most part-time workers work about 20 hours D) men are more likely to work part time than women E) None of these above

22) The wage rate at which the individual worker is indifferent between participating and not

participating in the labour force is called the: A) indifference wage.

B) minimum wage.

C) reservation wage.

D) utility wage.

E) participating wage.

23) An increase in non-market income will have which of the following effects?

A) An upward shift in the income constraint B) A downward shift in the income constraint C) A clockwise rotation in the income constraint, making it steeper D) A counter-clockwise rotation in the income constraint, making it flatter E) There is no change to the income constraint.

24) Which of the following diagrams corresponds to a budget line that involves overtime hours

with a wage premium?

A) B) C) D) E)

(a) (b) (c) (d) None of these above

25) Which of the diagrams given below corresponds to a budget constraint with some non-labour

income?

A) B) C) D) E)

(a) (b) (c) (d) None of these above

26) Which of the diagrams given below corresponds to a budget line that involves a wage

increase?

A) B) C) D) E)

(a) (b) (c) (d) None of these above

27) Which of the diagrams given below corresponds to a budget line that involves an increase in

non-labour income?

A) B) C) D) E)

(a) (b) (c) (d) None of these above

28) In the basic income-leisure model, what is indicated by a parallel shift of the budget line?

A) The substitution effect B) The total effect of a price change C) A change in the preferences D) The income effect of either a price change or an income change E) The reservation wage

29) Our income-leisure model suggests that if a worker is moonlighting, then: A) She is underemployed.

B) She is unemployed.

C) she receives an overtime premium.

D) She is overemployed.

E) There is no income effect 30) Our income-leisure model suggests that if a worker is working overtime, then: A) she Is underemployed.

B) she is overemployed.

C) if she is paid the straight-time equivalent, she will work more hours than over-time

hours.

D) If she earns over-time premium, which leads to a greater income effect than substitution effect.

E) There is no substitution effect 31) Which of the following statements regarding indifference curves is true?

A) If an individual has a lower valuation of leisure, then the slope of his indifference

curve is steeper.

B) If an individual has a lower valuation of leisure, then the marginal rate of substitution of consumption over leisure is higher.

C) If an individual has a higher valuation of consumption, then the slope of his indifference curve is flatter.

D) If an individual has a higher valuation of consumption, then the marginal rate of substitution of consumption over leisure is higher.

E) None of these above 32) In the basic income-leisure model, how is the labour supply curve derived?

A) By varying the slope of the income constraint, finding the point of tangency with the

indifference curve, and reading the quantity of hours worked off of the horizontal axis B) By varying the position of the indifference curve, finding the point of tangency with the income constraint, and reading the quantity of hours worked off of the horizontal axis C) By varying the slope of the income constraint, finding the point of tangency with the indifference curve, and reading the wage off of the vertical axis D) By varying the position of the indifference curve, finding the point of tangency with the income constraint, and reading the wage off of the vertical axis E) By varying the intercept of the income constraint, finding the point of tangency with the indifference curve, and reading the quantity of hours worked off of the horizontal axis

33) Which of the following statements regarding the added worker effect is true?

A) It resembles moonlighting B) It works in a similar way as the discouraged worker effect C) It tends to boost labour force participation when unemployment is low D) It tends to reduce labour force participation when unemployment is high E) It tends to boost labour force participation when unemployment is high 34) Consider a worker who is supplying a positive number of hours. What could cause him to

drop out of the labour force?

A) A flattening of her indifference curve B) A change in preferences such that he values income more C) A decrease in non-labour income D) An increase in the offered wage E) A decrease in the offered wage 35) Consider a worker who is working a second job at lower pay because she needs to pay her

mortgage payments. This choice is most closely associated with: A) A reservation wage effect B) A substitution effect C) An income effect D) A labour force participation effect E) A backward bending supply curve 36) Consider a worker who is working overtime hours in order to take advantage of the pay

premium, even though she does not really feel like it. This choice is most closely associated with: A) A reservation wage effect B) A substitution effect C) An income effect D) A labour force participation effect E) A backward bending supply curve

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

37) A major and recurring theme of this textbook is the role of empirical research in labour economics. Conceptual models exist to analyze many labour market phenomena, but often the predictions that emerge are ambiguous. It is the objective of empirical research to test the validity of these predictions, and to try to sort out the multiple effects, which may work simultaneously. Such is the case for the theory of individual labour supply. Discuss the major conceptual implications of this model as well as the results from the empirical literature with correspond to them. The key is to link the predictions, which flow from the model, to the hypotheses that have been examined in the literature. In particular, your response can follow the following outline: • Without getting bogged down in technical details (i.e., don't give a graph), explain intuitively the role of preferences and constraints in determining the optimal choice of hours worked.

• What is the impact on the choice of hours worked by an individual if the level of nonmarket income changes?

• Briefly describe the income effect and the substitution effect of a wage change, and relate this to the backward bending supply curve.

• A large number of econometric studies have estimated the shape of the labour supply curve, the sign of the wage elasticity of labour supply, and the income elasticity of labour supply. What have they found, generally speaking, regarding the slope of the supply curve?

Does the slope differ between men and women?

• Figure 2.3 in the textbook shows what appears to be a slight negative empirical relationship across countries between per capita national income and male labour force participation rates, coupled with a slight positive empirical relationship across countries between per capita national income and female labour force participation rates. It might be possible to interpret these observed empirical patterns in terms of substitution effects and income effects.

SECTION BREAK. Answer all the part questions.

38) The figure below pertains to questions 2.1, 2.2, and 2.3.

38.1)

Given a wage increase from W0 to W1, the distance between L' and L1 represents: The substitution effect The income effect The combined effect of both the substitution effect and the income effect The equilibrium choice for hours worked The equilibrium choice for leisure

A) B) C) D) E) 38.2)

Given a wage increase from W0 to W1, the distance between L' and L0 represents: A) The substitution effect B) The income effect C) The combined effect of both the substitution effect and the income effect D) The equilibrium choice for hours worked E) The equilibrium choice for leisure

38.3)

Given a wage increase from W0 to W1, the distance between I1 and I0 represents: A) The substitution effect B) The income effect C) The combined effect of both the substitution effect and the income effect D) The equilibrium choice for hours worked E) The equilibrium choice for leisure

Answer Key Test name: chapter 2 1) D 2) A 3) A 4) E 5) B 6) B 7) C 8) E 9) C 10) A 11) D 12) E 13) D 14) A 15) C 16) C 17) B 18) C 19) A 20) C 21) B 22) C 23) A 24) C 25) A 26) B 27) D 28) D 29) A 30) B 31) C 32) A 33) E 34) E 35) C 36) B 37) Short Answer

The consumer choice model is used to analyze an individual's labour supply decision.

Consumers' preferences are represented by the indifference curve of consumption and leisure.

Consumers' constraints are given by their wage income from working hours as well as a time constraint which is a combination of working hours and leisure hours. Consumers' objective is to maximize their total utility from consumption by choose their preferred combination of income/consumption and leisure, as represented by their opportunity set or budget constraint. If this optimum occurs at zero hours of work, the individual does not participate. If optimal hours are positive, the individual participates, and the marginal rate of substitution between leisure and consumption equals to the wage rate.

The reservation wage is given by the marginal rate of substitution between leisure and consumption, at zero hours of work, which is a critical wage in determining the participation decision. For wage above the reservation wage, the consumer will choose to work. Otherwise, the consumer will not participate.

The budget constraint of a consumer is composed of two parts: non-labour income and wage income from total working hours. Therefore the change of non-labour income and wage rate will affect a consumer's labour supply decision. If non-labour income increases, there will be a pure income effect, an individual who choose not to participate before will remain out of participation and an individual who has positive working hours will reduce his/her working hours and enjoy more leisure time. The change of the wage rate, however, will have a more complex effect on one's labour supply decision. For those who do not participate before, if the increase of the wage rate exceeds the reservation wage, they will choose to participate and the working hours is determined by the marginal rate of substitution of consumption and leisure and the wage rate.

For those individuals who already work positive hours, a wage increase will have both income and substitution effect. An income effect from wage increase will induce more leisure and less working hours and a substitution effect (from the increase of the opportunity cost of leisure) will induce more working hours and less leisure. The overall effect of labour supply depends on the relative magnitudes of the two. This result is important to explain why labour supply curve can be backward binding. For an individual, the initial small increase of the wage rate may have a dominated substitution effect, which leads him/her to work more hours, however, as wage grows higher and higher, income effect grows larger and may become greater in magnitudes than the substitution effect, therefore, the individual will eventually reduce his/her working hours.

The empirical evidences on the estimate of elasticity of labour supply have further proved the results from income-leisure model. The shape of the labour supply curve really depends on the relative magnitudes of the income elasticity and compensated (substitution effect) elasticity. For example, Hansson and Stuart (1985) have summarized that, the overall elasticity of labour supply from a wage change is 0.10, uncompensated elasticity is about 0.25 and income elasticity is about -0.15. However, male and female may have a different labour supply schedule.

Generally, for males, the labour supply schedule is likely to be slightly backward bending. For females, the labour supply schedule is more strongly forward sloping, shown a strong positive substitution elasticity outweighing the weak negative income elasticity. This empirical evidence

can also be used in explaining the fact that the male participation rate is generally declining with national income and women's participation rises with nation income (Figure 2.3). For countries that average income is higher, higher wage rate induced strong income elasticity for males and strong substitution elasticity for females, which leads to lower participation rate for males and higher participation rate for females.

38) Section Break 38.1) B 38.2) A 38.3) C

Chapter 3: Labour Supply and Public Policy: Work Incentive Effects of Alternative Income Maintenance Schemes MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

39) All of the following government programs are types of income maintenance programs except: A) social assistance.

B) unemployment insurance.

C) Child care subsidies D) negative income tax schemes.

E) wage subsidy.

40) All of the following are sources of concern with income maintenance programs except that: A) They might reduce wages.

B) They might reduce work incentives.

C) They might be fiscally costly.

D) They might increase wages.

E) They might lower employment.

41) All of the following describe a demogrant except: A) an income grant to a specific demographic group B) the simplest income maintenance program C) A grant whose amount varies with the worker's wage D) a lump-sum transfer E) That it shifts the potential income constraint vertically upward 42) Which of the following programs is an example of a demogrant?

A) Old Age Security (OAS) B) Canada Pension Plan (CPP) Benefits C) Quebec Pension Plan (QPP) Benefits D) The Child Tax Benefit E) The Guaranteed Income Supplement

43) Which of the following is NOT a way to improve work incentives for welfare recipients?

A) Increase the market wages for jobs for which welfare recipients might be qualified to

perform.

B) Reduce the very high implicit tax rate that is applied to earnings of welfare recipients.

C) Alter the preferences that certain recipients might have for leisure compared to work.

D) Raise the benefit level.

E) Provide welfare recipients with job training and counselling services.

44) In the income-leisure framework, the impact of a demogrant payment involves which of the

following?

A) Only a substitution effect B) Only an income effect C) Both a substitution and an income effect D) A reservation wage effect E) No impact on incentives at all 45) Approximately how generous are social assistance payments?

A) About half of the official poverty line B) About two-thirds of the official poverty line C) About three quarters of the official poverty line D) About the same level as the official poverty line E) Above the official poverty line 46) What does the term negative refer to in a negative income tax scheme?

A) The individual does not have to pay income tax for any of his/her earnings.

B) The individual receives a subsidy or a credit rather than paying taxes for a certain

number of hours worked.

C) The program does not involve any disincentives to working.

D) The program involves fewer disincentives to working than does a conventional welfare or social assistance program.

E) None of the choices are correct

47) The difference between a conventional welfare program and a negative income tax program

is that: A) Recipients in the negative income tax program can receive labour market income

without having all of their benefits clawed back B) For the negative income tax program, the benefits received have to be repaid once the worker is working full time for wages.

C) Individuals have to be living below the poverty line in order to qualify for the negative income tax program.

D) The former type of program is transferred to the recipient by the government, while the latter is taxed away from the recipient by the government.

E) For the negative income tax program, the worker receives a wage supplement for each hour that he/she works.

48) Which of the following situations is depicted in this figure? G refers to a government benefit

payment.

A) B) C) D) E)

The absence of any income maintenance scheme The Canadian Employment Insurance scheme The wage subsidy scheme The conventional welfare program The negative income tax scheme

49) Which of the following statements regarding the negative income tax scheme is true?

A) There is no substitution effect involved B) It reduces work incentives relative to the situation of conventional welfare C) It reduces work incentives relative to the situation of no welfare D) It increases work incentives relative to the situation of no welfare E) It is neutral as far as work incentives are concerned, but it makes recipients better off 50) For which of the following programs does the recipient receive a supplement from the

government for each hour worked?

A) A wage subsidy program B) A negative income tax program C) A work-sharing program D) An unemployment insurance program E) Guaranteed Income Supplement 51) Which of the following statements concerning the work incentive (or disincentive) effects

under a wage subsidy program is true?

A) It strengthens the incentives to work B) It is ambiguous as far as the number of hours worked is concerned C) It could make the worker worse off D) The substitution effect works in the same direction as the income effect E) It is targeted to the population in need 52) Which of the following programs is superior in terms of its ability to direct payments to those

individuals or families in greatest need of assistance?

A) Social assistance or welfare B) Unemployment insurance C) Wage subsidies D) Canada Pension Plan E) None of the choices are correct 53) Empirical research regarding the incentive effects of welfare programs and tax changes

applied to the earnings of low-income workers has indicated that: A) Incentives are irrelevant to their labour force participation decisions B) No conclusions can be drawn due to the complex nature of the subject C) There is little response to changes in these tax rates D) Disincentives exist as far as labour force participation is concerned E) None of the above

54) What is the approximate rate at which lost earnings are replaced by Canada's unemployment

insurance system?

A) 100% of all earnings up to a certain threshold, and 0% for wages above that level B) 75% of all earnings C) 55% of all earnings D) 55% of all earnings up to a certain threshold, and 0% for wages above that level E) 0% of earnings up to a certain threshold, and 55% for wages above that level 55) The reason for which worker's disability insurance can potentially have adverse effects on

work incentives is that: A) the income that it provides enables one to reach a certain income level without any work obligation.

B) the opportunity cost of leisure increases.

C) the recipient is allowed to work as many hours as he/she can without losing any of the benefits.

D) the taxes that finance the benefits can have negative effects on labour demand.

E) All of the answer choices are correct.

56) Consider a worker who has small children. All of the following are effects ofincurring child

care expensesexcept: A) that they increase reservation wages.

B) that they might decrease labour force participation.

C) that they increase the hours of work for labour market participants.

D) that they reduce the hours of work for labour market participants.

E) None of the above, as they are all effects.

57) What is the effect of a demogrant on the budget constraint?

A) It shifts the budget line outward.

B) It makes the budget line flatter C) It makes the budget line steeper D) It places a kink in the budget line E) It changes the shape of the indifference curve 58) The Canadian Employment Insurance Program is best known for its generosity towards: A) Long-term unemployed workers B) Older unemployed workers C) High-wage unemployed workers D) Seasonally unemployed workers E) No particular group of unemployed workers

59) The Canadian Employment Insurance program has what impact on labour supply?

A) It decreases it B) It increases it C) Little influence D) Uncertain E) It increases it in one respect, but decreases it in another 60) Which of the following statements concerning subsidies for child care expenses is true?

A) They change the slope of the budget line.

B) They reduce the fixed costs of working.

C) They discourage labour force participation.

D) They tend to increase the reservation wage of working.

E) They cause a strong substitution effect toward more working activity.

61) Which of the following factors may affect the welfare participation rate for the entire

population?

A) The level of the basic benefit B) Unemployment rate C) The view of the political party in power D) the age composition of the population E) All of the above choices are correct 62) Non-experimental evidence regarding participation in welfare has suggested that: A) most people who initiate welfare benefits will leave welfare in one year.

B) most people who initiate welfare benefits will stay on welfare after one year.

C) the longer one is on welfare, the more likely one is to leave.

D) individuals with low predictable earnings and relative temporary characteristics are

less likely to use welfare.

E) Incentives do not appear to matter 63) Suppose that a worker says that due to a refundable tax benefit, it appears to her that working

pays more than it used to, and so she wants to work longer hours. What type of effect is involved?

A) Only a substitution effect B) Only an income effect C) Both a substitution and an income effect D) A reservation wage effect E) No impact on incentives at all

64) Suppose that the social assistant benefit that worker receives is reduced, as and such he can

no longer pay his rent. He therefore decides that he must work longer hours. What type of effect is involved?

A) Only a substitution effect B) Only an income effect C) Both a substitution and an income effect D) A reservation wage effect E) No impact on incentives at all 65) What is a difference between employment insurance and disability insurance programs?

A) The income-leisure framework cannot be applied to the case of disability insurance B) The two situations are quite similar.

C) There are no disincentives involved with disability insurance D) With disability insurance, the recipient could potentially have a higher level of

welfare than she did before the condition occurred E) There are no income effects involved with disability insurance SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

66) Congratulations! You have just been appointed to be the social policy czar by the prime minister. Your mission, whom you have no choice but to accept, is to reform these programs because they are presently not affordable and rife with inefficiencies. There is one fundamental issue that underlies the reform of workers' compensation, welfare/social assistance, and unemployment insurance, and that is the conflicting objectives of providing adequate income protection on one hand and providing a more efficient incentive structure on the other hand.

• Explain the nature of the disincentive effects that are involved with demogrant payments and the disincentive effects that are involved with tax and/or subsidy measures that vary directly with the number of hours worked. Do not get bogged down in technical details, and do not give graphs. Your response should be set in the framework of the labour supply model, which means a discussion of the income effect and the substitution effects.

• Explain the motivation of two variants of social assistance programs, the negative income tax program and wage subsidies. How are they supposed to improve the incentive structure?

Restrict your analysis to an intuitive explanation of the economic behavioural mechanisms.

SECTION BREAK. Answer all the part questions.

67)67) 67.1)

The four diagrams depict various ways to affect the incentive structure that is inherent in welfare programs. Which one shows the impact of increasing the offered wage rate?

A) Top left B) Top right C) Bottom left D) Bottom right

67.2)

The four diagrams depict various ways to affect the incentive structure that is inherent in welfare programs. Which one shows the impact of reducing the implicit tax rate?

A) Top left B) Top right C) bottom left D) bottom right

67.3)

The four diagrams depict various ways to affect the incentive structure that is inherent in welfare programs. Which one shows the impact of changing preferences such that recipients value labour market activity more?

A) Top left B) Top right C) bottom left D) bottom right

68) The following diagrams of budget constraints pertain to the next three questions. The vertical

axis is Income and the horizontal axis is Leisure.

Figure a)

Figure b)

Figure c)

Figure d)

68.1)

Which of the diagrams of budget constraints above depicts the Earned Income Tax Credit program?

A) a) B) b) C) c) D) d)

68.2)

68.3)

Which of the diagrams of budget constraints above depicts the Wage Subsidy program?

A) a B) b C) c D) d

Which of the diagrams of budget constraints above depicts the Negative Income Tax program?

A) a B) b C) c D) d

Answer Key Test name: chapter 3 39) C 40) A 41) C 42) A 43) D 44) B 45) C 46) B 47) A 48) E

Figure 3.5 in the textbook 49) C 50) A 51) B 52) A 53) C 54) D 55) A 56) D 57) A 58) D 59) E 60) B 61) E 62) A 63) A 64) B 65) D 66) Short Answer

The income-leisure framework is a useful way to analyze work incentive effects from different income maintenance programs. The budget constraint of a consumer is composed of two parts: non-labour income and wage income from total working hours. Therefore the change of nonlabour income and wage rate will affect a consumer's labour supply decision. If non-labour income increases, there will be a pure income effect, an individual who choose not to participate before will remain out of participation and an individual who has positive working hours will reduce his/her working hours and enjoy more leisure time. The change of the wage rate, however, will have a more complex effect on one's labour supply decision. For those who do not participate before, if the increase of the wage rate exceeds the reservation wage, they will choose to participate and the working hours is determined by the marginal rate of substitution of consumption and leisure and the wage rate. For those individuals who already work positive hours, a wage increase will have both income and substitution effect. An income effect from wage increase will induce more leisure and less working hours and a substitution effect (from the increase of the opportunity cost of leisure) will induce more working hours and less leisure. The overall effect of labour supply depends on the relative magnitudes of the two.

Demogrants are pure lump-sum transfers, based only on immutable individual characteristics like age or sex. While these transfers are independent of income, they will still have adverse work incentive effects as long as leisure is a normal good. Demogrant payments will directly add to non-labour income part of the budget constraint, which will induce a pure income effect. The individual choose not to participate in the labour market will remain out of workforce and for individual who has positive working hours, he/she will reduce work hours or if the income effect is large enough, withdrawing from the workforce.

In general, welfare programs are designed to increase the income of individuals with low income. Because welfare payments lead to income effect, all programs have adverse work incentive effects. The degree to which they have adverse work incentive effects depends on how strictly benefits are reduced in response to higher earnings.

Negative income taxes are proposed as an alternative to welfare programs with steep earnings tax-back rates. It composed of two parts: the first part is the basic guarantee income, which adds to the non-labour income part of the budget constraint, and the effect of that is work-reducing income effect; the second part is the implicit tax, any labour market earnings will subject to an implicit tax rate. The tax rate reduces the recipient wage rate and induce both income and substitution effect. In most cases, the dominated substitution effect will lead to fewer hours worked. As with the demogrant and welfare, at the point of maximum leisure, the basic income guarantee shifts the potential income constraint upward by the amount of the guarantee: even if the individual does not work, she has positive income equal to the amount of the guarantee.

Unlike welfare, as the individual works, income assistance is not reduced by the full amount of labour market earnings. However, income support does decline as income from work increases; thus, labour market earnings are subject to a positive implicit tax rate. Take-home pay does not rise as fast as labour market earnings; hence, the income constraint under the negative income tax plan is less steeply sloped than the original labour market income constraint.

Wage subsidies are targeted directly to the working poor. In this program, additional earnings are added directly to the wage rate to encourage higher participation and more working hours. For the recipients, it is exactly like a wage increase. If the person does not work, his income is still zero even though his wage is subsidized. However, as the person works more, his take-home pay rises more under the wage subsidy than if he were receiving only his market wage.

Just as an increase in wages has both an income and a substitution effect working in opposite directions insofar as they affect work incentives, so will the wage subsidy have an ambiguous effect on work incentives. The higher wage means higher potential income from which the individual will buy more of all normal goods, including leisure; hence, work incentives are reduced via the income effect. This income effect will be at work even though the individual has to work to receive the income: the increased leisure could come in the form of reduced hours or longer vacations or periodic withdrawals from the labour force or reduced work from another family member. The higher wage also means that the price (opportunity cost) of leisure has now increased; hence, work incentives are increased via this substitution effect. On net, theory does not indicate which effect dominates; hence, the work incentive effects of a wage subsidy are ultimately an empirical proposition.

Other things being equal (the recipients' welfare, their post-transfer income, or the size of the subsidy), the adverse work incentive effects of the wage subsidy are not as great as those of the negative income tax. Remember that under a negative income tax plan, both the income and substitution effects go in the direction of reducing hours of work. Work incentives are better under the wage subsidy because it increases the wage by the amount of the subsidy, while negative income tax reduced the wage by the amount of the implicit tax.

67) Section Break 67.1) B 67.2) C 67.3) D 68) Section Break 68.1) A 68.2) B 68.3) C

Chapter 4: Labour Supply Over The Life Cycle MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

69) Which of the following is a cohort effect?

A) When person A is born 10 years after person B, and this person has different preferences regarding leisure and income than person A because they were born in different social climates B) When person A is born in the same year as person B, and this person has different preferences regarding leisure and income than person A C) When person A is born 10 years after person B, and this person has different preferences regarding leisure and income than person A because of the age difference D) When person A has different preferences regarding leisure and income because of geographical differences E) When person A has similar preferences regarding leisure and income despite of geographical differences 70) Which of the following is NOT a life-cycle phenomenon?

A) retirement decisions B) The number of hours to work C) fertility decisions of women D) marital decisions E) All of these labour supply choices are life-cycle in nature 71) Fill in the blanks of the following statement. Individuals plan out their

their

environment.

A) lifetime labour supply; working B) lifetime labour supply; expected lifetime labour market C) expected earnings; expected lifetime labour market D) short run labour supply; permanent labour market E) lifetime labour supply; retirement

given

72) Which of the following expressions illustrates the point that lifetime consumption (over a

two-period framework) should equal lifetime earnings? Assume that the rate of interest is zero. C denotes consumption, W denotes wages, H denotes hours, l denotes leisure, and the subscript denotes the periods.

A) C1 * C2 = W1H1 + W2H2 B) C1 * C2 = W1 (H1 + H2) C) C1 + C2 = W1H1 + W2H2 D) C1 + W1H1 = C2 + W2H2 E) Utility = U (C1, C2, l1, l2) 73) Which of the following cannot describe an unanticipated wage increase?

A) permanent B) evolutionary C) temporary D) transitory E) None of the answer choices are correct.

74) Which of the following events will likely cause the largest labour supply response?

A) Permanent anticipated wage increase B) Permanent anticipated wage decrease C) Transitory unanticipated wage increase D) Evolutionary unanticipated wage increase E) Evolutionary anticipated wage increase 75) Consider an evolutionary wage change. An intertemporal substitution would mean that: A) A forward-thinking consumer will buy more leisure because it is a normal good and

he/she has received a raise.

B) A forward-thinking consumer will work more when the returns to doing so are lowest.

C) A forward-thinking consumer will work more when the returns to doing so are highest.

D) A forward-thinking consumer will buy less leisure because it is a normal good and he/she has received a raise.

E) A forward-thinking consumer will work less when the returns to doing so are highest.

76) What is the primary impact that is expected from an anticipated evolutionary wage change

over the life cycle?

A) An inter-temporal income response B) An inter-temporal substitution response C) The substitution effect dominating the income effect D) The income effect dominating the substitution effect E) None of the answer choices are correct.

77) Consider the labour supply responsiveness to wage changes of various types. In what order

would we expect this elasticity to be, from the largest response to the smallest response?

A) evolutionary anticipated, permanent unanticipated, transitory unanticipated B) evolutionary anticipated, transitory unanticipated, permanent unanticipated C) permanent unanticipated, evolutionary anticipated, transitory unanticipated D) transitory unanticipated, evolutionary anticipated, permanent unanticipated E) transitory unanticipated, permanent unanticipated, evolutionary anticipated 78) Which of the following factors is the most important in determining whether the

intertemporal substitution response from a wage change is significant?

A) Whether or not leisure is a normal good.

B) Whether income effect is present.

C) Whether lifetime earnings are high or low.

D) Whether the wage change is anticipated or unanticipated.

E) Whether the wage change is temporary or permanent.

79) The household production model is most closely related to: A) The retirement decisions of women B) The fertility decisions of women C) How the preferences of women regarding income versus leisure have evolved over

time D) The cohort effects on labour supply E) None of these options 80) Time intensive and goods-intensive commodities pertain to which of the following?

A) Household production B) Retirement choices C) Fertility choices D) Intertemporal substitution E) Evolutionary wage changes

81) Which of the following variables is not associated with the household production

framework?

A) The price of leisure (the wage) B) The price of a unit of nutrition from raw food C) The price of a unit of nutrition from pre-cooked (prepared) food D) The preparation time involved for cooking and housework E) None of these above, as they all are 82) Which of the following variables is likely to have theleast effect on fertility decisions?

A) the cost of having a child B) the income of the family C) the price of goods and services that are associated with child bearing D) the tastes and preferences of the individual E) None of the choices are correct.

83) What is probably the MOST important reason that the rate of fertility declines as the level of

education increases?

A) The opportunity cost of bearing children in terms of foregone income increases.

B) More family planning services and knowledge become available.

C) Children may not be normal goods. Better educated family may buy more of other goods and services when income rises.

D) The costs of rising children are higher for better educated women.

E) The cost of education becomes cheaper for most of the women.

84) Research regarding the impact of Quebec's former program called ‘Allowance for Newborn

Children' showed that: A) Not very many individuals benefitted B) The findings were inconclusive C) The program had a neutral impact on fertility D) Fertility rates actually responded negatively E) Fertility rates did respond positively 85) All of the following are theoretical determinants of retirementexcept: A) laws specifying mandatory retirement.

B) wealth and earnings.

C) health and the nature of work.

D) availability of public pensions.

E) None of these above, because they are all factors.

86) Which of the following isnot a pension plan in Canada?

A) the universal old age security program B) the CPP program C) an employer-sponsored retirement program D) the guaranteed income supplement plan E) None of the choices are correct.

87) Which of the following is NOT associated with occupational/employer sponsored pension

plans?

A) B) C) D) E)

defined benefit plans defined contribution plans universal retirement benefits earnings based plans None of the choices are correct.

88) The 'tax-back' feature of the guaranteed income supplement means that: A) The payments are reduced by a certain fraction of every dollar that is earned by

working.

B) Individuals will receive a refund on their tax return when they reach retirement age.

C) The employer has to pay a tax on the amount of this benefit that is awarded to its employees.

D) Individuals lose much of their Canada Pension plan benefit if they receive this supplement.

E) The payments are increased by a certain fraction of every dollar that is earned by working.

89) Assume that a worker becomes eligible for a full pension, but that no retirement test is

applied. What would the impact be?

A) An income effect would push her towards delaying retirement B) She has an incentive to retire fully C) An income effect would push her towards retirement, but she still has some incentive to work D) It depends on how well she is paid.

E) None of these above

90) Which of the following statements regarding retirement isfalse?

A) The funding of public pension programs poses a fiscal challenge B) The income-leisure framework cannot be applied to the retirement decision C) Defined contribution plans are less common than defined benefit plans D) Defined benefit plans allow members some flexibility regarding when to retire E) The estimated responses to changes in the provisions (rules) of public and private

plans are small 91) What is the difference between the static labour supply framework and the dynamic one?

A) The dynamic framework pertains to the present time frame, while the static

framework pertains to the entire life-cycle B) The static framework refers only to the individual's labour supply choices, while for the dynamic framework the spouse's decisions are taken into account.

C) The static framework refers to the short run, while the dynamic one refers to the longrun.

D) Events in one time period can have repercussions for labour supply choices in another time period in the dynamic framework but not in the static framework.

E) The static framework refers to the long run, while the dynamic one refers to the short run.

92) The empirical research on the reasons for the remarkable increase in the labour force

participation rate for women shows that: A) Rising wages for women were responsible for the increase in the participation rate.

B) Better working conditions for women in a broader array of occupations were responsible for the increase in the participation rate.

C) Falling fertility rates among women were responsible for the increase in the participation rate.

D) Macroeconomic conditions were responsible for the increase in the participation rate.

E) Improved education opportunities for women were responsible for the increase in the participation rate.

93) In the framework of the household production model, if there is an increase in the wage rate,

the primary impact that we would expect is: A) a rise in fertility.

B) a substitution effect away from the production of the time-intensive commodity.

C) a substitution effect away from the production of the goods-intensive commodity.

D) an intertemporal substitution effect.

E) an increase in early retirement.

94) The effect of the retirement test, according to which pensions are clawed back as pensioners

work, is to: A) discourage recipients from working.

B) increase the funds flowing into the fund.

C) improve equity between workers and retirees.

D) raise the supply of labour.

E) increase reliance of private pensions.

95) In order to estimate the pure cohort effect, we need to: A) isolate cohort effects from age effects only.

B) isolate cohort effects from macroeconomic business cycle effects only.

C) isolate cohort effects from time effects only.

D) isolate cohort effects from macroeconomic business cycle effects and time effects.

E) isolate cohort effects from age effects and macroeconomic business cycle effects.

96) Based on the household production model, which of the following will lead to a definite

increase in the amount of leisure taken?

A) a decrease in the price of precooked food B) a decrease in the price of raw food C) a decrease in the preparation time for raw food D) an increase in the wage rate E) better food quality 97) Fertility rates are lower in the higher income families and wealthier countries because: A) Children are not normal goods.

B) Potential earnings of women are higher for higher income families and in wealthier

countries.

C) The cost of raising children is higher in higher income families.

D) The Education level is higher for higher income families.

E) The cost of living is higher for higher income families and wealthier countries.

98) According to some empirical research, the introduction of the birth control pills: A) reduced the fertility rate in the 1960s for married women, thus inducing them to

acquire more education.

B) reduced fertility rate in 1960s for single women, thus inducing them to acquire more education.

C) delayed fertility for young women and increased labour supply in 1960s.

D) reduced fertility rate in the 1960s for married women, but did not lead them to acquire more education.

E) delayed fertility for married women but did not increase their labour supply in 1960s.

99) Which of the following is NOT correct?

A) The Old Age Security is a demogrant.

B) The guaranteed income supplement is a part of the universal old age pension

program.

C) CPP/QPP is financed by the general tax revenue.

D) Employer sponsored occupational pensions cover about one third of the labour force in Canada.

E) The retirement test has been eliminated in the Canadian Pension Plan.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

100) The basic theme of this chapter is labour supply in a dynamic setting. Explain the basic difference in approach between analyzing labour supply behaviour in a static setting, in which decisions are made for a relatively short time frame (such as number of hours to supply each day or number of weeks to supply each year), and analyzing labour supply behaviour in a dynamic setting, with decisions made for a much longer time horizon stretching many years into the future.

• Explain intuitively, without getting bogged down in technical details, the basic workings of the dynamic, life-cycle models of labour supply. What are the major elements and predictions? In particular, compare the labour supply response that one would expect from a transitory, unanticipated wage increase and an evolutionary, anticipated wage increase.

• How does the decision to have children fit into a dynamic setting with intertemporal decisions? What economic factors are thought to affect fertility decisions? To what extent does the empirical evidence support these theoretical predictions? Why might governments be concerned about childbearing behaviour at all?

Answer Key Test name: chapter 4 69) A 70) B 71) B 72) C 73) B 74) E 75) C 76) B 77) B 78) E 79) C 80) A 81) E 82) B 83) A 84) E 85) E 86) E 87) C 88) A 89) C 90) B 91) D 92) B 93) B 94) A 95) E 96) A 97) B 98) C 99) C 100) Short Answer

As individuals age, there are several systematic patterns in their labour supply - withdrawing to have children and eventually retiring from the labour force - that require modifications of the static labour supply model. Principally, this entails allowing for preferences to work at various points in one's life, and more importantly, the specification of the lifetime budget constraint: the present value of lifetime consumption equals the present value of lifetime income. The resulting labour supply functions give labour supply in any period as a function of wages in each of the time periods, as well as interest rates and the present value of lifetime resources. The income and substitution effects from a wage change are more complicated in the dynamic setting. If the wage changes are fully anticipated and known with certainty, such as a wage increase with the job tenure, it will not create a leisure inducing income fact. Because it is already accounted for in the consumer's optimization problem, a fully anticipated wage increase will have no income effect.

However, a forward-thinking consumer will buy leisure when it is cheapest, as wage increases, the substitution effect will grow larger and larger and induce the consumer to work more.

Therefore an anticipated evolutionary wage increase will induce the largest labour supply response. However, if there is a sudden and temporary wage increase in wages, such as an overtime pay for a short period, there will be a small leisure-inducing income effect spread over the life cycle. At the same time, the increased wage will have the usual work-inducing substitution effect for the short period. The consumer will take advantage of the high temporary wage and increase the labour supply over this period. Comparing with the anticipated, evolutionary wage change, the unanticipated, temporary change will have smaller effect on the individual's labour supply over life time.

Children can have an important impact on the labour supply of parents, especially mothers; however, children are themselves the outcome of parents' choices. Economic models of fertility explore the connections between economic variables like income, wife's wages, cost of raising children, price of related goods (such as education) and technology (such as the methods of birth control) on the decision regarding whether and how many children to have, as well as interactions between fertility and labour supply.

The empirical evidence on fertility behaviour is difficult to interpret because it is difficult to isolate one particular factor from the analysis while holding others as constant. Most of empirical researches from the multiple regression analysis have generally confirmed the economic predictions. For examples, there tends to be a negative relationship between the number of children and the cost of having children. There tends to be a positive relationship between income and family size. It is also important to know that government policies can have profound effect on fertility and labour supply. For examples, the one-child policy in China has reduced the fertility rate substantially and the sex ratio has tilted decidedly in favour of boys. Canadian researcher have also indicated that family allowance, the Child Tax Credit and maternity benefits under unemployment insurance all had a positive effect on family size.

Chapter 5: Demand for Labour in Competitive Labour Markets MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

101) The short-run demand curve slopes downward because: A) The labour supply curve slopes upward B) of the law of diminishing marginal returns to labour C) As employment levels increase, firms are forced to employ workers of lower quality D) Of the law of diminishing marginal utility E) Of the wage elasticity of labour demand 102)

The figures below give the production schedule and the product demand schedule for a firm, which has to decide how many workers to hire.

Workers hired

Total Physical Product

Price of output

0

0

$10

1

10

$10

2

18

$10

3

25

$10

4

30

$10

5

34

$10

6

37

$10

If the wage = $40 for the time period in question, then the number of workers hired is: A) 2 B) 3 C) 4 D) 5 E) 6 103)

Assume that at the wage rate of $10 per hour, a firm is hiring 100 hours of labour per week. If the wage elasticity of demand is -1.2, how many hours of labour will the firm shed if the wage increases by $2 per hour?

A) 5 hours per week B) 12 hours per week C) 20 hours per week D) 24 hours per week E) 36 hours per week

104)

Assume that the wage elasticity of labour demand is inelastic. Which of the following statements is true?

A) If the wage increases, then the total payroll, or wage bill, decreases.

B) If the wage increases, the quantity demanded of labour increases.

C) If the wage increases, the labour demand curve will shift to the left.

D) If the wage decreases, the labour demand curve will shift to the right.

E) If the wage increases, there is no change in quantity demanded

105)

Consider the model for the derivation of demand for labour in a long-run context. At equilibrium, which of the following statements isfalse?

A) A profit-maximizing firm will choose the cheapest capital-labour combination that yields the optimal output.

B) At the optimal level of output, labour is cheaper than capital.

C) If labour is twice as expensive per unit than capital, then the marginal product of labour is twice as large as the marginal product of capital.

D) If the firm were to alter its input combination by hiring more or less labour, its profits would fall.

E) The slope of the isoquant is equal to the slope of the isocost line.

106)

The primary reason why workers in the fast-food industry are paid less is that: A) The demand for the product that they produce is quite elastic, making the demand for labour wage elastic.

B) It is easy to substitute capital for labour in the industry, making the demand for labour wage elastic.

C) Labour costs comprise a large share of the employer's expenses, making the demand for labour wage inelastic.

D) These workers collect economic rents.

E) These workers are seldom unionized.

107)

If the employer is a monopolist in the output market: A) There is monopsony in the input market.

B) The demand for labour is less elastic than it would be if the firm operated in a competitive output market.

C) The demand for labour is less elastic than it would be if the firm operated in a competitive input market.

D) The firm's demand curve for labour is identical to the case where the firm is a competitor in the output market.

E) None of the above choices are correct.

108)

The empirical evidence that exists concerning the magnitude of the wage elasticity of labour demand indicates that it tends to be: A) negative and elastic.

B) negative and inelastic.

C) negative and unitary elastic.

D) positive and inelastic.

E) None of the above choices are correct.

109)

Suppose that the wage elasticity of labour demand is -0.55. Which of the following statements is true?

A) A $ 1 increase in wages corresponds to a 0.55 unit decrease in quantity demanded of labour B) A $ 0.55 increase in wages corresponds to a 1 % decrease in quantity demanded of labour C) A 0.55 % increase in wages corresponds to a 1 % decrease in quantity demanded of labour D) A $ 1 increase in wages corresponds to a 0.55 % decrease in quantity demanded of labour E) A 1 % increase in wages corresponds to a 0.55 % decrease in quantity demanded of labour

110)

If the wage elasticity of labour demand is inelastic, the labour demand curve will tend to

be: A) B) C) D) E) 111)

Vertical Horizontal Negatively sloped and relatively flat Negatively sloped and relatively steep None of these options

What is the behavioural force that underlies the demand curve for labour?

A) Profit maximizing behaviour on the part of firms B) Utility maximizing behaviour on the part of workers C) To maintain favourable public relations for the firm D) Revenue maximizing behaviour on the part of firms E) Market share maximizing behavior on the part of firms

112)

Which of the following statements isfalse?

A) The quantity demanded for school teachers is equal to the quantity supplied in equilibrium.

B) The demand for school teachers is downward sloping because it is profitable for schools to hire more teachers when wages fall.

C) The demand for school teachers is likely to fall when the government decides to cut funding to schools.

D) The demand for school teachers is likely to be quite wage elastic.

E) The demand for school teachers is likely to rise when the government decides to cut funding to schools.

113)

For labour demand choices, the long run is defined as: A) the time period over which all costs are fixed.

B) the period of time over which all inputs can vary.

C) the period of time over which fixed factors cannot vary.

D) the period of time over which variable factors can vary.

E) the period of time over which variable factors cannot vary.

114)

For a firm that is a competitor in the output market, the demand for labour doesnot depend on: A) the price of capital.

B) the market demand for the final product.

C) the structure of the labour market.

D) the marginal product of labour.

E) the price of the output.

115)

All of the following statements regarding the marginal product of labour are true except: A) The firm will hire units of labour until it is equal to the going wage rate.

B) It intersects the average product of labour curve at the maximum point on that curve.

C) It is zero at the maximum value of total product.

D) It eventually diminishes in value because the capital stock is fixed.

E) It is the increment to total product obtained by hiring one more unit of a variable factor.

116)

In the area of diminishing returns in production: A) Total output declines with each additional unit of labour input.

B) The marginal product of labour increases at a decreasing rate.

C) The marginal product of labour decreases eventually.

D) The marginal product of labour first increases, then reaches a maximum level, and then decreases.

E) The marginal product of labour first decreases, then reaches a minimum level, and then increases.

117)

In the short run, the demand for labour for a competitive firm is: A) the marginal product of labour curve.

B) the same as the total demand curve for labour.

C) the downward sloping portion of the value of the marginal product curve.

D) perfectly elastic at the market wage.

E) perfectly inelastic at the market wage.

118)

Consider a firm that seeks to minimize the cost of producing a given level of output.

Which of the following statements is true?

A) In equilibrium, the marginal product of labour is equal to the marginal product of capital B) In equilibrium, the ratio of input prices equals the marginal rate of technical substitution.

C) In equilibrium, the wage rate equals the slope of the isoquant.

D) In equilibrium, the rate of return on capital equals the slope of the isoquant.

E) In equilibrium, the rate of return on capital equals the wage rate.

119)

With respect to the labour demand choice in the long run, which of the following statements isfalse? MPPL = marginal physical product of labour, MPPK = marginal physical product of capital, w = wage, and r = rate of return on capital A) MPPL/MPPK = w/r.

B) W = VMPL and r = VMPK. C) VMPL/VMPK = w/r.

D) The equilibrium is situated at the point of tangency between the highest isoquant and the isocost curve E) Profits are maximized.

120)

With respect to labour demand choice in the long run, which of the following statements isfalse? MPPL = marginal physical product of labour, MPPK = marginal physical product of capital, w = wage, and r = rate of return on capital A) The rate at which capital can be substituted for labour in the technology of production is equal to the rate at which capital and labour can be exchanged in the market B) MPPL/MPPK = w/r.

C) MPPL * r = MPPK* w D) The profit made per worker is maximized E) The marginal rate of technical substitution is equal to the ratio of factor prices

121)

The scale effect of a wage change implies that: A) Firms substitute toward the input that has become relatively cheaper.

B) The wage elasticity of demand is inelastic C) The demand for labour may be upward sloping if labour is an inferior input.

D) The firm reduces its output in response to the wage increase.

E) In order to increase output, a firm will use more labour even if the wage increases.

122)

The determinants of the wage elasticity of demand for labour include all of the following except: A) the availability of substitute inputs.

B) the elasticity of supply of substitute inputs.

C) the elasticity of demand for output.

D) the ratio of labour cost to total cost.

E) All of the choices are determinants of the wage elasticity of demand

123)

Which of the following events will tend to increase the wage elasticity of labour demand?

A) The share of labour costs among all costs of production rises.

B) It becomes more difficult to substitute between capital and labour.

C) The supply of capital, substitute factor, becomes almost vertical.

D) The price elasticity of demand for the output that the workers make becomes very inelastic.

E) The firm is no onger maximizing its profits.

124)

Consider a firm that seeks to minimize the cost of producing a given level of output. How will it respond to an increase in the wage rate?

A) It will increase production B) It will hire more workers C) It will substitute capital for labour D) It will not react at all E) It will decide based on whether labour is an inferior factor of production or a normal one

125)

The slope of an isoquant reflects: A) the marginal cost of labour.

B) the wage elasticity of the demand for labour.

C) the marginal rate of technical substitution between inputs.

D) the marginal productivity of capital.

E) the marginal productivity of labour.

126)

Along an isocost curve, which of the following remains constant?

A) The market prices of inputs B) The quantity of labour utilised C) The quantity of capital utilized D) The level of production E) The wage elasticity of demand for labour

127)

Along an isoquant curve, which of the following remains constant?

The market prices of inputs The quantity of labour utilised The quantity of capital utilized The level of production The wage elasticity of demand for labour

A) B) C) D) E) 128)

A perfectly competitive labour market would be characterized by: A) the presence of labour unions.

B) wage-setting firms.

C) wage-taking firms.

D) the presence of monopsony power.

E) infinitely elastic labour demand curves.

129)

Which of the following statements regarding a firm's production function is true?

A) The marginal product of labour curve intersects the average product of labour curve at its lowest point.

B) The average product of labour curve intersects the marginal product of labour curve at its highest point.

C) The average product of labour curve intersects the marginal product of labour curve at its lowest point.

D) The marginal product of labour curve must not intersect the average product of labour curve.

E) The marginal product of labour curve intersects the average product of labour curve at its highest point.

130)

In the context of outsourcing, consider the case where domestic labour and foreign labour are complements. If there is an increase in the wage paid to domestic labour, then which of the following statements is true?

A) There will be a substitution effect and a scale effect away from domestic labour.

B) There will be a substitution effect and a scale effect towards domestic labour.

C) There will be a small substitution effect away from domestic labour, but the scale effect will work toward domestic labour.

D) There will be a small substitution effect toward domestic labour, but the scale effect will work in favour of domestic labour.

E) There will be no substitution effect but only scale effect.

131)

In order to obtain the substitution effect of a wage change: A) One traces the change of the quantity demanded of labour through a parallel shift in the isocost line.

B) One moves either up or down the labour demand curve.

C) One traces the change in the quantity demanded of labour by moving along an isoquant curve as the factor prices change.

D) One needs to first know the wage elasticity of demand for labour.

E) One traces the change in output as firms respond to it.

132)

In order to obtain the scale effect of a wage change: A) One traces the change of the quantity demanded of labour through a parallel shift in the isocost line.

B) One moves either up or down the labour demand curve.

C) One traces the change in the quantity demanded of labour by moving along an isoquant curve as the prices change.

D) One needs to first know the wage elasticity of demand for labour.

E) One traces the change in output as firms respond to it.

133)

It is not necessarily the case that Canadian workers are doomed to hold "bad" jobs, as all of the "good" jobs are outsourced to countries with cheap labour. Which of the following related statements isfalse?

A) Canadian employers always have an incentive to seek out the lowest-cost labour and send the work there.

B) It is not clear that Canadian and foreign labour are typically substitutes in production.

C) One has to consider the unit labour costs in the two countries.

D) While Canadian labour is often expensive compared to foreign labour, it is often much more productive.

E) Outsourcing typically lowers the costs of production, which can lower the prices that Canadian consumers pay for certain goods, thereby permitting an increase in spending on other goods.

134)

Regarding an increase in wage, which of the following is INCORRECT? A) In a perfectly competitive industry, the wage increases shift up the firm's marginal and average cost curves.

B) In a perfectly competitive industry, the wage increases will reduce output and raise the market price of the output.

C) In a monopoly, the wage increases will raise the product price and reduce output.

D) The wage increases will reduce output, therefore total costs will be reduced as well.

E) In the case of wage increases, the scale effect and the substitution effect work in the same direction to reduce labour demand.

135)

Which of the following is correct regarding the elasticity of labour demand?

A) If capital and labour are easily substitutable, the derived demand for labour will be inelastic.

B) If the supply of substitute inputs is inelastic, the derived demand for labour will be inelastic.

C) If the product demand is elastic, the derived demand for labour will be inelastic.

D) If the share of the labour costs in total costs is large, the derived demand for labour will be inelastic.

E) None of the choices are correct.

136)

Which of the following is correct regarding the impact of globalization on the Canadian market?

A) Due to global competition, if there is a change in the product price, productivity of Canadian labour will decrease.

B) The labour demand in the Canadian market will decrease.

C) If Canadian labour and foreign labour are close substitutes, cheaper foreign labour will lead to scale effects, which may increase the demand for Canadian labour and foreign labour (holding other factors fixed) D) If Canadian labour and foreign labour are complements, cheaper foreign labour will lead to scale effects, which may increase the demand for Canadian labour and foreign labour.

E) The labour demand in the Canadian market will increase.

137)

Which of the following facts are correct regarding international comparison of labour costs and productivity?

A) Canada's compensation costs are relatively high compared to other European countries.

B) Canada has relatively low productivity growth since 1990s compared to many other European countries.

C) Canada's unit labour costs are much lower since 1990s due to the increase of productivity.

D) Canada's unit labour costs are lower than that of the United States.

E) Canada has relatively higher productivity growth since 1990s compared to many other European countries.

138)

The variable of unit labour costs is associated with which of the following?

A) The income effect of a wage change B) The substitution effect of a wage change C) The placement of the isocost curve D) The degree of competitiveness in international trade E) The wage elasticity of labour demand

139)

Which of the following items are not included in unit labour costs?

A) The wage elasticity of labour demand B) The foreign exchange rate C) Labour productivity D) Wages in local currency E) All of them are included

140)

Suppose that unit labour costs increase in Canada. What would be the expected impact?

A) An increase in the demand for Canadian labour B) An increase in Canadian exports C) A decrease in the demand for foreign labour D) An increase in the wage elasticity of labour E) A decrease in the demand for Canadian labour

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

141) Outline step by step the derivation of the short run labour demand curve. Do not confuse this with the model for long run labour demand involving isoquants and the isocost curves.

You do not have to give a graph. The first step is a description of the behavioural assumption. Restrict your analysis to an intuitive but methodical discussion. Include in your analysis an explanation of why it is called the derived demand for labour.

• Explain the different implications for labour demand between the case in which the output market is monopolized and the case in which it is perfectly competitive.

• Hicks' laws refer to the factors which affect the elasticity of labour demand. Explain the role of each of the following variables, and provide an explanation: a) the availability of substitute inputs b) the elasticity of demand for output c) the ratio of labour cost to total cost.

SECTION BREAK. Answer all the part questions.

142)142) 142.1) Assume that the wage increases from W0 to W1, but the rate of interest remains at r0. The

substitution effect is given by: A) N0 to NS B) N0 to N1 C) NS to N1 D) K0 to K1 E) We cannot tell 142.2) Assume that the wage increases from W0 to W1, but the rate of interest remains at r0. The

scale effect is given by: A) N0 to NS B) N0 to N1 C) NS to N1 D) K0 to K1 E) We cannot tell

Answer Key Test name: chapter 5 101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137)

B D D A B A B B E D A E B B A C C B B D D E A C C A D C E A C A A D B D B

138) 139) 140) 141)

D A E Short Answer

Labour demand curve explains the relationship between market wage rate and the demand of labour by profit-maximizing firms. It is a derived demand because the demand of labour depends on the demand of the product that the firm produces. In the short run, firms cannot adjust all of the factors of production used and labour may be the only variable factor. In the short run, the firm will choose how many workers to hire in order to produce the profit maximizing amount of product. In this case, if the market wage rate is given, the higher the wage, the higher the cost of production, a firm will choose to hire fewer workers in order to maximizing its profits. Therefore market wage rate and labour demand is negatively related.

Generally speaking, the profit maximizing firm chooses to produce where marginal revenue equals to marginal cost of the product. Therefore, the demand schedule of a profit-maximizing firm that is a wage-taker in the labour market is where the marginal revenue product of labour equals the wage rate. Marginal revenue product can be decomposed into marginal revenue of the product (additional revenue which a firm can gain by selling additional unit of the product) and marginal product of labour (additional products which a firm can produce by hiring one more unit of labour). If the product market is perfectly competitive, a firm is a price taker. In this case, product demand is given by price equalizes marginal revenue of the product; therefore the labour demand is given by price times the marginal product of labour, which gives the market value of the marginal product of labour.

If a firm is a monopoly in the product market, then the firm is a price-setter on the product market. In this case, the firm faces a downward slopping product demand curve, in order to sell additional unit of output, the monopolist has to lower the price for its product. Assuming that it cannot differentiate its homogeneous product to consumers, the monopolist will also have to lower the price on all units of its output. As a result, its marginal revenue will fall faster than its price, reflecting the fact that the price decline applies to intramarginal units of output. The marginal revenue curve for the monopolist will lie below and to the left of the demand curve. By equating marginal revenue with marginal cost so as to maximizing profits, the monopolist will produce less output and charge a higher price. Therefore in the labour market, the monopolist will also hire less workers given the market wage rate. Its marginal revenue product is the product of marginal revenue and the marginal product of labour and in this case, marginal revenue is not equal to the price of the product.

The elasticity of labour demand explains the responsiveness of labour demand to the change of market wage rate. It can be measured by the percentage change of labour demand over the percentage change of market wage rate. Because labour demand is a derived demand, the factors that affect output demand elasticity will affect labour demand elasticity as well. For example, if the demand for output is more elastic, the demand for labour is also more elastic. if labour and other input factors are easily substitutable, as wage rate increases, firms can easily replace labour with other input (such as workers vs. automation), therefore labour demand is subject to higher elasticity. Lastly, the ratio of labour cost to total cost may also affect labour demand elasticity. If labour cost is a large proportion of the total cost, such as house painting services, the change of

the wage rate will not affect the demand of labour as much. Therefore given all things are equal, higher the labour cost, lower the elasticity of the labour demand.

142) Section Break 142.1) A 142.2) C

Chapter 6: Labour Demand, Nonwage Benefits, and Quasi-Fixed Costs MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

143) Suppose that the government decides that it seeks to alter the composition of labour input somewhat such that more jobs are created but those with jobs work fewer hours. What type of policy measure might promote that goal?

A) Increasing the fringe benefits that are available to workers with jobs B) Increasing the overtime premium C) Lowering the ceiling of wages and salaries to which social contributions apply D) Wage cuts across the board E) None of the choices are correct.

144)

When labour costs are quasi-fixed, then which of the following statements are true?

A) The employer has committed to them in a contract.

B) They are dependent of the number of hours worked by a firm's workforce.

C) They are independent on the number of hours worked by a firm's workforce.

D) They are fixed in the short run but variable in the long run.

E) They are fixed in the long run but variable in the short run.

145)

Which of the following isnot a category in pay for time not worked?

A) Pensions plans B) Welfare plans C) workers' compensation D) unemployment insurance benefits E) overtime pay

146)

Why do employers have an interest in paying their workers some of their compensation in the form of non-wage benefits?

A) Because they increase certain work incentives and raise turnover.

B) Because it allows them to cut wages C) Because the government pays part of the compensation package.

D) Because they serve to reduce unwanted turnover and provide certain work incentives.

E) Because they reduce the costs of the compensation package that the employers pay.

147)

Deferred compensation refers to: A) benefits that the worker receives only after filling out the proper paperwork B) benefits that the worker receives after retirement C) benefits that the worker receives at an early stage in his/her career D) benefits that the worker receives only after his/her performance has been evaluated E) A refund of the worker's contributions to the retirement fund

148)

The benefits of using deferred compensation include all of the following,except that: A) It serves as a screening device for hiring new workers.

B) It strengthens work incentives.

C) It fosters employee loyalty and reduces unwanted turnover.

D) It drives a wedge between the marginal revenue product and the wage.

E) It raises the cost to the employee of being fired for poor work, absenteeism and other work-ethic related issues.

149)

Which of the following statements regarding wage costs is true?

A) They are a one-time labour cost.

B) They are a fixed labour cost.

C) They are a quasi-fixed labour cost.

D) They are a variable labour cost.

E) They are deferred compensation.

150)

Layoff rates are much higher among low-skilled workers compared to high-skilled workers because: A) High-skilled workers have a smaller wedge or buffer between their marginal revenue product and their wage.

B) Hiring and training costs tend to be significantly higher for high-skilled workers.

C) Low-skilled workers tend not to work as hard as high-skilled workers.

D) Low-skilled workers are often over-paid E) The quasi-fixed labour costs of low-skilled workers are higher.

151)

If quasi-fixed labour costs are very high, employers may try to meet their labour demand needs by: A) making their existing workers work overtime B) hiring more workers.

C) Increasing the intensity of work effort D) Cutting the variable labour costs E) starting a work-sharing program

152)

The practice of work-sharing refers to: A) sharing the scarce number of employees that are available.

B) sharing the scarce number of jobs that are available by reducing the length of the standard work week.

C) sharing the scarce number of work hours and jobs that are available by reducing the number of jobs.

D) sharing the scarce number of jobs that are available by banning overtime.

E) sharing the scarce number of jobs that are available by hiring new workers.

153)

Suppose that a government seeks to reduce the extent to which firms have their workers working overtime hours. Which of the following would be ineffective?

A) Reducing the length of the standard work week beyond which an overtime premium must be paid B) Decreasing the overtime wage premium C) Granting workers the right to refuse overtime D) Reducing the absolute maximum number of hours that any worker can work E) All the choices would have the desired effect

154)

Complete the following sentence. According to the "lump-of-labour fallacy," .

A) there is a fixed number of jobs in the economy regardless of wages.

B) there are always jobs available in the economy; they just have to be spread around.

C) Many workers have more than one job.

D) There is always a situation of high unemployment.

E) Unemployed workers always exist.

155)

Economists have made several recommendations to reduce barriers to employment sharing programs. Which of the following is an example?

A) hiring more employees in order to reduce the need for overtime hours B) Pro-rating employer contributions to medical, dental, and life insurance plans according to the number of hours worked C) banning the scheduling of overtime hours D) raising quasi-fixed labour costs as a share of total labour costs E) Cutting wages across the board

156)

Which of the following statements regarding the practice of labour hoarding is false?

A) It is most likely to occur in situations where quasi-fixed labour costs are high.

B) It is most likely to occur with high-skilled workers.

C) It is most likely to occur when most labour costs are variable.

D) There is not a lot of empirical evidence that firms adopt this practice.

E) It is least likely to occur with low skilled workers.

157)

What is the impact of an increase in the magnitude of quasi-fixed labour costs on the demand curve for labour?

A) The demand curve shifts upwards and to the right.

B) The demand curve shifts downwards and to the left.

C) There is no change to the demand curve.

D) The demand curve becomes more elastic.

E) The demand curve becomes less elastic.

158)

All of the following are factors contributing to the rise in the proportion of the labour force hired by temporary-help agencies, except that: A) Employers require the services of an employee for only a short period.

B) Employers seek to replace a permanent employee who is temporarily absent.

C) Employers seek to reduce quasi-fixed labour costs.

D) Employers can avoid hoarding excess labour.

E) Employers seek to develop stable, loyal, and productive labour forces.

159)

Which of the following statements regarding the presence of non-wage benefits isfalse?

A) As a percentage of the payroll among large firms, there has been a downward trend in the presence of non-wage benefits over the past 60 years or so.

B) A major component is pay for hours that are not worked.

C) Major components are pension and welfare plans D) Pay for time not worked is the fastest growing component of the non-wage benefit since 1960s.

160)

In the context of quasi-fixed labour costs, the "buffer" refers to a gap between the value of the marginal revenue product of a worker and his/her wage. Which of the following statements isfalse?

A) The buffer is created by the presence of quasi-fixed labour costs.

B) When labour demand falls, employment might not fall by as much.

C) When labour demand rises, employment might not rise by as much.

D) It is consistent with labour hoarding behaviour on the part of firms.

E) None of the choices are correct.

161)

In which countries have short-time compensation programs been developed the most?

The USA and Canada Japan Australia Continental Europe The United Kingdom

A) B) C) D) E)

162)

Why did the unemployment rate actually decline during the recession of 2008-09 in Germany?

A) Because the unemployment rate of all OECD countries had declined during this period.

B) Because of the presence of large and effective short-time work schedule programs in Germany.

C) Because out of the 19 OECD countries, all but Germany had low unemployment rate prior to the recession.

D) Because the German labour unions negotiated pay cuts for much of the German labour force E) None of the choices are correct.

163)

Assume the there are positive hiring and training costs. Which of the following expressions is true? VMP is the value of the marginal product, W is the wage, and r is the discount rate.

A) B) C) D) E)

164)

Which of the following phenomena couldnot be explained by the presence of quasi-fixed labour costs?

A) The rise of part-time labour B) Labour hoarding C) The rise of the gig economy D) The rise of temporary help agencies E) None of these above, as they can all be explained

165)

What is the approximate percentage of non-wage labour costs of total labour costs?

A) 10% B) 30% C) 50% D) 5% E) This is unknown

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

166) Congratulations! Based on your performance advising the prime minister on employment related issues in the past, your contract has been renewed. This time your task is to analyze the effect of quasi-fixed labour costs on the demand for labour. In the report that you prepare for him or her, you should cover the following points.

• Define quasi-fixed labour costs and give some concrete examples.

• Explain intuitively the impact of quasi-fixed labour costs on labour market behaviour. You need not give a graph, but give some mention of the discounted present value of the stream of wages and the stream of the values of marginal product is desirable.

• The prime minister is very concerned about high unemployment and would like for you to explain why overtime is prevalent when employers could be meeting their labour force needs by hiring unemployed workers. He is also concerned about the growing use of casual and part-time labour rather than full-time labour. Do you have any policy recommendations that speak to this issue?

Answer Key Test name: chapter 6 143) 144) 145) 146) 147) 148) 149) 150) 151) 152) 153) 154) 155) 156) 157) 158) 159) 160) 161) 162) 163) 164) 165) 166)

B C E D B D D B A B D A B C B E A E D B B A B Short Answer

Nonwage benefits, such as paid vacations, pensions, and other social insurance contributions, account for almost 40 percent of labour compensation. Many of these compensation costs are "quasi-fixed" in that they are incurred once a worker is hired but do not change with the number of hours worked. Other labour costs, such as hiring, training and firing costs are also quasi-fixed costs. Quasi-fixed costs do not increase proportionately with hours worked drives a wedge between the marginal cost of hiring an additional worker and working an existing worker more hours. This generates an important distinction between the number of workers and hours worked per worker in yielding a given labour input.

Because the existence of quasi-fixed costs, the marginal cost of hiring an additional worker increases, which distorts the labour expansion decision of the firm away from employment and toward more hours so as to minimize the costs. In the presence of nonrecurring fixed costs of employment, the profit-maximizing condition which the value of marginal product of labour equals to the worker's market wage rate changes to the dynamic setting. The present value of the costs of hiring an additional worker (hiring, training costs in the first period and worker's wage costs for the future periods of the job tenure) equals to the present value of the marginal revenue.

Therefore, when hiring an additional worker, the firm must anticipate that the value of the marginal product will exceed the wage in most future periods.

Many governments have adopted policies to restrict the use of overtime. For examples, overtime legislation can include reducing the standard work week beyond which an overtime premium must paid, increasing the overtime premium, establishing or reducing the statutory maximum hours that are allowed and/or granting workers the right to refuse overtime. As a policy maker, one must realize that the empirical evidence on the effectiveness of overtime legislation is limited and not conclusive. Therefore the reductions in the use of overtime may not translate directly into new jobs. (Also see Exhibit 6.3 and empirical evidences in the text further explanations).

Chapter 7: Wages and Employment in a Single Labour Market MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

167) Which of the following statements regarding the demand for labour isfalse?

A) If a firm is a monopolist in the product market, the firm's demand for labour is the same as the industry's demand for labour.

B) If a firm is a monopolist in the product market, the firm's demand curve is more elastic than it would be if the firm were operating in a perfectly competitive product market.

C) If a firm is a monopolist in the product market, it may or may not pay wages which are higher than the case in which the firm operates in a competitive output market.

D) If a firm is a monopolist in the product market, it may still behave as a wage taker in the labour market.

E) If the firm is a monopolist in the product market, the firm's demand curve is steeper than it would be if the firm were operating in a perfectly competitive product market.

168)

If workers receive economic rents, then: A) They are receiving wages which are higher than the competitive level.

B) They are receiving wages which are below the competitive level.

C) If wages were to be increased, the employment level would rise.

D) If wages were to be reduced, the firm would no longer be able to recruit labour.

E) The product market could be perfectly competitive.

169)

Under what conditions might one expect wages to be above the prevailing competitive levels?

A) Only when unemployment is low B) only in the case where a union exists C) Only when there is a shortage of labour D) only in cases in which the employer has market power in the labour market E) in cases in which the employer is a monopolist, an oligopolist, or a monopolistic competitor in the output market

170)

If an employer is competitive in the labour market: A) It has to pay at least the going wage.

B) It can pay at most the going wage.

C) The wage level depends on the structure of the product market.

D) It can affect the going market wage by either hiring many workers or laying off many workers.

E) It can pay less than the market equilibrium wage.

171)

Which of the following statements isfalse?

A) If a firm is an imperfect competitor in the labour market, the labour supply curve that it faces is upward sloping.

B) If a firm is an imperfect competitor in the labour market, the marginal labour cost curve lies above the labour supply curve.

C) If a firm is a perfect competitor in the labour market, then there is no marginal labour cost curve.

D) If a firm is an imperfect competitor in the labour market, then the employees receive lower wages than they would if the market were perfectly competitive.

E) If a firm is an imperfect competitor in the labour market, then the labour supply curve is less than perfectly elastic.

172)

What is the primary difference between a monopsonist and a firm which operates in a perfectly competitive labour market?

A) The monopsonist is likely to be more profitable.

B) In order to recruit another worker, the monopsonist incurs a larger increase in labour costs.

C) In order to recruit another worker, the monopsonist incurs a smaller increase in labour costs.

D) The monopsonist hires such that the marginal revenue product of labour is equal to the marginal labour cost, but the non-monopsonist does not.

E) The labour supply curve is irrelevant for the monopsonist.

173)

Which of the following statements isfalse?

A) The monopsonist is a wage taker.

B) Technically speaking, the monopsonist has no demand curve for labour.

C) The monopsonist has market power in the labour market.

D) The monopsonist is a profit-maximizing firm.

E) The monopsonist may be able to carry out wage discrimination.

174)

Which of the following statements regarding monopsony isfalse?

A) The equilibrium wage and the equilibrium employment levels are lower than what they would be if the labour market were perfectly competitive.

B) All workers except for the marginal worker are paid more than their reservation wage.

C) If a competitive labour market were to become a monopsony, economic rent would be transferred from the workers directly to the employer.

D) The total wage bill is lower in the case of monopsony.

E) The marginal cost of labour is lower than the average cost of labour in the case of monopsony.

175)

Which of the following statements regarding monopsony isfalse?

A) A perfectly discriminating monopsonist pays all of its workers less than the wage that would prevail in a perfectly competitive labour market.

B) The monopsonist pays its workers less than their reservation wages.

C) A perfectly discriminating monopsonist will hire the same number of workers as a firm which is a perfect competitor in the labour market.

D) A monopsonist can lower the wages that it pays without losing its entire labour force.

E) A perfectly discriminating monopsonist earns more profit than a simple monopsonist does.

176)

Which of the following statements regarding monopsony isfalse?

A) A monopsonist is likely to face a fairly inelastic supply of labour.

B) A monopsonist faces no constraints as it sets wages.

C) A monopsonist is likely to lose some of its market power in the long run.

D) Monopsony is more likely in situations of unskilled labour.

E) Monopsony is more likely in situations of immobile labour.

177)

In the real world, what are some of the signs that are indicative that the labour market might be characterized by a monopsony?

A) low wages B) high unemployment C) unfilled vacancies and recurrent labour shortages D) labour markets in which the employers are diffused E) underemployed workers

178)

The empirical literature on monopsony has found that: A) there is evidence of monopsony power in certain labour markets.

B) Although one might expect to see monopsony power in markets for nurses and teachers, studies have failed to find this effect.

C) Where it exists, monopsony power seems to endure over the long run.

D) The incidence of it has diminished over time.

E) All of the answer choices are correct.

179)

Within the theoretical framework of competitive labour markets, what is the expected effect of the minimum wage?

A) to make the workers better off B) to reduce employment below the level that would otherwise exist C) to make the workers who are retained less productive than what would otherwise be the case D) to shift the demand for low-skilled workers to the left (a fall) E) to cause a shortage of workers at the going transactions wage

180)

Empirical evidence on the practical importance of minimum wage laws suggests: A) that they do reduce the employment levels of younger and unskilled workers to a minor extent - a weak dis-employment effect.

B) that they do reduce the employment levels of younger and unskilled workers to a major extent - a strong dis-employment effect.

C) that their impact on the employment level is nil.

D) that their impact on employment is actually favourable because they put more money in the hands of poorly paid workers, stimulating consumer spending, thus promoting economic growth.

E) that they succeed in raising the incomes of poor households.

181)

The supply of labour to an industry is generally upward sloping because: A) Workers are more willing to work when there is the added incentives in the form of higher wages.

B) It is more profitable for firms to hire more workers when labour is cheap.

C) The substitution effect and the scale effect of a wage change work in the same direction.

D) The wage elasticity of labour supply is elastic.

E) There are many workers working for an industry.

182)

If a firm operates in a perfectly competitive labour market, then: A) It must be a monopsonist B) It faces an infinitely elastic supply of labour.

C) Its demand for labour must be inelastic D) It must also operate in a perfectly competitive output market E) the workers are unionized.

183)

Which of the following is a normative statement about minimum wages?

A) "A minimum wage causes some unemployment in the labour market."

B) "A minimum wage is a just another name for a living wage."

C) "A minimum wage has adverse consequences for inflation."

D) "A minimum wage is an effective instrument to fight poverty" E) None of the choices

184)

If the government sets a minimum wage for workers that is above the competitive wage, A) Wages would fall as firms try to reduce labour costs.

B) Unemployment would decrease through a dis-employment effect.

C) Unemployment would increase through a dis-employment effect.

D) The total wage bill must rise.

E) The total wage bill must fall.

185)

Which of the following statements is true if a firm is operating in a competitive labour market?

A) The supply of labour is horizontal at the market wage.

B) The demand for labour is the marginal product of labour curve.

C) The marginal cost of labour curve lies above the supply curve.

D) The market demand curve must be horizontal E) The marginal cost of labour curve lies below the supply curve.

186)

Competitive labour markets lead to all of the following conditionsexcept: A) Wages are equalized across all labour markets.

B) The additional benefit that a worker receives equals to the additional cost of foregone

leisure for the worker.

C) Labour market leads an efficient allocation of labour resources.

D) The marginal workers not receiving economic rents.

E) Market wage rate is determined when labour demand equals to the labour supply.

187)

Which of the following statements about a payroll tax is true?

A) It generally reduces the quantity of workers.

B) It is borne entirely by workers if the supply of labour is perfectly elastic.

C) It reduces the quantity demanded of workers if the supply of labour is perfectly inelastic.

D) It is borne entirely by workers if demand is perfectly inelastic.

E) It is shared equally between workers and employers.

188)

Which of the following statements is true? The burden of a payroll tax is paid: A) by workers if the supply of labour is perfectly elastic.

B) by workers if the demand for labour is perfectly inelastic.

C) by both workers and firms if the elasticities of demand and supply of labour are between zero and infinity.

D) by firms if they are legally responsible for remitting the tax to the government.

E) by workers if the taxes are withheld from their paychecks government.

189)

Which of the following statements is true in regarding to the marginal cost of labour?

A) is derived from the marginal revenue product curve.

B) is horizontal for a perfectly competitive firm but is downward sloping for a monopsonist.

C) shows the increase in revenue received by the firm if it hires one more worker.

D) is equal to the wage paid if the firm is a monopsonist.

E) is the same as the supply curve of labour for a monopsonist.

190)

Which of the following statements isfalse?

A) Monopsony firms have a wage greater than the marginal labour cost because they face upward- sloping labour supply curves.

B) Monopsony firms will behave as if they are competitive if a wage is imposed at the level of the competitive wage.

C) Monopsony firms will hire more workers if a minimum wage is imposed above the monopsony wage.

D) Monopsony firms can earn a higher profit than firms operating in competitive labour markets.

E) Monopsony firms have a wage lower than the marginal labour cost because they face upward- sloping labour supply curves.

191)

What is the expression for the wage elasticity for a linear demand curve?

A) W / Nd B) Δ W / Δ Nd C) Δ Nd / Δ W D) (Δ Nd / Nd) / (Δ W / W) E) (Δ W / W) / (Δ Nd / Nd)

192)

Which of the following occupations is thought to be affected by monopsonistic conditions in the real world?

A) Nurses B) Fast-Food Workers C) Cleaners and Housekeepers D) Physicians E) Professional Athletics

193)

In 2007, the government of Ontario raised the minimum wage substantially and justified it as a policy designed to help the poor. What was the evidence found in this regard?

A) It does help the poor because the employment effect is strong.

B) It does help the poor because most of the poor are working at low-paid jobs.

C) It does not help the poor because there is not a lot of overlap between the poor and minimum-wage workers.

D) It does help the poor because many of them work long hours, and thus will benefit from a higher wage.

E) The existing research is inconclusive on this issue.

194)

One way to evaluate empirically the impact of the minimum wage on employment is to: A) survey employers in order to ask them whether they laid off employees as a result of the increase in the minimum wage.

B) estimate an equation for aggregate employment that has the minimum wage as the independent variable.

C) observe and record what happens to the employment of low-wage workers every time there is an increase in the minimum wage.

D) appeal to the theory of labour demand, which says that all other factors held constant, an increase in the minimum wage unambiguously reduces employment.

E) compare what happens to the employment of low-wage workers in one sample consisting of firms that were subjected to an increase in the minimum wage to a comparable group of firms that were not.

195)

What has empirical research on the incidence of the payroll tax found?

A) That most of the burden falls upon workers B) That there is no burden at all because the tax is free C) That most of the burden falls upon firms D) That the burden is shared almost equally between firms and workers E) That payroll taxes are "job killers"

196)

After the imposition of minimum wage, monopsonist's profits will: A) increase B) decrease C) remain the same D) rise as fast as the marginal cost E) Be equal to zero

If the labour market is perfectly competitive, labour demand function is given by ND = a + bW and labour supply function is given by NS = c + dW; W is the wage rate, and a, b, c, and d are constants. At market equilibrium, we can determine the market wage rate as: A) (a + c)/(d + b).

B) (a + c)/(d - b).

C) (a - c)/(d + b).

D) (a - c)/(d - b).

E) (d + b)/(a + c).

197)

198)

If the labour market is perfectly competitive, labour demand function is given by ND = a + bW and labour supply function is given by NS = c + dW; W is the wage rate. After imposing a payroll tax T, market equilibrium wage rate will be: A) lower than before the tax, and workers pay b/(b - d) share of the tax.

B) lower than before the tax, and the firm pays b/(b - d) share of the tax.

C) higher than before the tax, and workers pay b/(b - d) share of the tax.

D) higher than before the tax, and the firm pays b/(b - d) share of the tax.

E) equal to what it was before the tax.

199)

Given a market wage of W*, what is the expression for the market quantity demanded of labour Nm? A) The product all of the values of Nf, where Nf is the firm's quantity demanded of labour at W*.

B) The vertical summation of all of the Nf curves, where Nf is the firm's quantity demanded of labour at W*.

C) The sum of all of the values of Nf, where Nf is the firm's quantity demanded of labour at W*.

D) The percent change in Nm divided by the percent change in the wage.

E) It cannot be derived, as it has to be given.

200)

Dynamic monopsony refers to the situation whereby: A) The firm's supply curve of labour is always upward sloping.

B) The firm's supply curve of labour is infinitely elastic.

C) The supply curve of labour for the entire market is infinitely elastic.

D) The firm is always a wage-taker.

E) The firms supply curve of labour might slope upwards temporarily.

201)

If a firm has to pay higher wages in order to recruit more workers, then: A) The firm's supply curve of labour is upward sloping.

B) The firm's supply curve of labour is infinitely elastic.

C) It will not hire and employ any more workers D) The firm is always a wage-taker.

E) It must be operating in a perfectly competitive labour market.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

202) Congratulations! You have just been appointed the special advisor to the prime minister for employment-related issues. Fortunately, your portfolio does not involve analyzing all of the facets of labour markets, but rather two specific policy measures: the payroll tax and the minimum wage regulation.

• Payroll taxes have risen rapidly in Canada over the past decade, and some analysts claim that this has a detrimental effect on employment. The payroll tax has been labelled by some as a "job killer." Explain how you would go about analyzing this proposition. Because you are a trained economist, you can go beyond the scope of the rhetorical anecdotes and unsubstantiated, ideological accusations, and apply supply-and-demand analysis to this issue.

Your response should include a graph with an explanation, and an identification of the variables that determine the extent of the alleged disemployment effect.

• It is alleged by some that minimum wage laws have a potentially adverse effect on employment. If valid, this assertion would definitely weaken the ability of minimum wage laws to help the disadvantaged. It is time to play point-counterpoint. First, put on your neoclassical economist hat and argue a case against the minimum wage. What are the economic effects? Is it an effective policy measure? Because you are a trained economist, you can apply substantive economic analysis using labour demand theory. Next, put on your more interventionist hat, and argue that the minimum wage does not have significant disemployment effects. In particular, you might mention the case of implementing a minimum wage in a monopsony, or the case of an employer with a high degree of market power. Finally, put on your empirical researcher hat. We know that there are theoretical reasons to expect at least some disemployment effect, but how important are these effects in the real world? Without discussing the technical details, discuss the essence of the findings of the empirical research. You should provide a bit more depth than a simple yes/no answer.

SECTION BREAK. Answer all the part questions.

203) 203) 203.1) VMP = value of marginal product, N = employment, and W = wage. The equilibrium

wage and employment levels for the monopsonist are: A) W3 and N1 B) W1 and N1 C) W2 and N2 D) W1 and N2 E) W2 and N1 203.2) VMP = value of marginal product, N = employment, and W = wage. The equilibrium

wage and employment levels for the firm in a perfectly competitive labour market are: A) VMPW and NM. B) WM and NM. C) WC and NC. D) WM and NC. E) WC and NM. 203.3) VMP = value of marginal product, N = employment, and W = wage. The number of

vacancies that exists for the monopsonist is: A) Zero B) Given by the distance WCWM C) Given by the distance NMNC D) Given by the distance VMSM E) Given by distance SMWM

204) 204) 204.1) Which depicts the situation of a monopsonistic firm. A minimum wage of W1 is imposed

by the government on this firm. The equilibrium employment level is: A) the same as it would be if the labour market were perfectly competitive B) N1, which is greater than the level of employment that would prevail if the firm were a monopsonist C) N0 D) at the intersection of the minimum wage W1 and the marginal cost of labour curve E) indeterminate

Answer Key Test name: chapter 7 167) 168) 169) 170) 171) 172) 173) 174) 175) 176) 177) 178) 179) 180) 181) 182) 183) 184) 185) 186) 187) 188) 189) 190) 191) 192) 193) 194) 195) 196) 197) 198) 199) 200) 201) 202)

B A E A C B A E B B C A B A A B B C A A A C C A D A C E A B D A C E A Short Answer

The textbook has very good and detailed explanations on how payroll tax affects the labour market equilibrium. A good answer to this question should include three parts. The first part explains how to derive market equilibrium under linear demand/supply function which includes a graph similar as Figure 7.4. For example, If the labour market is perfectly competitive, labour demand function is given by ND = a + bW and labour supply function is given by NS = c + dW; W is the wage rate. At market equilibrium, we can determine the market wage rate as W* = (a c)/(d - b). The second part of the answer should explain how the imposition of pay roll tax reduced market equilibrium wage rate and employment and identify the share of the tax paid by the workers and the firm. For example, if a pay roll tax, T, is imposed, T will add to the labour demand side of the equation, the new equilibrium wage rate is W1 = (a - c)/(d - b) - b/(b - d)T, therefore W1 < W*, workers' share of the tax is given by b/(b-d)T and firm's share of tax is given by d/(b - d)T. A figure similar to Figure 7.5 can further explain the effect of payroll tax. Lastly, it is important to explain that even though the employer seems to pay the tax, but workers share the burden of the tax, the proportion that workers pay is determined by the relative slope and the elasticity of the demand and supply curve. If the slope of labour demand is steeper than the slope of the labour supply, workers pay a larger proportion of the tax; therefore the disemployment effect is small. If the labour supply curve is perfectly inelastic (in the long run), workers will end up paying all of the tax and the employment will not be affected.

The textbook has thoroughly explained the effect of minimum wage legislation on labour market.

In a competitive labour market, the imposition of a minimum wage above the prevailing (equilibrium) wage will unambiguously reduce employment, as long as the labour demand curve is downward sloping. A detailed explanation can be seen with Figure 7.8. Therefore the neoclassical economist will predict a disemployment effect after imposing the minimum wage.

On the other hand, the imposition of a minimum wage set between the monopsony and competitive wage will increase employment in a monopsonistic labour market. It is important to understand that under monopsony, labour supply curve is upward sloping. The resultant marginal cost schedule is rising faster than the average wage cost because of the necessity to pay intramarginal workers the extra wage. In the absence of the minimum wage, the monopsonist would choose his employment by equating MC with VMP. With the imposition of minimum wage, part of the labour supply schedule becomes horizontal line and for this part of the labour supply (AC = MC), the monopsonist will pay same minimum wage regardless the number of employment. Therefore employment can be increased under monopsony market with the imposition of minimum wage. There is considerable debate about the empirical impact of minimum wages on employment. Early studies in the 1980s have shown that minimum wage legislation reduces employment. However, some of newer studies, especially that of Card and Krueger (1994) (see Exhibit 7.4), did not find evidence of a disemployment effect, and even found evidence suggesting that increases in minimum wages were associated with increases in employment, which is more in line with the monopsony model. Recent Canadian evidence suggests that the short-run effect is small, though the disemployment effect may be higher in the long run.

203) 203.1) 203.2) 203.3) 204) 204.1)

Section Break B C D Section Break B

Chapter 8: Compensating Wage Differentials MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

205) Consider the diagram for a labour market in which the relevant job attribute is the stability of the hours (increasing from left to right). In other words, less stable jobs are characterized by irregular hours, with no guarantee of a full time job, but with the possibility of overtime hours some weeks. What would the curves look like?

A) The model cannot be used for this situation B) Negatively sloped iso-profit curves and positively sloped iso-utility curves C) Positively sloped iso-profit and iso-utility curves D) Negatively sloped iso-profit and iso-utility curves E) Positively sloped iso-profit curves and negatively sloped iso-utility curves 206)

Consider the diagram for a labour market in which the relevant job attribute is job safety (increasing from left to right). Why are the iso-profit curves concave, i.e., bowed in towards the origin?

A) Because a firm's profit decreases if it provides a safer environment for the workers.

B) Because paying higher wages and providing a safer environment for the workers are both costly for the employer.

C) Because the marginal rate of transformation between wages and safety is increasing as a firm introduces stronger safety procedures.

D) Because there is a negative trade-off between job safety and wages E) Because the marginal rate of transformation between wages and safety is decreasing as a firm introduces stronger safety procedures.

207)

Which of the following statements does not pertain to wage structures?

A) The wage premiums that compensate workers for working jobs with undesirable characteristics B) The relative prices of labour that are utilized in order to allocate labour to its most efficient use C) The relative prices of labour that are used to remunerate skills and ability D) The lowest wage levels at which workers will accept jobs having certain attributes E) None of the answer choices are correct.

208)

Which of the following isnot a way in which high wages may induce higher productivity?

A) Through improved morale B) Through greater intensity of work effort C) Through reductions in absenteeism D) Through higher levels of job safety and improved working conditions E) Through lower levels of turn over

209)

An iso-profit schedule is defined as: A) The various combinations of wages and safety that the firm can provide and maintain the same level of profits.

B) The various combinations of safety initiatives and wages that the firm can provide and still earn profit.

C) The variation between profit and loss margins that a firm earns as a function of changing wage and job safety levels.

D) The various combinations of wages and safety that the firm can provide and maintain the same level of utility for the labour force.

E) The various combinations of wages and safety that the firm can provide and maintain the same level of costs.

210)

Fill in the blank in the sentence below. The iso-profit schedule exhibits a(n) between wages and job safety levels.

A) increasing marginal rate of transformation B) diminishing marginal rate of transformation C) diminishing marginal rate of substitution D) increasing marginal rate of substitution E) constant tradeoff

211)

The employers' offer curve shows which of the following?

A) the maximum compensating wages that will be offered in the labour market for various levels of safety B) the minimum compensating wages that will be offered in the labour market for various levels of safety C) the wage levels offered by employers that are dependent on the required levels of safety and health D) the employers' preferred combination of wage and safety levels E) the employers' profit-maximization wages that combines wage and safety levels

212)

The curvature of the iso-utility curve illustrates: A) a diminishing marginal rate of transformation between wages and job safety.

B) a diminishing marginal rate of substitution between wages and job safety.

C) the diminishing marginal rate of technical substitution between wages and job safety.

D) the level of safety that can be exchanged for wages on the labour market.

E) the law of diminishing marginal returns applied to wages.

213)

Compensating premiums for job-related risks are normally paid (ceteris paribus) in the form of: A) higher wages.

B) certificates of appreciation for working at a tough job.

C) time off the job with pay.

D) longer coffee breaks at Tim Hortons.

E) higher degrees of job security.

214)

Fill in the blanks in the sentence below. The more the individual worker, the more he/she requires a compensating wage differential in return for accepting a riskier work environment.

A) risk-averse; larger B) risk-loving; larger C) risk-averse; smaller D) risk-neutral; smaller E) risk-neutral; larger

215)

Fill in the blank in the following sentence. Higher iso-profit schedules would imply profits that are _ the normal, competitive level.

A) below B) higher than C) equal to D) greater than or equal to E) None of the answer choices are correct.

216)

The slope of the wage-safety locus gives: A) The change in the wage premium that the labour market yields for differences in the salary of each worker.

B) The change in the wage premium that the labour market yields for differences in the degree of risk of the job.

C) The change in the wage premium that the labour market yields for differences in the utility levels of workers.

D) The change in profitability that is associated with different combinations of wages and job safety.

E) The change in the wage premium that the labour market yields for differences in the preference of the workers.

217)

In wage-job safety space, workers' indifference (or iso-utility) curves slope downwards because: A) More hours of labour are supplied when wages are increased.

B) Employers will compensate them for their aversion to risk.

C) Lower wages are required in order to keep profits constant if a higher degree of job safety is required.

D) Workers require a higher compensating wage in order to remain indifferent to the additional risk.

E) Workers require a higher compensating wage in order to avoid risky jobs.

218)

In the context of empirical research on compensating differentials, omitted variable bias may exist when: A) Important variables are not controlled for in the measurement of the wage-risk tradeoff.

B) Employers attempt to hide crucial safety information from their employees.

C) The information about factors that are correlated with job risk is imperfect.

D) Irrelevant variables are included in the equation.

E) Estimating samples have selection issues.

219)

In the context of job-related risk, the term "value of life" refers to: A) people's willingness to pay to save a person's life.

B) people's willingness to pay in order to reduce the risk of death from a job-related accident to zero.

C) more leisure time.

D) the average amount of awards in lawsuits involving wrongful death.

E) the value that is placed on the possibility of death in a working environment.

220)

How do economists go about estimating the value of life in the context of job safety regulation?

A) They never engage in such an exercise, as life is infinitely precious and thus no value can be placed upon it.

B) They add up the cost of implementing all of the job safety features in firms that have excellent job safety records.

C) They take the amounts that are rewarded to victims' families in wrongful death lawsuits.

D) They estimate the compensating wage differential that workers in a dangerous occupation receive for the level of risk that they assume, and then extrapolate that figure for a scenario in which the risk is reduced to zero.

E) They estimate the difference between profits that are earned by firms with dangerous working conditions versus those with safer working conditions.

221)

In searching for empirical evidence of the existence of compensating differentials, all of the following problems are potentially an issue except: A) error-in-variables problems for the risk variable B) omitted variable bias in the wage equation C) Serially correlated error terms D) sample selection bias for the wage equation E) simultaneous equation bias problem

222)

Which of the classical economists was the first to think and write about the topic of compensating wage differentials?

A) David Ricardo B) Alfred Marshall C) John Stuart Mill D) John Maynard Keynes E) Adam Smith

223)

With reference to behavioural economics, in the context of compensating differentials, all of the following statements application except that: A) The labour market will generate compensating differentials in order to deal with jobrelated amenities and disamenities.

B) It investigates how individuals make job-related choices (such as working conditions) based on imperfect information.

C) It makes a case for government intervention and regulation in the workplace.

D) It gives reasons for why people ignore major infrequent risks or possible disamenities of the job.

E) It is based on laboratory experiments in which the choices of workers are observed.

224)

What does the empirical evidence regarding compensating differentials tend to reveal?

A) They do not exist to any great extent.

B) They do exist in situations of job safety and work hazards.

C) There is evidence of the existence of both positive and negative differentials for a wide range of job amenities and dis-amenities.

D) It is thought that they exist, but the methodology is so fraught with pitfalls that the evidence is not deemed to be credible.

E) The findings of the research studies are contradictory.

225)

Which of the following regarding attracting doctors to rural community is NOT correct?

A) Most of the doctors prefer to work and live in the urban area.

B) Doctors will not respond to salary premiums for practicing in these areas.

C) Given the tight budget constraints, government cannot afford to pay the doctors a premium to attract them in the rural community.

D) Rural communities do not always have fully staffed and equipped hospitals.

E) The theory of compensating wages explains that the doctors will move to rural community as long as a premium is paid.

226)

Regarding empirical research on compensating wage differentials, which of the following is NOT correct?

A) People in poorer countries are willing (more realistically, constrained) to take on more risk in return for smaller wage increases than are people in richer countries.

B) Compensating wage premiums are paid for work hazards and they increase with the seriousness of the risk.

C) Compensating wage premiums are larger in non-union than in union environments.

D) Empirical evidence supports the claim that individuals would have to be compensated for bearing the risk of unemployment.

E) Empirical evidence shows that overall compensation inequality increased even more than wage inequality.

227)

Which of the following regarding family-friendly workplace practice is correct?

A) One cannot use the theory of compensating wage differentials to explain familyfriendly workplace practice since it is not viewed as a job characteristic.

B) One cannot use the theory of compensating wage differentials to explain familyfriendly workplace practice, since people are not willing to accept lower wages in return to family-friendly work environment.

C) Conditions such as the availability of parental leave, flexible working hours, job sharing, and taking time off work and making it up later are all part of the familyfriendly workplace programs advocated by the government.

D) Empirical research finds little evidence to support the use of the theory of compensating wage differentials to explain family-friendly workplace practice.

E) None of the answer choices are correct.

228)

Which of the following is correct in a competitive labour market?

A) imposing safety regulation is easy since all firms will adopt it right away due to the market competition.

B) a legislated increase in safety will always make people better off.

C) a legislated increase in safety will definitely drive some firms out of the business.

D) the application of uniform safety standards will not help to weed out the firms that have low safety technologies.

E) the firm will bear the costs of a legislated increase in safety regulations.

229)

Which of the following is a problem related to the empirical studies of compensating wage differentials?

A) Errors-in-variables problems B) Multi-collinearity C) Serial correlation D) Representative estimating samples E) None of these above

230)

In the model of compensating differentials, the derivation of the market-wage safety locus is premised on which of the following conditions?

A) perfect information and imperfectly competitive conditions B) Homogenous firms and homogeneous preferences of workers C) Risk neutral workers D) Perfect information and competitive conditions E) None of these above

231)

The main point of the perspective of behavioral economics is that: A) Firms are not necessarily driven by profit maximizing behavior B) Workers tend to downplay risk regarding the workplace hazards C) The free market can attain an optimal equilibrium that trades off wages against risk D) Job safety regulation often fails E) Workers are not necessarily driven by utility maximizing behaviour

232)

Consider an equilibrium between a firm and a worker that consists of a relatively low wage and a relatively high degree of safety. How would one describe the parties?

A) A relatively safe firm and a relatively risk-averse worker B) A relatively unsafe firm and a relatively risk-averse worker C) A relatively safe firm and a not so risk-averse worker?

D) A relatively unsafe firm and a not so risk-averse worker?

E) We cannot tell given this information

233)

In the context of compensating differentials, what has the literature regarding UBER drivers found?

A) That the drivers are underpaid based on their working conditions B) That the theory of compensating differentials does not application at all C) That the drivers' preferences are similar to that of cabdrivers engaged in standard jobs D) That they are willing to accept less favourable working conditions in exchange for higher wages E) That the drivers are willing to accept lower wages in exchange for flexibility

234)

All of the following items are something that workers might receive or pay a compensating differential for except: A) The risk of injury B) A higher or lower level of utility C) Health benefits D) Family friendly work practices E) Employment security

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

235) Explain in general, intuitive terms the theory of compensating differentials. There is no need to provide a graphical analysis or to furnish technical details. Your response should address the following issues: (1) Explain how it fits onto the primary, neo-classical approach to labour economics.

(2) What are the primary elements (what are the curves in this model actually reflecting)?

(3) What are the two primary implications?

• Illustrate this theory by describing the following phenomena: • very low wages in the child care sector • very high wages in the mining sector • high wages in construction Explain why an economist like Adam Smith who subscribes to free-market ideology would find this model so appealing.

Answer Key Test name: chapter 8 205) 206) 207) 208) 209) 210) 211) 212) 213) 214) 215) 216) 217) 218) 219) 220) 221) 222) 223) 224) 225) 226) 227) 228) 229) 230) 231) 232) 233) 234) 235)

D E C D A B A B A A A B D A B D C E A B B C C D A D B A E B Short Answer

The theory of compensating differentials uses neoclassical approach to explain why wages can be expected to differ across individuals, especially individuals with equal productivity characteristics.

The model of compensating wage differentials can be applied to any job characteristic, but the most common application is workplace safety. Firms can choose their production technology to offer workers greater safety, or they can economize on safety and offer the savings to workers in the form of higher wages. For any firm, there will generally be a tradeoff in offering more safety or higher wages, holding constant the level of profits. In the broader labour market, however, the competition between firms for workers will imply that for any level of safety, the technologically highest possible wage will be offered, while firms earn zero economic profits. The resulting "menu" of wage-safety combinations is called the employers' offer curve.

Workers have preferences over combinations of wages and workplace safety. Obviously, they would like more of both, but at any level of utility, workers are willing to accept some additional risk in exchange for higher wages. Not all workers have the same attitudes toward workplace risk and will put different values on workplace safety. Workers will sort across firms according to their relative tastes for wages or safety. Those who are least tolerant of risk will choose to work for those firms offering more safety, at the price of lower wages, while those who are less concerned about safety will work at the riskier, but higher-paying jobs.

In comparing wages across jobs with different levels of safety, the resulting equilibrium choices of workers and firms will yield a "market wage-safety locus." Given that most workers value safety (i.e., on the margin are willing to buy some additional safety in the form of lower wages at some price), and that safety is costly for firms to supply, we expect that the wage-safety locus will show a negative relationship between wages and safety; that is, that wages will be lower for safer jobs, all else equal.

In general, wages will be higher for some individuals in order to compensate them for doing unpleasant jobs (or incurring additional costs of employment), while others will willingly accept lower pay for jobs with more amenities. Sectors such as child care services, office clergies are low risk sectors, which average wage is lower than sectors which are high risk, such as mining and construction.

This model is very appealing to many economists who advocate free market competition. In particular, competitive markets can yield the optimal amount of these characteristics, with compensating wages being the price that equilibrates markets. This ensures that the need of employers to carry on production in a manner that may involve undesirable working conditions is required to confront the need of workers for desirable conditions, and vice versa. This also implies, for example, that the optimal amount of safety is not zero; people are seldom willing to pay the price of attaining that otherwise desirable state. In such competitive markets, regulations setting a uniform standard, such as a health and safety standard run the risk of making the parties worse off, largely because compensating wages will adjust in a fashion that workers themselves would not have accepted for the improved working conditions.

Chapter 9: Human Capital Theory: Applications to Education and Training MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

236) How do employers typically finance training their workforce?

A) By paying workers a wage which is greater than the value of the marginal product during the early stages of the employment relationship.

B) By paying workers a wage which is lower than the value of the marginal product during the later stages of the employment relationship.

C) By charging the new employee/trainees an upfront, out-of-pocket fee.

D) By paying workers a wage which is greater than the value of the marginal product during the later stages of the employment relationship.

E) By paying workers a wage which is lower than the value of the marginal product during the early stages of the employment relationship.

237)

According to the signaling theory of education, A) The level of education or training directly measures the productivity of the worker.

B) The level of education or training of one worker affects the productivity of her coworkers.

C) Education and training function as utility-generating goods from the worker's perspective.

D) Education and training do not contribute directly to productivity, but act as a filter to screen candidates.

E) The social rate of return to education is greater than the private rate of return.

238)

The essence of human capital theory is that: A) Firms spend money on their capital stock and equipment in order for labour to become more productive.

B) Investments are made in human resources so as to improve their productivity and, therefore, their earnings.

C) All workers who want to increase their salary should obtain a university diploma.

D) Workers invested in higher education in order to send a signal to potential employers regarding their underlying ability.

E) Education and training do not contribute directly to productivity, but act as a filter to screen candidates.

239)

The opportunity cost of obtaining human capital is: A) the job experience lost while attending school.

B) the direct cost of books, supplies, and tuition fees.

C) the income foregone while acquiring it.

D) the estimate of the increase in salary that results from the acquisition of skills.

E) Higher the greater the discount rate

240)

Private costs and benefits are those that are: A) accrued or incurred by society.

B) not entered into the calculation of the value of human capital.

C) accrued or incurred by the parties investing in human capital.

D) external to the decision of investing in human capital.

E) of great concern to the government.

241)

Which of the following statements regarding pecuniary costs is true?

A) They involve resource costs like the cost of labour.

B) They are included in the calculation of social costs and benefits.

C) They involve a transfer from one group to another.

D) They are all fixed costs.

E) They are not subject to present value discounting

242)

The shape of the "age-earnings" profiles reflect all of the following,except that: A) earnings tend to increase with age but at a deceasing rate.

B) individuals generally continue to make human capital investments in the form of onthe-job training and work experience once they have entered the labour force.

C) the earnings of individuals with higher levels of education are generally higher than those with fewer years of education.

D) older, more experienced workers have higher wage profiles than younger workers.

E) None of these above, as they are all valid statements.

243)

In the context of investments in human capital, perfect capital markets imply all of the following,except that: A) An individual considering an investment in human capital does not have to be concerned with the timing of income.

B) An individual considering an investment in human capital does not have to be concerned with the timing of expenditures.

C) An individual can base his/her human capital decision on total lifetime income.

D) An individual faces no liquidity constraints as they can borrow against expected future income.

E) An individual makes an investment decision based on his/her current level of income.

244)

The decision to invest in human capital doesnot involve which of the following?

A) The costs of tuition and books B) Direct expenditures C) Forgone earnings D) Projected earnings E) None of the choices are correct, as they all apply.

245)

The rule for optimal human capital investment is that: A) the individual should increase years of education until the discounted present value of the benefits of an additional year of education equals the discounted present value of the additional costs.

B) the individual should increase years of education until the discounted present value of the benefits of an additional year of education is less than the discounted present value of the additional costs.

C) the individual should increase years of education until the discounted present value of the benefits of an additional year of education is greater than the discounted present value of the additional costs.

D) the individual should increase years of education until the discounted present value of the benefits of all of the years of education equals the discounted present value of all of the associated costs.

E) The individual should invest in training and skill development such that the potential employer is impressed with her credentials.

246)

When some important variables that enter into economic decision making are not observable until after a decision has taken place, firms are said to operate in an environment of: A) imperfect information.

B) market equilibrium.

C) imperfect competition in the output market.

D) imperfect competition in the input market.

E) perfect capital markets

247)

In the context of hiring and recruitment, which of the following isnot true of a sorting device?

A) It illustrates the more general phenomenon of signaling in markets.

B) It provides an alternative explanation of the positive correlation between education and earnings.

C) It is an integral part of human capital theory.

D) It involves an alternative theory to investment in training and education.

E) It is related to the empirical problem of ability bias.

248)

Fill in the blanks in the following sentence. Earnings tend to with age, and thus with labour market experience, until age _ years is reached, and then tend to .

A) decrease; 40 to 50; increase B) decrease; 45 to 50; increase C) increase; 40 to 50; decline D) increase; 45 to 55; increase E) Level off; 40 to 50; decrease

249)

Fill in the blanks in the following sentence. workers would their wages.

A) Increases; skilled; increase B) Decreases; unskilled; depress C) Increases; unskilled; depress D) Decreases; skilled; depress E) Increases; unskilled; have no effect on

250)

251)

in the relative supply of

Which of the following refers to general training?

A) It is the training that can be used only by the firm that provides it.

B) It is the training that can be used by various firms.

C) It is the training that can be generalized to a wide range of jobs.

D) It is the training designed for generalists: so-called "jack of all trades."

E) None of these above

Fill in the blank in the following sentence. In the absence of will be financed by the employees.

A) bonding arrangements B) government subsidies C) job market signaling D) specific human capital E) Opportunity costs

252)

, general training

In the context of discounted present value, under what conditions can the sum of the income earned in each period divided by the discounting factor be replaced by the payment divided by the rate of interest?

A) When the stream of payments is collected over a long period of time B) When the interest rate is high C) When the payments are variable over time D) When the costs of obtaining the education are zero E) Under no circumstances is that approximation correct

_

253)

The human capital model has strong neo-classical underpinnings. Why might a heterodox economist disagree with this approach?

A) Because some of the predictions that flow from the model have turned out to be wrong B) Because the earnings function that stems from the human capital model has not been empirically validated C) Because it is based on the assumption that most individuals have a wide degree of choice in regards to how many years of education that they obtain D) Because there are certain challenges involved in the estimation of the earnings function that stems from the human capital model E) Because one should not draw an analogy between the decision to invest in an inanimate capital project and the decision to invest in a human.

254)

What is the idea behind the income-contingent loan financing scheme?

A) Tuition should be lowered for all students in order to improve access to higher education and reduce student debt-loads upon graduation.

B) Grants awarded to many students should be raised in order to improve access to higher education and reduce student debt-loads upon graduation.

C) Tuition should be raised somewhat in order to boost the quality of education provided, but repayment of student loans should be geared to the student's income after graduation.

D) Tuition should be raised somewhat in order to boost the quality of education, but repayment of student loans should be contingent upon graduation.

E) Tuition should be raised somewhat in order to boost the quality of education, but in the event of a default, student loans should be forgiven.

255)

A human capital earnings function is: A) a function relating an individual's earnings to his/her education level.

B) a function relating an individual's earnings to his/her characteristics that determine productivity.

C) a function relating an individual's earnings to the signals that he/she emitted to potential employers D) a function relating an individual's earnings to his/her family background.

E) a function relating an individual's earnings to his/her professional background.

256)

Which of the following equations corresponds to the most common form of the empirical earnings equation? S denotes the number of years of schooling, EXP denotes the number of years of experience, AGE denotes the age of the worker, epsilon denotes a disturbance term, r denotes the rate of return to education, and ln denotes the logarithmic operator.

A) ln Y = α + r S + β 1 EXP + β 2 EXP2 + ε B) ln Y = α + r S + β 1 EXP + β 2 S 2 + ε C) ln Y = α + r S + β 1 AGE + β 2 AGE 2 + ε D) ln Y = r EXP + β 1 S + β 2 EXP2 + ε E) Y = α + (ln r) S + β 1 EXP + β 2 EXP2 + ε

257)

It is indisputable that the degree of inequality in the distribution of wages has risen drastically in North America over the past 35 years or so. The most widely accepted explanation is that: A) The returns to education and to unobserved skill have increased.

B) The decline of institutions such as labour unions tends to raise the wages of lowerpaid workers.

C) The increased international competition and imports tended to positively affect lowwage workers.

D) There is increased exploitation of labour by unscrupulous multi-national firms.

E) Cuts in social programs such as social assistance and employment insurance negatively affect low-wage workers.

258)

Which of the following factors does NOT determine the private rate of return to education?

A) Future earnings B) Foregone income C) Interest rate D) Direct costs of education E) All of the choices answer the question.

259)

Which of the following regarding "education as a signaling device" is correct?

A) Higher educated workers have higher productivity.

B) Lower educated workers have lower productivity.

C) The role of education in this model is only used as a filter, which has no effect on worker's productivity.

D) Higher educated workers may have higher marginal costs to obtain education.

E) Lower educated workers may have lower marginal costs to obtain education.

260)

A problem may arise while estimating the return of education. This is called: A) sample selection bias.

B) omitted variable bias.

C) specification bias.

D) ability bias.

E) simultaneous equation bias.

261)

Which of the following statements regarding the issue of "ability bias" isfalse?

A) In the earning function, ln Y = a + bS + e, where log wages depend only on the level of schooling, S, and unobserved talent, e. The OLS estimate of the return to schooling b is biased, because unobserved talent, e, is correlated with schooling.

B) The estimated coefficient may overstate the true causal effect, if more highly educated individuals would have earned more than less educated individuals even with the same amount of schooling as the less educated.

C) The estimated coefficient may understate the true causal effect, if more highly educated individuals would have earned more than less educated individuals even with the same amount of schooling as the less educated.

D) The problem of "ability bias" can be addressed by "natural experiments" technology.

E) Recent empirical studies have found that the problem of "ability bias" is exaggerated.

262)

Empirical research regarding the effectiveness of job training programs has tended to find that: A) They tend to have a large positive impact on the labour market outcomes of participants B) They tend to have a small but significant positive impact on the labour market outcomes of participants C) They tend to have little impact on the labour market outcomes of participants D) They tend to be inconclusive in regards to their impact on the labour market outcomes of participants E) While they appear to be effective, they are not worth the government expenditures that are incurred

263)

In the context of empirical research regarding training programs, the control group refers

to: A) A group of workers who did not receive the training but otherwise resemble the group

of workers that did participate B) A group of researchers who control the training program to ensure that regulations are followed.

C) A group of workers who did receive the training but were determined not to have benefitted D) A group of workers who did not receive the training because they did not qualify for it E) A group of workers who did receive the training and were determined to have benefitted 264)

Active labour market programs are designed to: A) Indemnify unemployed workers for their lost wages B) Stimulate the labour market by increasing the overall number of jobs available C) Assist unemployed workers in being re-integrated into the labour market D) Raise the average wage level in the labour market E) None of these above

265)

It the social benefits of providing education and counselling exceed the private benefits of doing so, then the government should: A) Implement policies to reduce these social benefits B) Not intervene at all C) tax the provision of it D) Subsidize the provision of it.

E) Implement policies to raise these private benefits

266)

The estimated annual rate of return for each additional year of education acquired is in the neighborhood of: A) 5 to 7 % B) 13 to 15 % C) 3 to 5 % D) 16 to 18 % E) 9 to 11 %

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

267) The model of human capital can be used as an analytical tool for labour supply phenomena and labour demand phenomena. On the supply side, it is used as a tool to determine an individual's decision to invest in education. Explain in intuitive terms this approach of determining whether an individual should obtain a higher degree or certification.

No graph is necessary, but you should cover the assumptions which underlie this approach and the major variables which play a role. What implication does this model have for labour supply? Discuss the role of human capital attainment in the demand for labour.

268)

The demand-side interpretation of human capital has been challenged by another model, the signaling approach, which offers a contrasting view. What is the economic role for education in this paradigm, and how does it contrast with the economic role in the human capital model?

269)

Briefly review the empirical evidence on the returns to schooling, which pertains to the human capital model. Describe in general terms the age-earnings profiles of workers who hold only an elementary school education, those who hold a high school diploma, those who hold some post-secondary education, and university-educated workers. Has the evidence indicated that investment in human capital is subject to diminishing returns?

SECTION BREAK. Answer all the part questions.

270) Mary is an 18-year-old high school graduate who can take a job paying $30,000 without further education. The prevailing interest rate is 10 percent.

270.1) What is Mary's present value of earning $30,000 a year from age 18 to 20 (3 years in

total)?

A) B) C) D) E)

$90,000 $82,066 $99,300 $104,132 $109,909

270.2) Now assume that after completing a one-year post-secondary program, Mary would earn

$60,000 more than if she had stopped her education right after high school. The present value from age 18 to age 20 would now be given by (2 years in total): A) $120,000.

B) $109,909.

C) $104,132.

D) $99,300.

E) $82,066.

270.3) Now assume that after completing a one-year post-secondary program, Mary would earn

$60,000 than if she had stopped her education right after high school. Should Mary complete the post-secondary program and what is the internal rate of return?

A) Yes, since the return is 100 percent B) Yes, since the return is 50 percent C) Yes, since the return is 10 percent D) No, since the return is less than 10 percent E) No, since there is no return

271)

This diagram shows the age-earnings profiles of three different individuals who opt to choose three options: not graduating from high school, graduating from high school, and graduating from a university.

271.1) The area labeled d) refers to: A) The explicit, out-of-pocket costs incurred B) The opportunity costs incurred by someone who opted for income stream B (a high

school graduate) C) The earnings premium earned by someone who opted for income stream B (a high school graduate) relative to a worker who did not obtain a high school diploma.

D) The earnings premium earned by someone who opted for income stream C (a university graduate) relative to a worker who graduated from high school.

E) The total cost of attending university 271.2) The area labeled e) refers to: A) The explicit, out-of-pocket costs incurred B) The opportunity costs incurred by someone who opted for income stream B (a high

school graduate) C) The earnings premium earned by someone who opted for income stream B (a high school graduate) relative to a worker who did not obtain a high school diploma.

D) The earnings premium earned by someone who opted for income stream C (a university graduate) relative to a worker who graduated from high school.

E) The total cost of attending university

271.3) The sum of the areas labeled b), c), and d) refers to: A) The explicit, out-of-pocket costs incurred B) The opportunity costs incurred by someone who opted for income stream B (a high

school graduate) C) The earnings premium earned by someone who opted for income stream B (a high school graduate) relative to a worker who did not obtain a high school diploma.

D) The earnings premium earned by someone who opted for income stream C (a university graduate) relative to a worker who graduated from high school.

E) The total cost of attending university

Answer Key Test name: chapter 9 236) 237) 238) 239) 240) 241) 242) 243) 244) 245) 246) 247) 248) 249) 250) 251) 252) 253) 254) 255) 256) 257) 258) 259) 260) 261) 262) 263) 264) 265) 266) 267)

E D B C C B D E E A A C C C B A A C C A A A E C D C B A C D E Short Answer

Generally speaking, the individual decision to acquire education can be treated like any investment. The human capital investment decision is based on a comparison of the present value of the net benefits of obtaining varying levels of education. The optimal choice will maximize the present value of net benefits, accounting for the direct costs of schooling, as well as the opportunity cost of the time spent in school. Because it is costly for people to acquire education, workers will need to be compensated in the labour market by higher wages in order to justify the investment in additional human capital. As long as firms are willing to pay these higher wages (because higher-educated workers are more productive), there will be a positive return to education. The internal return to education can be calculated as the present value of net benefits from the education divided by the total costs (both direct costs and opportunity costs) of the education.

268)

Short Answer In this model, worker productivity is unknown when hiring decisions are made, and education plays a role as a signal of the productivity of employees. Employers in the model are assumed to not know the productivity of individual workers prior to hiring those workers. Even after hiring, employers may be able to observe the productivity of only groups of employees rather than that of each individual employee. However, employers do observe the amount of education obtained by the job applicant and they believe that more educated workers are more productive. They will offer higher wages to more educated workers. Note also that the more-able workers are assumed to be able to acquire education at a lower cost per unit of education obtained. The market equilibrium is given by a "education threshold", where more-able workers will obtain the threshold amount of the education and be paid with higher wage and less-able workers will obtain zero education and be paid with lower wage.

269)

Short Answer There is a strong relationship between education and lifetime earnings, on average. The income streams of those with more education lie above the streams of those with less education. Two additional patterns are evident. First, earnings increase with age and thus (presumably) labour market experience until around age 50 and then decline slightly which attributed to the accumulation of human capital in the form of on-the-job training and experience, a process that displays diminishing returns. Second, earnings increase most rapidly to age 45 to 49 for those individuals with the most education. Thus the salary differential between groups with different amounts of education is much wider at age 50 than at ages 20 or 30.

270) 270.1) 270.2) 270.3) 271) 271.1)

Section Break B C A Section Break A

271.2) C 271.3) E

Chapter 10: Wage Structures Across Markets MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

272) Which of the following statements is true? An earnings function is: A) a function relating an individual's earnings to his/her ability.

B) a function relating an individual's earnings to his/her characteristics that determine productivity.

C) a function relating an individual's earnings to his/her level of professional or occupational training in the particular field.

D) a function relating an individual's earnings to his/her family background.

E) a function relating an individual's earnings to his/her professional or occupational background.

273)

Occupational premiums refer to: A) the percentage differences in earnings associated with a certain occupation relative to other occupations.

B) the percentage differences in earnings associated with working the most common occupation.

C) the percentage differences in earnings associated with working the most highly paid occupation.

D) rents accruing to workers who benefit from imperfect competition in the labour market.

E) the rate of return on human capital investment as measured across occupations.

274)

The economic benefits of migration include all of the followingexcept: A) expected income gains.

B) better expected employment opportunities.

C) better expected availability of social services.

D) less expected variability of income.

E) None of the choices are correct, as they all application.

275)

Fill in the blanks in the following sentence. Ceteris paribus, tend to engage more often in job mobility because of their A) older; shorter benefit period B) younger; shorter benefit period C) older; longer benefit period D) younger; longer benefit period E) None of the choices are correct.

workers would .

276)

Average interindustry wage differentials reflect all of the followingexcept: A) wage structures across occupations.

B) wage structures by region.

C) wage structures by public sector versus private sector.

D) wage structures by characteristics of the labour force.

E) None of the choices are correct.

277)

Which of the following statements is true? Efficiency wages: A) refer to wages at the level of a competitive equilibrium.

B) constitute rents to the workers who receive them.

C) are generated by the intersection of labour supply and labour demand.

D) clear the labour market as there is no unemployment.

E) are wages below the market equilibrium wage.

278)

In competitive labour markets, interfirm wage differentials could stem from all of the followingexcept: A) non-pecuniary differences in the nature of jobs.

B) short run changes in labour demand.

C) non-competitive factors operating in labour markets.

D) persistent supply and demand imbalances in labour markets E) None of the choices are correct.

279)

The public sector is subject to various peculiarities which include all of the followingexcept: A) monopsony power exercised by employers.

B) political constraints.

C) Wage-inelastic demand for labour.

D) a high degree of unionization.

E) a profitability constraint.

280)

The political constraint facing the public sector is less binding than the profit constraint facing the private sector because: A) Taxpayers are often well-informed about the state of public finances.

B) Public sector managers can escape accountability for their management decisions.

C) Future taxpayers have little representation in the current political process, and can be saddled with public debt.

D) All services that the public sector provides are indispensable.

E) Tax revenues continue to flow in even if the services are not provided in the event of a strike.

281)

Which of the following statements regarding the political constraint in the public sector isfalse?

A) Tax revenues continue to flow in even if the services are not provided in the event of a strike.

B) The political constraint replaces the profit constraint facing private sector employers.

C) Public sector employers typically do not have to pay the going wage.

D) The public sector employer can compel payment for the services that its workers provide.

E) Future taxpayers have little representation in the current political process, and can be saddled with public debt.

282)

Keeping other factors constant, which of the following statements concerning migration behaviour isfalse?

A) Younger workers are expected to migrate more frequently than older workers.

B) Migration is more likely to occur out of higher unemployment areas.

C) Migration is more likely to occur during recoveries than during recessions.

D) Migration is less likely to occur from Quebec than from other provinces.

E) Migration is more likely to be observed when the distances are long.

283)

Which of the following statements concerning migration behaviour isfalse?

A) In the long run, it will generally erase inter-regional disparities in wages.

B) It is modeled as a marginal cost and marginal benefit decision.

C) It is more likely to occur when the wage gains are expected to be high.

D) It is affected by the availability of information on wages and employment conditions.

E) It is dampened by imperfect capital markets which make it difficult for many individuals to finance a move.

284)

Basic economic theory suggests that in the long-run, competitive forces should eliminate pure inter-industry wage differences. If these differences exist, it could be explained by all of the followingexcept: A) non-pecuniary characteristics of an industry B) efficiency wages C) non-competitive factors D) Inter-industrial migration of workers E) rent sharing between labour and capital

285)

According to basic economic theory, how can one assess whether workers in a certain industry are overpaid?

A) By surveying the workers and asking them whether they think that their wages are too high B) By the existence of long queues of qualified workers whenever there are vacancies, and witnessing few quits C) By comparing their wages to wage norms in other industries D) By comparing the educational attainment of the labour force with that of other workers E) By comparing the desirability or the undesirability of their working conditions with those of other workers.

286)

287)

Which of the following statements concerning efficiency wages isfalse?

A) Efficiency wage premiums are obtained through union power.

B) Efficiency wage premiums are paid voluntarily by employers without pressure from the workers.

C) An efficiency wage is designed to elicit greater effort from the worker.

D) The efficiency wage is greater than the competitive, market clearing wage.

E) Efficiency wages are sometimes used to support industrial policies

Suppose that a wage premium is paid to workers throughout the occupational spectrum of an industry: the blue-collar workers and the white-collar workers. This could be interpreted as evidence of the existence of: A) compensating differentials B) high human capital requirements C) non-competitive factors associated with the industry in the output market D) a labour intensive industry E) Discriminatory behaviour

288)

Why might one expect the public sector to pay lower wages, ceteris paribus, than the private sector?

A) The skills and education levels of these workers is lower than that of their private sector counterparts.

B) Public sector workers tend to have a higher degree of job security.

C) Public sector workers have lower fringe benefits than their private sector counterparts have.

D) Public sector workers are less heavily unionized than their private sector counterparts.

E) The demand for labour in the public sector is often quite wage inelastic.

289)

The empirical literature on the public sector/private sector wage premium has shown that: A) Workers in the public sector have earnings equal to workers in the private sector.

B) Workers in the public sector have lower earnings than workers in the private sector.

C) Workers in the public sector have lesser endowments of wage determining factors such as education.

D) The public sector premium, holding all other factors constant, is higher for skilled and educated workers than it is for lesser skilled workers.

E) The public sector premium, holding all other factors constant, is lower for skilled and educated workers than it is for lesser skilled workers.

290)

Consider an earnings function. In addition to the usual explanatory variables of experience and schooling, one can include variables for reflecting all of the following factors except: A) occupational premiums.

B) industry premiums.

C) unobserved heterogeneity D) regional premiums.

E) family background.

291)

In the mid-to-late 2000s, a regional wage premium developed within the Canadian labour market. Which of the following statements isfalse?

A) Wages rose in Alberta relative to Ontario B) The demand for labour expanded more in Alberta than in Ontario.

C) The wage premium was related to the situations in the manufacturing sector and the energy sectors of the Canadian economy.

D) In the long run, one expected the wage premium to dissipate through regional migration.

E) The supply of labour contracted in Alberta, helping to push up the wage.

292)

What is the role of frictions involving short-run adjustments in determining the wage structure?

A) They can explain the existence of wage differentials across regions, industries, or occupations even if the labour market is very competitive.

B) They are necessary in order for efficiency wage differentials to exist.

C) They are the primary factor generating the public sector/private sector wage differential.

D) They are closely linked to the firm size effect on wages.

E) They are consistent with Roy's law

293)

Which of the following theories regarding wage determination is most likely to be used as an argument in favour of industrial policy?

A) The compensating differentials approach (non-pecuniary benefits) B) The non-competitive market approach C) The unobserved heterogeneity principle D) The efficiency wage approach E) The political versus profit constraint principle

294)

The phenomena of deregulation and globalization is most likely to impact which of the following types of wage differentials?

A) inter-industry wage differentials.

B) inter-occupational wage differentials.

C) inter-regional wage differentials within Canada.

D) public/private differentials.

E) inter-firm wage differentials.

295)

Which of the following regarding Roy's model of earning determination is NOT correct?

A) People choose their occupation (or type of job or employer) on the basis of their comparative advantage.

B) Comparative advantage results in a selection bias since workers with different sets of observed and unobserved skills tend to sort themselves into different jobs or occupations.

C) Most workers earn rents in equilibrium in the sense that the wage in the job they choose is higher than what they would get in other jobs.

D) A market clearing equilibrium holds because no worker would prefer to switch to a different kind of job in equilibrium.

E) Wages are perfectly equalized across sectors, as workers will migrate to the sector in which they earn more than in any other job.

296)

Which of the following regarding Roy's model of earning determination is true?

A) All workers are homogenous B) It is very similar to the standard perfectly competitive model C) At the margin, workers are indifferent between working in the two sectors D) Workers migrate across sectors so that wages are equalized E) The law of one price (for labour) holds

297)

Empirical research regarding the wage differential between public sector workers and private sector workers has estimated it to be approximately: A) 10 - 15 % in favour of public sector workers B) 20 - 25 % in favour of public sector workers C) 10 - 15 % in favour of private sector workers D) 20 - 25 % in favour of private sector workers E) No significant differential

298)

Which of the following statements regarding wage differentials is true?

A) In Canada, regional wage differentials have eroded greatly over time through migration B) There is no significant wage differential between public sector workers and private sector workers C) Occupational wage differentials cannot be estimated because the training requirements differ across them.

D) Even within a given sector, there can exist major differentials between firms E) Monopsony power plays no role in determining wage differential across sectors

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

299) Congratulations! You have just been appointed chair of the pay equity commission, but this is not like the conventional commission which is concerned with the relative pay levels of women and visibility minorities. Your mandate is to analyze pay premia across occupations, industries, regions, as well as the public sector/private sector premium.

• How does one typically argue that a certain group of workers is receiving a wage premium?

What serves as the frame of reference, or point of comparison, for such an evaluation? In other words, "overpaid" compared to what?

• Explain the theoretical causes of wage premia. In particular, identify each of the following economic factors, and explain how each could give rise to wage differentials. In each case, give a concrete illustration pertaining to a wage premium across one of the dimensions listed in the paragraph above.

- non-competitive factors, such as efficiency wages - compensating differentials - immobility of labour across markets - short-run transitory disequilibria across markets • Without giving any technical details, what is the fundamental empirical challenge in asserting that worker A receives a wage premium compared to worker B?

Answer Key Test name: chapter 10 272) 273) 274) 275) 276) 277) 278) 279) 280) 281) 282) 283) 284) 285) 286) 287) 288) 289) 290) 291) 292) 293) 294) 295) 296) 297) 298) 299)

B A E D E B D E C C E A D B A C B E C E A D A E C A D Short Answer

• Wage structures vary a great deal across labour markets, even among apparently identical workers. The easiest way to summarize wage structure across various categories is to use earnings function from Chapter 9. The left hand side variable is the Log of earnings and we can include many categorical variables to the right hand of the equation, such as, schooling, experience, industry, region and occupation. The estimated coefficients are the premiums representing the percentage differences in earnings of having a given characteristic differing from a base category.

• There are a few possibilities may explain the wage differentials from after take into account of the difference in human capital from a theoretical point of view: 1. Compensating differentials: earnings may vary because of differences in nonpecuniary benefits across sectors 2. Immobility across sectors: there may be barriers to mobility across sectors caused by government regulation or noncompetitive features in the labour market. In this case, it is not reasonable to treat the two submarkets as parts of a common, integrated labour market.

3. Short run versus long run: the unexplained differentials may reflect only a short-run, transitory, disequilibrium across the markets. This may be due to adjustment costs of mobility across markets.

4. Other non-competitive factors, such as efficiency wages: firms pay higher wages because worker productivity depends on the wage rate. In this case, some industries will be high-wage industries, even in the long run, despite queues of workers who would like to switch from lowerwage industries. Because it would reduce worker productivity, firms in high-wage industries are unwilling to cut wages to increase employment and thus clear the cross-industry labour market.

• Systematic evidence on the existence of pure interindustry wage differences is difficult to compile because of the problem of controlling for other factors that affect the wage difference.

With the advent of microeconomic data sets using the individual worker as the unit of observation, however, it has been possible to use econometric techniques to control for the influences of some of these different factors, and to thereby isolate a pure interindustry wage differential. The econometric results indicate that interindustry wage differences do reflect the conventional determinants of wage structures: nonpecuniary differences in the jobs, short-run demand changes, and noncompetitive factors across industries. Different industries, for example, utilize different skill mixes, and they are concentrated in different regions and are composed of firms of different sizes. Hence, interindustry wage differences often confound wage differences by other factors such as occupation, region, or plant size. The evidence also suggests the existence and persistence of pure interindustry wage differentials or rents that are consistent with the payment of efficiency wages.

Chapter 11: The Economics of Immigration MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

300) The two primary "levers" that immigration policymakers can manipulate are: A) the number of immigrants that are admitted and the conditions they have to meet for admissibility.

B) the fees that are charged to applicants and the number of immigrants that are admitted.

C) the fees that are charged to applicants and the conditions they have to meet for eligibility.

D) the number of immigrants that are admitted and the number of applications that are evaluated.

E) The application of strict quotas 301)

All of the following are motivations for allowing incoming immigration, with theexception of: A) humanitarian concerns relating to the applicant.

B) The utilization of specific labour market skills that immigrants might have.

C) family reunification.

D) Attaining population growth E) Increasing government revenues

302)

Assessed classes of immigrants are those who are: A) evaluated on the basis of their likely contribution and success in the labour market.

B) awarded a grant in order to start a new life in Canada.

C) evaluated on the basis of their financial net worth prior to being admitted into Canada.

D) evaluated on the gravity of their human rights situation in their home countries E) evaluated on the basis of their financial background.

303)

The point system is one in which points are awarded for: A) the salary range that the person was earning before he/she came to Canada.

B) the overall state of neediness of the applicant C) a set of skills and attributes that the applicant has.

D) the type of immigrant class under which his/her application falls.

E) the humanitarian concerns related to the applicant.

304)

The increase in labour supply that accompanies immigrant inflows may haveno adverse effect on the wages of workers already in Canada because of all of the following, with theexceptionthat: A) The supply of lower-skilled labour may become more abundant.

B) Immigration typically causes an increase in labour demand as immigrants purchase goods and services.

C) Immigration activity improves ties with the source country, which can increase demand in the labour market.

D) Some workers who are already in the region might move and work elsewhere E) Immigrants may relieve the labour market shortage without any adverse effect on wages or unemployment.

305)

Which of the following refers to the labour market conditions that would prevail in the absence of any immigration activity?

A) The cohort entry effect B) The assimilation effect C) The family investment hypothesis D) The counterfactual case E) The age effect

306)

If immigrants are positively selected, it means that: A) They are chosen deliberately by the Canadian government and then asked to apply.

B) Their wage levels exceed those of their native counterparts.

C) Those individuals who are highly motivated and able are more likely to apply to immigrate to Canada.

D) They have received a high number of points in the assessment process.

E) The applicant is deemed to be ready to start a new life in Canada.

307)

The entry effect refers to: A) the number of immigrants that end up returning to their home country B) the earnings penalty that newly arrived immigrants might experience compared to their native counterparts C) the number of Canadians who experience job loss because of an inflow of immigrants D) the degree to which immigrants' earnings catch up over time to the earnings levels of their native counterparts E) the brain drain

308)

Recent studies on economic assimilation for Canadian immigrants have found all of the following, with theexception that: A) The entry effect is diminishing over time as the recent immigrants had higher levels of skills than the earlier immigrants.

B) The earnings return to a year of education is much lower for immigrants educated outside Canada.

C) The earnings return to years of experience is much lower for immigrants educated outside Canada.

D) "Age at immigration" matters.

E) The assimilation rates are uniformly too low for the average earnings of any cohort of immigrants to catch up with the comparable native born.

309)

The "brain drain" phenomenon refers to: A) Workers experiencing a fall in productivity levels due to a lack of up-to-date training.

B) The event of less economically developed countries losing their best and brightest workers through immigration to more developed ones.

C) The event of highly skilled, white-collar workers withdrawing from the labour force.

D) The underemployment of highly skilled immigrants in occupations that do not make a good use of their skills.

E) A disease in which the victim's brain shrinks.

310)

Which of the following is the most common source region of immigrants to Canada?

A) Asia B) The Middle East C) Europe D) North America (the US and Mexico) E) Latin America

311)

The scientific literature on the economics of immigration addresses all of the following topics, with theexception of: A) economic models of migration.

B) human capital models.

C) The economic performance of immigrants.

D) the impact of immigrants on outcomes for native workers.

E) evaluation of government policy towards immigrants.

312)

Which of the following isnot a criterion for the point system for immigration?

A) The level of education of the applicant B) The applicant's proficiency in the official languages C) The applicant's degree of work experience D) The applicant's source country E) An assessment of the applicant's adaptability to the Canadian labour market

313)

The quasi-panel estimation approach is mostly useful when estimating: A) the entry effect for immigrants' earnings.

B) the assimilation effect for immigrants' earnings.

C) the positive selection effect for immigrants' earnings.

D) the discrimination effect for immigrants' earnings.

E) the impact of immigration activity on the earnings of native-born Canadians.

314)

Research regarding emigration out of Canada suggests that: A) It usually involves highly skilled individuals.

B) The numbers of individuals involved are high.

C) The rate of emigration has been stable over the past few decades.

D) Any worker who can earn higher pay in the US is likely to move out of Canada.

E) Lowering tax rates in Canada would likely stem the tide of emigration.

315)

Which of the following is NOT a fact drawn from recent changes in patterns of immigration to Canada?

A) In 2019, India was the most important source country, accounting for 25 % of immigrants B) The share of immigrants from the assessed classes is higher than it was two decades ago.

C) The variations in the sources of global conflict or economic crises do affect the changing pattern of immigration to Canada from source countries.

D) Europe is an important source of immigrants to Canada E) While immigrant shares are highest in Toronto and Vancouver, they have grown in other large cities as well

316)

Regarding the point system revised in 2016, which of the following category is given the maximum score?

A) Education B) Command of the official languages C) Work experience D) Age E) Adaptability to the Canadian labour market

317)

Which of the following is NOT a fact drawn from recent studies regarding the impact of immigration on labour market?

A) Immigration has no significant effect on the wages of native-born workers.

B) Immigrants and natives with the same observed skill levels are not perfect substitutes.

C) Immigrants to the United States tend to be more skilled than those to Canada.

D) Sample size in Canadian census data may be a problem in the earlier empirical research.

E) All of the choices are correct.

318)

Based on the most recent studies, which of the following is NOT a factor that contributes to the difficulties for immigrants in finding a job?

A) poor knowledge of the Canadian labour market B) a lack of job-related skills specific to Canada C) weak English-language facility D) Not having a university degree E) A lack of Canadian working experience

319)

The issue of the having a counterfactual case for labour market conditions is most relevant to estimating: A) the entry effect for immigrants' earnings.

B) the assimilation effect for immigrants' earnings.

C) the positive selection effect for immigrants' earnings.

D) the discrimination effect for immigrants' earnings.

E) the impact of immigration activity on the earnings of native-born Canadians.

320)

321)

The selection of immigrants into Canada is based on: A) The ‘merit system' B) The ‘points system' C) The ‘quota system' D) The ‘lottery system' E) None of these above

Approximately what percentage of the residents of Canada were born outside of Canada in 2016?

A) 20 % B) 10 % C) 30 % D) 40 % E) 5 %

322)

A relatively new topic in the research on immigration in Canada is: A) The impact of immigration on the wages earned by natives B) Temporary immigration in the Canadian labour market C) The evaluation of Canada's immigration policies D) The economic performance of immigrants in the Canadian labour market E) None of these above

323)

Which analytical framework is typically employed in order to estimate the impact of immigrants on the wages of native-born workers?

A) The theory of labour demand B) The human capital framework C) The supply and demand framework D) The earnings function E) The theory of labour market discrimination

324)

There exists an extensive literature regarding the impact of immigration of the wages of native-born workers. What has it shown?

A) The results tend to be conclusive and find that a substantial number of native workers are displaced B) The results tend to be inconclusive C) The results tend to be conclusive and find that there is no impact on the wages of native-born workers in one direction or another.

D) The results tend to be conclusive and find that the wages of native-born workers are depressed.

E) The results tend to be conclusive and find that the wages of native-born workers are actually increased.

325)

Consider the body of economic research regarding the impact of immigration on the wages earned by natives. One approach is to link empirically changes in immigrant flows to changes in wage differentials across regional labour markets. What of the following is true about that approach?

A) It is a lot like the natural experiment approach - such as the approach utilized in the Mariel boatlift study B) Counterfactual situations of the absence of immigration can be observed in this case.

C) It is similar to the approach used to examine the process of assimilation D) Wages might be relatively high in cities that draw immigrants, thus confounding any estimation of that impact E) It has become accepted as the best approach for addressing this issue.

Under which circumstances is a Canada-based worker most likely to join the ‘brain drain' and immigrate to the United States?

A) When the overall incidence of brain drain is higher, i.e. when many of her peers are doing it.

B) When she can get an immediate pay raise in the USA C) Whenever the taxes that she faces in Canada are raised such that they exceed US taxes.

D) Whenever the discounted present value of her earnings in USA exceed the discounted present value in Canada E) All of these above are possibilities

326)

327)

The two primary "levers" that immigration policymakers can manipulate are: A) the number of immigrants that are admitted and the conditions they have to meet for admissibility.

B) the fees that are charged to applicants and the number of immigrants that are admitted.

C) the fees that are charged to applicants and the conditions they have to meet for eligibility.

D) the number of immigrants that are admitted and the number of applications that are evaluated.

E) The application of strict quotas

328)

All of the following are motivations for allowing incoming immigration, with theexception of: A) humanitarian concerns relating to the applicant.

B) The utilization of specific labour market skills that immigrants might have.

C) family reunification.

D) Attaining population growth E) Increasing government revenues

329)

Assessed classes of immigrants are those who are: A) evaluated on the basis of their likely contribution and success in the labour market.

B) awarded a grant in order to start a new life in Canada.

C) evaluated on the basis of their financial net worth prior to being admitted into

Canada.

D) evaluated on the gravity of their human rights situation in their home countries E) evaluated on the basis of their financial background.

330)

The point system is one in which points are awarded for: A) the salary range that the person was earning before he/she came to Canada.

B) the overall state of neediness of the applicant C) a set of skills and attributes that the applicant has.

D) the type of immigrant class under which his/her application falls.

E) the humanitarian concerns related to the applicant.

331)

The increase in labour supply that accompanies immigrant inflows may haveno adverse effect on the wages of workers already in Canada because of all of the following, with theexceptionthat: A) The supply of lower-skilled labour may become more abundant.

B) Immigration typically causes an increase in labour demand as immigrants purchase goods and services.

C) Immigration activity improves ties with the source country, which can increase demand in the labour market.

D) Some workers who are already in the region might move and work elsewhere E) Immigrants may relieve the labour market shortage without any adverse effect on wages or unemployment.

332)

Which of the following refers to the labour market conditions that would prevail in the absence of any immigration activity?

A) The cohort entry effect B) The assimilation effect C) The family investment hypothesis D) The counterfactual case E) The age effect

333)

If immigrants are positively selected, it means that: A) They are chosen deliberately by the Canadian government and then asked to apply.

B) Their wage levels exceed those of their native counterparts.

C) Those individuals who are highly motivated and able are more likely to apply to immigrate to Canada.

D) They have received a high number of points in the assessment process.

E) The applicant is deemed to be ready to start a new life in Canada.

334)

The entry effect refers to: A) the number of immigrants that end up returning to their home country B) the earnings penalty that newly arrived immigrants might experience compared to their native counterparts C) the number of Canadians who experience job loss because of an inflow of immigrants D) the degree to which immigrants' earnings catch up over time to the earnings levels of their native counterparts E) the brain drain

335)

Recent studies on economic assimilation for Canadian immigrants have found all of the following, with theexception that: A) The entry effect is diminishing over time as the recent immigrants had higher levels of skills than the earlier immigrants.

B) The earnings return to a year of education is much lower for immigrants educated outside Canada.

C) The earnings return to years of experience is much lower for immigrants educated outside Canada.

D) "Age at immigration" matters.

E) The assimilation rates are uniformly too low for the average earnings of any cohort of immigrants to catch up with the comparable native born.

336)

The "brain drain" phenomenon refers to: A) Workers experiencing a fall in productivity levels due to a lack of up-to-date training.

B) The event of less economically developed countries losing their best and brightest workers through immigration to more developed ones.

C) The event of highly skilled, white-collar workers withdrawing from the labour force.

D) The underemployment of highly skilled immigrants in occupations that do not make a good use of their skills.

E) A disease in which the victim's brain shrinks.

337)

Which of the following is the most common source region of immigrants to Canada?

A) Asia B) The Middle East C) Europe D) North America (the US and Mexico) E) Latin America

338)

The scientific literature on the economics of immigration addresses all of the following topics, with theexception of: A) economic models of migration.

B) human capital models.

C) The economic performance of immigrants.

D) the impact of immigrants on outcomes for native workers.

E) evaluation of government policy towards immigrants.

339)

Which of the following isnot a criterion for the point system for immigration?

A) The level of education of the applicant B) The applicant's proficiency in the official languages C) The applicant's degree of work experience D) The applicant's source country E) An assessment of the applicant's adaptability to the Canadian labour market

340)

The quasi-panel estimation approach is mostly useful when estimating: A) the entry effect for immigrants' earnings.

B) the assimilation effect for immigrants' earnings.

C) the positive selection effect for immigrants' earnings.

D) the discrimination effect for immigrants' earnings.

E) the impact of immigration activity on the earnings of native-born Canadians.

341)

Research regarding emigration out of Canada suggests that: It usually involves highly skilled individuals.

The numbers of individuals involved are high.

The rate of emigration has been stable over the past few decades.

Any worker who can earn higher pay in the US is likely to move out of Canada.

Lowering tax rates in Canada would likely stem the tide of emigration.

A) B) C) D) E) 342)

Which of the following is NOT a fact drawn from recent changes in patterns of immigration to Canada?

A) In 2019, India was the most important source country, accounting for 25 % of immigrants B) The share of immigrants from the assessed classes is higher than it was two decades ago.

C) The variations in the sources of global conflict or economic crises do affect the changing pattern of immigration to Canada from source countries.

D) Europe is an important source of immigrants to Canada E) While immigrant shares are highest in Toronto and Vancouver, they have grown in other large cities as well

343)

Regarding the point system revised in 2016, which of the following category is given the maximum score?

A) Education B) Command of the official languages C) Work experience D) Age E) Adaptability to the Canadian labour market

344)

Which of the following is NOT a fact drawn from recent studies regarding the impact of immigration on labour market?

A) Immigration has no significant effect on the wages of native-born workers.

B) Immigrants and natives with the same observed skill levels are not perfect substitutes.

C) Immigrants to the United States tend to be more skilled than those to Canada.

D) Sample size in Canadian census data may be a problem in the earlier empirical research.

E) All of the choices are correct.

345)

Based on the most recent studies, which of the following is NOT a factor that contributes to the difficulties for immigrants in finding a job?

A) poor knowledge of the Canadian labour market B) a lack of job-related skills specific to Canada C) weak English-language facility D) Not having a university degree E) A lack of Canadian working experience

346)

The issue of the having a counterfactual case for labour market conditions is most relevant to estimating: A) the entry effect for immigrants' earnings.

B) the assimilation effect for immigrants' earnings.

C) the positive selection effect for immigrants' earnings.

D) the discrimination effect for immigrants' earnings.

E) the impact of immigration activity on the earnings of native-born Canadians.

347)

The selection of immigrants into Canada is based on: A) The ‘merit system' B) The ‘points system' C) The ‘quota system' D) The ‘lottery system' E) None of these above

348)

Approximately what percentage of the residents of Canada were born outside of Canada in 2016?

A) 20 % B) 10 % C) 30 % D) 40 % E) 5 %

349)

A relatively new topic in the research on immigration in Canada is: A) The impact of immigration on the wages earned by natives B) Temporary immigration in the Canadian labour market C) The evaluation of Canada's immigration policies D) The economic performance of immigrants in the Canadian labour market E) None of these above

350)

Which analytical framework is typically employed in order to estimate the impact of immigrants on the wages of native-born workers?

A) The theory of labour demand B) The human capital framework C) The supply and demand framework D) The earnings function E) The theory of labour market discrimination

351)

There exists an extensive literature regarding the impact of immigration of the wages of native-born workers. What has it shown?

A) The results tend to be conclusive and find that a substantial number of native workers are displaced B) The results tend to be inconclusive C) The results tend to be conclusive and find that there is no impact on the wages of native-born workers in one direction or another.

D) The results tend to be conclusive and find that the wages of native-born workers are depressed.

E) The results tend to be conclusive and find that the wages of native-born workers are actually increased.

352)

Consider the body of economic research regarding the impact of immigration on the wages earned by natives. One approach is to link empirically changes in immigrant flows to changes in wage differentials across regional labour markets. What of the following is true about that approach?

A) It is a lot like the natural experiment approach - such as the approach utilized in the Mariel boatlift study B) Counterfactual situations of the absence of immigration can be observed in this case.

C) It is similar to the approach used to examine the process of assimilation D) Wages might be relatively high in cities that draw immigrants, thus confounding any estimation of that impact E) It has become accepted as the best approach for addressing this issue.

Under which circumstances is a Canada-based worker most likely to join the ‘brain drain' and immigrate to the United States?

A) When the overall incidence of brain drain is higher, i.e. when many of her peers are doing it.

B) When she can get an immediate pay raise in the USA C) Whenever the taxes that she faces in Canada are raised such that they exceed US taxes.

D) Whenever the discounted present value of her earnings in USA exceed the discounted present value in Canada E) All of these above are possibilities

353)

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

354) Congratulations! You have just been appointed a special advisor to the prime minister on immigration policy. Unfortunately for you, this is a very controversial matter. In a nutshell, you are to make a case for or against continuing Canada's existing set of immigration policies, which are the most liberal in the industrialized world.

• First, you should provide some background for the report. How have the patterns of immigration changed over the past 40 years? There has been a major evolution on the source countries and the "class" composition of immigrants. You should include in your response a description of the point system.

• Here comes the sensitive part. Some native-born Canadians believe that immigrants displace them or put downward pressure on their wages. Using supply-and-demand analysis and the appropriate graphs, explain in theory how this might occur. You should mention the question of whether immigrant labour tends to be complementary to or substitutable for native labour.

• The issue of actual impact can only be resolved by recourse to empirical analysis. One of the many empirical challenges is the fact that the counterfactual case — what the labour market equilibrium would have been in the absence of immigration — is not observed.

Explain why this factor is important, and mention the potential endogeneity of the immigration effect.

• What is the central thrust of most of the empirical research that has been carried out in North America? Are the fears of some native Canadian workers justified?

355)

Congratulations! You have just been appointed a special advisor to the prime minister on immigration policy. Unfortunately for you, this is a very controversial matter. In a nutshell, you are to make a case for or against continuing Canada's existing set of immigration policies, which are the most liberal in the industrialized world.

• First, you should provide some background for the report. How have the patterns of immigration changed over the past 40 years? There has been a major evolution on the source countries and the "class" composition of immigrants. You should include in your response a description of the point system.

• Here comes the sensitive part. Some native-born Canadians believe that immigrants displace them or put downward pressure on their wages. Using supply-and-demand analysis and the appropriate graphs, explain in theory how this might occur. You should mention the question of whether immigrant labour tends to be complementary to or substitutable for native labour.

• The issue of actual impact can only be resolved by recourse to empirical analysis. One of the many empirical challenges is the fact that the counterfactual case — what the labour market equilibrium would have been in the absence of immigration — is not observed.

Explain why this factor is important, and mention the potential endogeneity of the immigration effect.

• What is the central thrust of most of the empirical research that has been carried out in North America? Are the fears of some native Canadian workers justified?

SECTION BREAK. Answer all the part questions.

356) The figure shows the age-earnings profiles for the native born and for immigrants. YSM = years since immigration

356.1) The entry effect for a new cohort of immigrants is represented by: A) The distance between the two profiles at age 65 B) The distance between the two profiles at the point labelled ‘T' C) The distance between the two profiles at age 20 D) The slope of the immigrants' profile minus the slope of the native-born profile E) The slope of the native-born profile minus the slope of the immigrants' profile 356.2) The interpretation of the point labelled ‘T' is which of the following?

A) The returns to age B) The wage discrimination effect C) The point at which the earnings of natives catch up to the earnings of immigrant D) The entry effect E) The point at which assimilation has been reached.

356.3) The entry effect for a new cohort of immigrants is represented by: A) The distance between the two profiles at age 65 B) The distance between the two profiles at the point labelled ‘T' C) The distance between the two profiles at age 20 D) The slope of the immigrants' profile minus the slope of the native-born profile E) The slope of the native-born profile minus the slope of the immigrants' profile

356.4) The interpretation of the point labelled ‘T' is which of the following?

A) The returns to age B) The wage discrimination effect C) The point at which the earnings of natives catch up to the earnings of immigrant D) The entry effect E) The point at which assimilation has been reached.

357)

The figure shows the age-earnings profiles for the native born and for immigrants. YSM = years since immigration

357.1) The entry effect for a new cohort of immigrants is represented by: A) The distance between the two profiles at age 65 B) The distance between the two profiles at the point labelled ‘T' C) The distance between the two profiles at age 20 D) The slope of the immigrants' profile minus the slope of the native-born profile E) The slope of the native-born profile minus the slope of the immigrants' profile 357.2) The interpretation of the point labelled ‘T' is which of the following?

A) The returns to age B) The wage discrimination effect C) The point at which the earnings of natives catch up to the earnings of immigrant D) The entry effect E) The point at which assimilation has been reached.

357.3) The entry effect for a new cohort of immigrants is represented by: A) The distance between the two profiles at age 65 B) The distance between the two profiles at the point labelled ‘T' C) The distance between the two profiles at age 20 D) The slope of the immigrants' profile minus the slope of the native-born profile E) The slope of the native-born profile minus the slope of the immigrants' profile 357.4) The interpretation of the point labelled ‘T' is which of the following?

A) The returns to age B) The wage discrimination effect C) The point at which the earnings of natives catch up to the earnings of immigrant D) The entry effect E) The point at which assimilation has been reached.

Answer Key Test name: chapter 11 300) 301) 302) 303) 304) 305) 306) 307) 308) 309) 310) 311) 312) 313) 314) 315) 316) 317) 318) 319) 320) 321) 322) 323) 324) 325) 326) 327) 328) 329) 330) 331) 332) 333) 334) 335) 336)

A E A C A D C B A B A B D B A D B C D E B A B C B D D A E A C A D C B A B

337) 338) 339) 340) 341) 342) 343) 344) 345) 346) 347) 348) 349) 350) 351) 352) 353) 354)

A B D B A D B C D E B A B C B D D Short Answer

• Canada currently receives over 200,000 immigrants per year. Compared to 40 years ago, immigrants are significantly more likely to come from Asia than Western Europe. Most immigrants settle in large cities, especially Toronto and Vancouver. The Canadian government has two main policy instruments for controlling immigration. First, it can set a target number of total immigrants. Whether the target binds will depend to some extent on the supply side by the number of people who want to immigrate to Canada. Second, the government can affect the mix by determining how many immigrants will be admitted in the assessed and non-assessed classes.

Since the 1990s, the government tilted the mix toward more skilled immigrants by increasing the number of immigrants assessed by the points system and decreasing the size of the familyreunification class.

• Policymakers and economists can use the simple supply and demand framework in order to simulate the potential impact of immigration on the labour market (i.e., on the employment and wages of the native born). If the only effect of immigration is to shift out the supply curve, we would predict that immigration would depress wages. However, the impact of immigration may be offset by shifts of the labour demand curve, in which case the impact of immigration is indeterminate.

• Generally speaking, empirically evaluating the impact of immigration on the labour market is difficult, because it is impossible to know what would have happened in the absence of immigration. A common approach, for example, is to compare native-born wages across cities with different levels of immigration. This can be a difficult empirical strategy if immigrants choose to go to cities with more prosperous labour markets; if native-born workers move in response to immigration; or if firms invest in factories to take advantage of the pool of immigrant labour. All of these factors will make it difficult to detect an adverse effect, even if one exists.

Researchers have employed a variety of strategies to circumvent these problems, including exploiting "natural experiments," whereby there were large sudden inflows of immigrants to particular labour markets. The "consensus "estimates of the impact of immigration suggest that the impact is modest, though possibly that an increase in unskilled immigrants reduces lowskilled wages.

355)

Short Answer

• Canada currently receives over 200,000 immigrants per year. Compared to 40 years ago, immigrants are significantly more likely to come from Asia than Western Europe. Most immigrants settle in large cities, especially Toronto and Vancouver. The Canadian government has two main policy instruments for controlling immigration. First, it can set a target number of total immigrants. Whether the target binds will depend to some extent on the supply side by the number of people who want to immigrate to Canada. Second, the government can affect the mix by determining how many immigrants will be admitted in the assessed and non-assessed classes.

Since the 1990s, the government tilted the mix toward more skilled immigrants by increasing the number of immigrants assessed by the points system and decreasing the size of the familyreunification class.

• Policymakers and economists can use the simple supply and demand framework in order to simulate the potential impact of immigration on the labour market (i.e., on the employment and wages of the native born). If the only effect of immigration is to shift out the supply curve, we would predict that immigration would depress wages. However, the impact of immigration may be offset by shifts of the labour demand curve, in which case the impact of immigration is indeterminate.

• Generally speaking, empirically evaluating the impact of immigration on the labour market is difficult, because it is impossible to know what would have happened in the absence of immigration. A common approach, for example, is to compare native-born wages across cities with different levels of immigration. This can be a difficult empirical strategy if immigrants choose to go to cities with more prosperous labour markets; if native-born workers move in response to immigration; or if firms invest in factories to take advantage of the pool of immigrant labour. All of these factors will make it difficult to detect an adverse effect, even if one exists.

Researchers have employed a variety of strategies to circumvent these problems, including exploiting "natural experiments," whereby there were large sudden inflows of immigrants to particular labour markets. The "consensus "estimates of the impact of immigration suggest that the impact is modest, though possibly that an increase in unskilled immigrants reduces lowskilled wages.

356) Section Break 356.1) C 356.2) E 356.3) C 356.4) E 357) Section Break 357.1) C 357.2) E 357.3) C 357.4) E

Chapter 12: Discrimination and Male-Female Earnings Differentials MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

358) Which of the following policies to combat labour market discrimination is likely to have the most far-reaching impact?

A) conventional equal pay policies B) comparable worth or pay equity C) equal employment opportunity legislation D) facilitating policies E) employment equity legislation 359)

In the context of anti-discrimination policy, what is meant by the term administrative concept of value?

A) A worker's value is evaluated by the administrators to whom he or she reports.

B) A worker's value is determined by his or her own marginal product of labour in the labour market.

C) A worker's value is determined by the average value of his/her wage determining features, such as skill, effort, responsibility, and working conditions.

D) A worker's value is determined by supply and demand forces.

E) A worker's value is determined by his/her own assessment, assuming that it is done reasonably.

360)

It is thought that the most important source of labour market discrimination facing women is that: A) Women are often segregated into low-wage establishments and industries.

B) White collar women reach the glass ceiling.

C) Women on average do not have the same levels of productive characteristics as men.

D) In many cases, women are not receiving equal pay for equal work.

E) None of the choices are correct.

361)

The sources of discrimination include all of the following, with the exception of: A) employers.

B) Customers who are served by the workers.

C) male co-workers.

D) systemic human resource management practices in the labour market.

E) productivity differences.

362)

The demand theory of discrimination focuses on which of the following?

A) The demand for female labour is reduced relative to the demand for equally productive male labour.

B) The demand for female labour relies on the preferences of the recruitment and hiring committee of each firm.

C) Females tend to be less aggressive than males when they are negotiating wages with their employer.

D) Females are restricted from entering certain occupations, and are thus crowded into other occupations.

E) Women have a higher labour force participation rate than men.

363)

The supply theory of discrimination focuses on which of the following?

A) The supply of female labour is reduced relative to the demand of female labour.

B) The supply of female labour relies on the preferences of the hiring committee of each firm.

C) The supply of female labour to certain occupations or industries is increased as a result of discrimination.

D) Women have a higher labour force participation rate than men E) Females receive lower salaries for the typical "male-type" jobs.

364)

The crowding hypothesis states that: A) Females will not be hired when there is a lack of jobs.

B) Females will receive a lower salary in executive-level employment.

C) Females tend to receive the smallest offices, in case of congested office spaces.

D) Females tend to be segregated into "female-type" occupations.

E) Females receive lower salaries for the typical "male-type" jobs.

365)

When one breaks down the difference in earnings between men and women into the part due to productivity differences and the part due to discrimination, one produces the: A) the male-female earnings gap B) the total discriminatory impact C) the Oaxaca decomposition D) the market premium E) the comparable worth amount

366)

Which of the following public policies is not among the primary ones employed to combat discrimination?

A) Conventional equal pay legislation B) Policies designed to facilitate female employment C) Equal employment opportunity legislation D) Labour standard requirements E) Equal value legislation

367)

Conventional equal pay legislation requires equal pay for equal work: A) within the same establishment.

B) within the same age group.

C) across the board.

D) within the same industry.

E) for workers who have same level of education.

368)

Pay equity is the same as: A) equal pay for work of equal value.

B) equal pay for work in the same industry C) equal opportunity for jobs in the same industry.

D) equal pay for men and women on average.

E) equal wages but not necessarily equal earnings

369)

In the context of equal value determination, the policy capturing approach refers to: A) Taking the average of the wage of male-dominated jobs and female-dominated jobs and applying it to both types of jobs.

B) Applying the wage determination mechanism that applies to male-dominated jobs, and applying them to female-dominated jobs.

C) Taking the wage-determination policies that are contained in collective agreements, and applying those policies to female-dominated jobs.

D) Allowing wages of both female-dominated occupations to be generated by market policies.

E) Allowing the wage determination process that applies to female-dominated occupations to be captured by special interests.

370)

In the context of equal value determination, the economic concept of value refers to cases in which: A) The administration of a company determines the wage.

B) The wage is determined by the average value of the inputs, such as skill, effort, responsibility, etc.

C) The wage is determined by collective agreements.

D) The wage is determined by the value of output produced by the worker in question.

E) The wage is determined by the additional output produced by the worker in question.

371)

In the context of anti-discrimination policies, facilitating policies include all of the following, with the exception of: A) Policies designed to expand the range of career choices open to women.

B) Policies designed to facilitate the participation of women in the labour market in a non-discriminatory fashion.

C) Policies designed to make it easier for women to enter the labour market and maintain family- related responsibilities.

D) Policies designed to raise women's pay to parity with their male counterparts.

E) None of the choices are correct.

372)

According to some scientific studies which have been published, what is a major factor explaining the apparent pay gap between men and women?

A) Women are far more likely to have interrupted their careers for family-related responsibilities.

B) Women are not as highly educated as men, ceteris paribus.

C) Women are not as productive as men, ceteris paribus.

D) Women tend to lack confidence and aggressiveness when comparing to men.

E) Women are not given as many opportunities as men.

373)

Although the view is not unanimous, the consensus in the empirical literature on wage discrimination is that: A) Blacks do suffer from discrimination, but women do not, once one has controlled for all of the productivity-related factors.

B) Discrimination against women and minorities is greater in the US than in Canada.

C) The raw wage differential is only a little greater than the differential that remains after controlling for all of the productivity-enhancing characteristics.

D) Discrimination and inequality of opportunities and responsibilities originating from outside of the labour market do not play an important role.

E) Even after having controlled for all of the productivity-related factors, there is a degree of wage discrimination against women and minorities, but it is not enormous.

374)

A major challenge that is involved in the empirical investigation of wage discrimination

is: A) The unexplained wage differentials are larger than the explained differentials.

B) The Oaxaca decomposition is subject to ability bias.

C) Some of the control variables are not really pre-market characteristics, as their values

might be the result of discrimination rather than cause it.

D) The unexplained wage differentials are too small to estimate.

E) The absence of a comparison group leads to a systematic bias in the estimation of discrimination.

375)

The literature treating the question of wage discrimination against homosexuals has tended to find that: A) Gay men face discrimination more than lesbian women do.

B) Neither gay men nor lesbian women face discrimination.

C) Both gay men and lesbian women face substantial discrimination.

D) Gay men face less discrimination than lesbian women do.

E) The data that are required to research the issue do not exist.

376)

Within the framework of the Oaxaca decomposition, the basic approach to analyzing whether there exists wage discrimination against women is to: A) compare the actual mean wage of women to the actual mean wage of men.

B) compare the actual wage of women to the predicted wage that they would earn given female attributes and coefficients from the male equation.

C) compare the actual wage of women to the predicted wage that they would earn given male attributes and coefficients from the male equation.

D) compare the actual wage of women to the predicted wage that they would earn given female attributes and coefficients from the female equation.

E) search for anecdotal cases of low-paid women that appear to be affected by discrimination.

377)

Which element of the Oaxaca Decomposition reflects the wage discrimination?

A) The differences in the estimated coefficients between the male and the female wage equations B) The differences in the attributes between men and women C) The explained component of the wage differential D) The differences in the predicted wages between men and women E) None of the choices are correct.

378)

Recent studies in behavioural economics show that which of the following can NOT explain male-female wage differentials?

A) Females tend to be more risk averse B) Females are less competitive in their demeanor C) Females tend to value jobs that emphasize people and family over money D) Females are more antagonistic and disagreeable E) None of the choices are correct.

379)

Which of the following can NOT explain the declining trend of male-female pay gap?

A) Improvements in the productivity-related characteristics of females B) A decline in discrimination against females.

C) Increase in the "knowledge economy" skills of females D) Decline in unionization rate among the work force.

E) None of the choices are correct.

380)

Regarding to the empirical research on discrimination in Canada, which of the following is correct?

A) More Canadian research is focused on ethnic-white earning differentials.

B) The earning differentials between white and aboriginals have declined recently.

C) The research on ethnic-white earnings differentials is difficult due to data limitations.

D) Earnings disadvantages for immigrants distribute evenly across the countries of origin of the immigrants.

E) Wage gaps of black workers with high school education are substantially reduced after controlling for differences in ability scores.

381)

Which of the following is the finding from the evaluation of Ontario Pay Equity legislation?

A) There is no substantial impact on women's wages in male-dominated jobs.

B) There is a reduction in male wage in the male-dominated jobs.

C) There is a small reduction in the male-female wage gap in female-dominated jobs.

D) There is an increase in female wages in male-dominated jobs.

E) There is a small increase in female employment in large firms.

382)

All of the following are associated with various theories of discrimination with the exception of: A) demand based B) Choices of working patterns that workers make that might influence their productivity C) supply based D) non-competitive labour markets E) Human capital theory

383)

Why might some analysts criticize studies measuring wage discrimination which include some variables, such as the occupation, the length of time that women might spend out of the labour force, and womens' choices of field of study?

A) Because these outcomes themselves might be shaped by discriminatory factors.

B) Because they are thought to be irrelevant C) Because they cannot be measured, and thus there are no data D) Because they do not affect the worker's productivity levels E) None of these above

384)

According to the empirical literature, which of the following factors appears to play the most important role in generating the male-female wage gap?

A) The industry in which workers are employed B) The occupation of the workers C) The particular firm that employs them D) The geographical region in which the workers reside E) The gender of the worker

385)

According to the empirical literature, what is the approximate value of the lowest estimate of the which of the following factors appears to play the most important role in generating the male-male-female wage gap after having controlled for factors that might explain it?

A) About 20 % lower for females B) About 10 % lower for females C) About 40 % lower for females D) About 33 % lower for females E) No major differential

386)

According to the empirical literature, among full-time, full year workers, the raw female to male earnings ratio (before applying any adjustments for pre-market characteristics) is approximately: A) 60 % B) 90 % C) 50 % D) 70 % E) None of these above

387)

Consider the Oaxaca framework for the decomposition of the wage gap between two groups of workers. The variables that are included as controls that might explain the gap might involve all of the following with theexception of: A) Ability and motivation on the job B) Workplace characteristics C) Education D) Experience E) Occupation

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

388) Congratulations! You have just been appointed to a commission studying wage discrimination against women. Again, you have been pushed from the frying pan into the fire, as this is a sensitive topic. It is your role to give the background report to the commission, who will subsequently make some recommendations for anti-discrimination policy.

• There are several theoretical models of labour market discrimination that seek to explain why men and women with equal productivity levels may not be paid the same. Briefly describe in intuitive terms the demand-side approach, the supply-side approach (the crowding hypothesis), and the non-competitive approach involving barriers to mobility.

• It is true that, on average, women spend less time in the labour market gaining experience, on-the-job training, and other forms of human capital than men do, which is often tied to childbearing responsibilities. Some apologists claim that lower pay for women might be justified, as employers have less of an incentive to invest in workers with higher turnover. On the other hand, this line of reasoning has been countered by some analysts. What is the nature of the critique of those who disagree with the apologists? (An apologist would say that the pay differentials are justifiable based on productivity and that there is no direct discrimination against women.)

• Like many other issues raised in this textbook, the conceptual models take us only so far in our analysis. Empirical research on male-female earnings differentials is required to assess the validity of the models. The extent of the wage discrimination is typically measured by the so-called Oaxaca decomposition effect. Without getting into the technical details of this equation, explain the general idea of the procedure. You should describe the major elements.

No graph is necessary.

• Finally, describe the essence of the vast empirical literature on the male-female wage differential. You should include a mention of the occupational effect on wages. Has the gap been increasing or decreasing over time?

SECTION BREAK. Answer all the part questions.

389) Considering YM ={MISSING IMAGE}media:ref_12-01(printfile).png% SM and SF are average number of school years for males and females, respectively.

389.1) What is male to female wage ratio in logarithms?

A) 0.7 B) 0.36 C) -0.36 D) 1.42 E) indeterminant 389.2) Using Oaxaca decomposition, the unexplained differentials is given by which of the

following?

A) (0.1 - 0.07)*SF B) (0.1 - 0.07)*SM C) 9.2 - 9.4 = -0.2 D) (0.1 - 0.07) E) 0.07 - 0.1 = -0.03 389.3) Using Oaxaca decomposition, the differential that is attributable to pre-market

characteristics is given which of the following?

A) (0.1 - 0.07)*SF B) (0.1 - 0.07)*SM C) 9.2 - 9.4 = -0.2 D) 0.1*(SM - SF) E) 0.07*(SM - SF)

390) 390)

390.1) Consider the Oaxaca framework for the decomposition of the wage gap between two

groups of workers. In figure SB 12-2, the portion of the wage gap that might be attributed to discrimination is: A) The distance between B and C B) The distance between D and C C) The distance between A and B D) The distance between D and A E) Indeterminant 390.2) Consider the Oaxaca framework for the decomposition of the wage gap between two

groups of workers. In figure SB 12-2, the portion of the wage gap that is attributed to premarket characteristics is: A) The distance between B and C B) The distance between D and C C) The distance between A and B D) The distance between D and A E) Indeterminant

Answer Key Test name: chapter 12 358) 359) 360) 361) 362) 363) 364) 365) 366) 367) 368) 369) 370) 371) 372) 373) 374) 375) 376) 377) 378) 379) 380) 381) 382) 383) 384) 385) 386) 387) 388)

B C A E A C D C D A A B D D A E C A B A D D C C E A C B C A Short Answer

• Generally speaking, demand theories of discrimination have the common result that the demand for female labour is reduced relative to the demand for equally productive male labour.

This can occur because employers have a prejudice against hiring female labour, or customers have an aversion to buying from female labour or co-workers have an aversion to working with female workers. The resultant decreased demand for female labour would reduce the employment of females. The Supply theories of discrimination have the common result that the supply of female labour is increased by discrimination or, conversely, that the female asking wage is reduced by discrimination. The crowding hypothesis was first outlined by Edgeworth (1922) when he referred to "that crowding of women into a comparatively few occupations, which is universally recognized as a main factor in the depression of their wages." In a similar vein, dual labour market theory posits two separate and distinct labour markets. The primary or core labour market (unionized, monopolistic, and expanding) provides secure employment at high wages where men are typically worked for. The secondary or peripheral labour market (nonunionized, highly competitive, and declining) is characterized by unstable employment at low wages where women are typically worked for. Supply theories of discrimination also emphasize the importance of preferences in determining various decisions with respect to education, training, hours of work, working conditions, and occupational choice—all of which can influence the jobs that women take and the pay they receive. There are a number of economic mechanisms by which discrimination could persist in the long run using noncompetitive theories. The first such mechanism is the one associated with labour force adjustment costs. According to the Arrow proposition, firms which have discriminated in the past are reluctant to undo the wage discrimination that occurred because it would involve firing a lot of their male workers and/or cutting their pay, both of which can wreak havoc on labour relations. A related story is the efficiency wage hypothesis, according to which firms pay supercompetitive wages in order to reduce turnover and elicit more effort on the part of their workers.

This phenomenon goes hand-in-hand with unions working to raise wages, and other noncompetitive wage-employment outcomes. When super-competitive wages are paid (which include economic rents), there will be workers queuing for these scarce jobs. Under such conditions, discrimination against women and minorities is more likely. According to this proposition, the incumbent employees, who are mostly male, benefit from the discrimination, and place pressure on the employer (and perhaps on female applicants) in the act of hiring them.

• Female wages may differ from male wages because of productivity differences that arise from differences in the human capital endowments and differences in the absenteeism and turnover of males and females. In general, there is little reason to believe the differences in these innate characteristics between the sexes are significant in regards to productivity. And in an increasingly mechanized society the innate characteristic for which there may be the greatest difference—physical strength—takes on reduced importance. The human capital decision therefore may reflect rational choice; however it is important to consider that these choices may also be subject to discriminatory constraints. Females may be discriminated against through the returns they receive for acquiring human capital as well as in borrowing to finance the cost of

human capital formation. More important, females may face peer pressure and prejudice from the society and force them to make a choice which is discriminative to start with (such as the role of household tasks). Differences in household responsibilities then may lead to comparative advantages in different task, such as women are better at household tasks and men are better at labour market activities, which then reinforce discrimination.

• The framework most commonly employed by economists is a straightforward application of the human capital earnings function, which is called Oaxaca decomposition. The objective is to decompose the difference in earnings between men and women (or any two groups) into that part due to productivity and that due to discrimination. In the absence of discrimination, pay differences should arise only from differences in the productive characteristics, such as the average years of schooling, not differences in the pay scales, the coefficient estimates of productive characteristics from the human capital earnings function. This method can decompose the total difference of male-female log earnings into two parts: the first part gives the predicted difference in earnings that would arise if men and women were paid on the same basis, but had different characteristics. The second component yields the part of the differential due to differences in pay structure, or discrimination.

• Numerous studies have reviewed the empirical procedures and the evidence on male-female wage differentials and the determinants of those differentials. The general findings are summarized as (also see Weichselbaumer and Winter-Ebner (2005)): • Before adjusting for the effect of different factors that can influence the male-female pay gap, females tend to earn about 60% or slightly more of what males earn.

• The ratio tends to increase (i.e., the male-female pay gap decreases) as adjustments are made for various factors, such as women working fewer hours, having less continuous work experience, having fields of study in education that tend to be less labour market oriented, working in lower-paying occupations and smaller firms, and having a disproportionate burden of household responsibilities that can affect their job search and labour market performance. Many of these factors themselves, however, may reflect discrimination.

• The male-female pay gap is smaller in the public sector and in unionized environments, likely reflecting such factors as egalitarian pay practices, compressed wage structures, and sensitivity to their public image.

• The gap is dissipating over time, although that convergence has slowed in recent years.

• The gap is smaller in countries with centralized bargaining structures, where wage structures tend to be compressed and equal pay issues are incorporated into centralized bargaining.

• The discriminatory gap is smaller the greater the degree of competition in product markets, suggesting that competitive forces can dissipate discrimination • Evidence also exists that suggests a glass ceiling whereby a large male-female pay gap exists at the high end of the pay distribution in Canada.

• In addition to being disproportionately employed in low-wage occupations, women tend to be employed in low-wage establishments and industries.

• There are evidences to show that the gap is small or nonexistent when females first enter the labour market, but it increases with their time spent in the labour market.

• Evidence that the male-female pay gap is declining over time, albeit more slowly in recent years, is also documented in U.S. studies.

389) 389.1) 389.2) 389.3) 390) 390.1) 390.2)

Section Break B A D Section Break C B

Chapter 13: Optimal Compensation Systems, Deferred Compensation, and Mandatory Retirement MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

391) Principal-agent theory deals with the problem of: A) designing an efficient contract between the employer and the employee when there are incentives to cheat or shirk.

B) failed negotiations between workers and their employees.

C) designing an optimal compensation system to reduce turnover.

D) designing an optimal compensation when there is perfect information.

E) All of these above 392)

What is the essence of efficiency wages?

A) The level of wages may affect the productivity levels.

B) Wages are always paid according to the worker's marginal revenue product.

C) Wages are determined by a bargaining process between the worker and the firm.

D) Wages are paid such that the allocation of labour is efficient.

E) Wages that are determined by other mechanisms must be inefficient.

393)

Which of the following donot apply to "superstar" salaries?

A) A premium is paid even if the star is only a marginally better performer than the second- best person.

B) They are astronomical compared to even the salary of the second best performer.

C) They magnify small differences in skill into large differences in pay.

D) They resolve the principal-agent problem.

E) There is a common demand the performances of this type of worker

394)

All of the following are potential problems with inequality in the pay structure,exceptthat: A) It can discourage free-riding behaviour on the part of workers, thus providing incentives to work more diligently.

B) It can discourage cooperative behaviour and teamwork.

C) It can encourage some workers sabotaging the work of other employees such that they might not get promoted.

D) It may not be attractive to workers with risk-averse preferences.

E) It can be viewed as inequitable and unfair in its outcomes.

395)

Which of the following might be tempered or reduced by the negative ramifications of excessive inequality?

A) Deferred compensation B) Mandatory retirement C) Executive compensation D) Compensation by the piece E) Compensation in the spot market for labour

396)

Deferred compensation systems are those that contain: A) wages that are paid upon completion of the job.

B) pensions accruing even after requirement.

C) wages above the level of an individual's value of the marginal product of labour for more senior employees.

D) Training benefits and signing bonuses E) Low turnover costs

397)

Deferred compensation reduces which of the following activities?

A) The need to examine the past performance of a worker before hiring him/her B) The need for constant, everyday monitoring of the marginal productivity of workers C) The need for mandatory retirement D) The need to provide incentive pay

398)

One of the ways in which employees do not benefit from deferred compensation is: A) the due process and seniority rules.

B) the possible synchronization of the worker's income and expenditures.

C) the periodic rather than the everyday monitoring.

D) the remuneration according to the worker's true contribution to the firm.

399)

The "lump-of-labour-fallacy" implies that: A) The only way that a job seeker can find work is for someone who is currently employed to leave his/her position.

B) Work-sharing arrangements will not create any jobs.

C) The only way that an unemployed person can find work is for total employment to rise.

D) The number of jobs at each firm depends on the state of the overall labour market.

E) There is a high degree of turnover in the labour market, as many workers leave their positions for various reasons.

400)

The phenomenon of asymmetric information is most closely related to: A) deferred compensation.

B) the 1/N problem.

C) up-or-out rules.

D) the principal-agent problem and monitoring of workers.

E) The remuneration of superstars

401)

The basic idea that underlies the theory of salaries as tournament prizes is that: A) Workers are paid according to their own, individual values of marginal revenue product.

B) Workers are paid according to the average revenue product of individuals within a class of workers.

C) Workers are paid according to their rank in a classification of their own, individual performances.

D) Workers are paid according to the 1/N rule of compensation.

E) Workers are paid according to the provisions of collective agreements.

402)

Linear pay structures, also know as piece rates, are those that award additional earnings evenly according to every unit of production or widget produced, while non-linear pay structures award additional earnings in very uneven fashion based on job categories that are ranked. Which of the following statements isfalse?

A) The non-linear compensation systems tend to generate relatively egalitarian pay structures.

B) The non-linear pay systems can generate disincentives for job good performance under certain circumstances.

C) The non-linear pay systems are thought to stimulate good job performance.

D) The non-linear pay systems can generate non-cooperative behaviour within the labour force.

E) None of these above, as they are all true.

403)

An example of "piece rate" compensation is: A) executive compensation.

B) raiding and offer-matching compensation.

C) fee for service compensation.

D) straight-salary compensation.

E) Capitation compensation

404)

Consider a deferred compensation scheme. Which of the following describes the wageproductivity profile?

A) A wage profile below the productivity profile during the early stages of the career, and the opposite situation at the later stages of the career B) A wage profile above the productivity profile during the early stages of the career, below the productivity profile during the middle stages of the career, and above it again during later stages of the career C) A wage profile that coincides with the productivity profile during all phases of the career D) A wage profile above the productivity profile during the early stages of the career, and the opposite situation at the later stages of the career E) A wage profile that is above the productivity profile throughout the entire career.

405)

Which of the following isnot the rationale for mandatory retirement?

A) An employment contract should have a termination date when the productivity level of the employee is way below the paying wage of the employee.

B) Mandatory retirement can open up opportunity for younger workers.

C) Mandatory retirement may create a greater degree of certainty about when an employee will retire for future production planning.

D) Mandatory retirement may increase the need for the monitoring and evaluation of older workers.

E) Mandatory retirement can be integrated with the pension plan under which the workers are covered.

406)

Which of the following is true regarding the banning of mandatory retirement?

A) It has postponed the age of retirement B) It reduces the continued employment of older workers.

C) It may reduce the employment and promotion opportunities of younger workers.

D) The wages of younger workers will fall and the wages of older workers will rise further.

E) It would put an end to discrimination against older workers.

407)

Which of the following occupations is often paid at the piece rate?

A) University professors B) Medical doctors C) Fire fighters D) Auto workers E) Bus drivers

408)

Which of the following regarding "deferred payments" is NOT correct?

A) Workers' wages normally rise with seniority.

B) Workers' productivities rise with seniority.

C) Deferred payment reduces turnover.

D) Deferred payment reduces monitoring costs.

E) They can compensate the worker for receiving pay below the value of marginal productivity at the early stages of their careers

409)

Which of the following is a rationaleagainst mandatory retirement?

A) It is a form of age discrimination.

B) It reduces the need for monitoring and evaluating older workers.

C) It can encourage pre-retirement planning and preparation for eventual retirement.

D) They are incompatible with collective agreements between workers and unions.

410)

All of the following are elements of the "new economics of personnel" theory involving the compensation of workers with the exception of: A) The spot market for labour B) Game theory (strategic behavior) C) Monitoring costs D) Asymmetric information regarding the worker's true productivity E) Uncertainty

411)

All of the following are typical attributes of very highly paid corporate executives with theexception of: A) Extremely able and successful at accomplishing a number of tasks B) An ability to recognize problems and challenges at a detailed level C) Very strong communication skills D) Presence in high-variance industries in which decision making can have high payoffs E) An ability to strategize and manage at a general level

412)

Advantages of Piece-rate remuneration schemes include which of the following?

A) It tends to encourage long-term relationships between the employer and the firm B) Incentivizing workers to work hard and attracting risk-averse workers for the job C) Incentivizing workers to cooperate in teams D) Incentivizing workers and attracting workers who prefer to work under that scheme E) It works best when the worker's effort can be measured

413)

Fill in the blanks in the following sentence. In the framework of efficient labour contracts, principals refer to , while agents refer to the .

A) Customers; workers B) Workers; employers C) Employers; workers D) Employers; governments E) None of these above

414)

The tournament prize mechanism is sometimes utilized to explain which of the following phenomena?

A) A compressed wage structure B) The elicitation of effort from the worker C) Pay that is matched closely to the worker's marginal productivity D) Deferred compensation E) Very high salaries that appear to be exorbitant paid to a few workers

415)

What would likely occur if we were to ban mandatory retirement?

A) The productivity profiles would shift upward, as workers would become more productive throughout their career.

B) Wage profiles would more closely approximate the productivity profiles C) There would be less monitoring and evaluation of workers D) Labour force participation rates would fall E) Many older workers would postpone their retirement

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

416) Congratulations! You have just been hired as the director of human resources for the Hiram N. Firem corporation. Until now, this firm has typically hired labour in an unfettered, ultra-competitive labour market. It has always paid competitive wages, but has always laid off workers at the first sign of a downturn in product demand and hired them at the first sign of an upturn. Some might call this the disposable labour model, but in technical jargon, it is called a spot market. Now the management is considering modifying its compensation and lay-off practices.

• The first question that you must address is how the executives should be paid. Until now, they have received stratospheric compensation compared to the rank-and-file workers.

Explain this phenomenon by appealing to the salary-as-a-tournament-prize approach of the economists Lazear and Rosen.

• In establishing the pay structure within an organization, trade-offs are involved in determining the optimal degree of inequality of pay. Explain the nature of this trade-off: what factors push toward salary compression, and what factors push toward greater dispersion?

• Now it is time to time to develop a wage/seniority policy for the rank-and-file workers.

You are to analyze a deferred compensation system. Give a graph and a brief economic explanation of the wage, productivity, and seniority profile. Explain the rationales for deferred compensation.

• Finally, explain the link between a deferred compensation mechanism and the policy of mandatory retirement.

SECTION BREAK. Answer all the part questions.

417)

Figure 13-1 from the text.

a).

b).

c).

d).

417.1) Which of the following depicts the situation of the deferred wages contract market?

A) a) B) b) C) c) D) d) E) None of these above 417.2) Which of the following depicts the situation of the spot market?

A) a) B) b) C) c) D) d) E) None of these above 417.3) Which of the following depicts the situation of deferred wages with company-specific

training?

A) a) B) b) C) c) D) d) E) None of these above

417.4) Which of the following depicts the situation of general training?

A) a) B) b) C) c) D) d) E) None of these above

Answer Key Test name: chapter 13 391) 392) 393) 394) 395) 396) 397) 398) 399) 400) 401) 402) 403) 404) 405) 406) 407) 408) 409) 410) 411) 412) 413) 414) 415) 416)

A A D A C C B D A D C A C A D C B B A A B D C E B Short Answer

• The discussion of tournaments and superstars suggests that executives may be paid by much high salaries relative to the average pay of other workers; you may even consider the stock options. This idea is motivated in part by the need to pay "prizes" to the top persons, as a way to induce incentives among other executives so as to win the "tournament prize." Making sure that the top person gets the job is especially important for an executive who is responsible for an extremely large organization. Correct decisions in these circumstances, for example, can have huge ramifications for the performance of large numbers of workers. In that vein, the incentive that is important is not the incentive for the executive to work hard or to acquire managerial skills, but rather it is to ensure that the executive with the right talent gets matched with the organization that needs and values that talent the most. Paying a person a million dollars as opposed to half a million dollars a year is not likely to make her work any harder or be more productive. It may not even be necessary to have such a large "prize" to improve the incentives of potential candidates to be promoted and "win" it. However, it may be necessary to ensure that the appropriate person goes to the organization where her talent is valued most.

• In establishing the pay structure within an organization, trade-offs are involved in determining the optimal degree of inequality of pay. Some dispersion of inequality of pay is necessary to provide an incentive to perform well in order to advance up the hierarchy and perhaps ultimately reach the top. However, too much inequality or dispersion may be inefficient in that it can discourage co-operative behaviour and teamwork if only a few can rise to the top. It may even encourage sabotage to prevent your fellow employees, if they are competitors, from being promoted if that reduces your own chance of promotion. As well, a large degree of salary inequity may not be attractive to persons with a degree of risk aversion, or who are motivated by concepts of fairness. Pay inequality can also be counterproductive if it fosters jealousy among workers who feel they are not paid appropriately.

The challenge for compensation specialists and human resource managers is to establish the optimal degree of pay equality or salary compression to provide performance incentives and yet encourage teamwork and co-operative behaviour, if that is important. The optimal degree of pay equality likely differs across different situations. For example, different pay incentive schemes also may be appropriate for different levels within an organization, as well as for different organizational structures. It may be sensible to pay higher-level managers bonuses on the basis of individual or group output, rather than paying them on the basis of their relative performance.

Similarly, regarding to competitions, some firms may get higher output, more innovation, and better quality by fostering competition; others may do better by fostering co-operation amongst employees. Some workers may thrive on competition; others may be devoured by it and do their best work in a co-operative environment. The practice of human resource management is complicated, it must mix and match workers and pay scales to achieve the best result.

• The last two questions are highly related. A figure similar to Figure 13.2 can be attached to these questions. As shown in the figure, productivity or the value of marginal productivity is assumed to rise with seniority, though tapering off at higher level of seniority. Wage start off below the individual's productivity profile but they rise more rapidly than productivity,

eventually reaching a break point, and then being above productivity at the higher levels of seniority (indicating overpayment relative to productivity). Compensation often appears to be deferred in the sense that wages are above an individual productivity for the more senior employee. Such deferred compensation systems may serve a number of important functions and hence have an efficiency rationale. It can help ensure honesty and work effort as well as the long-term commitment to the work arrangement of the employee. Such a compensation system also reduces the need for constant everyday monitoring of the productivity of the worker and also reduce unwanted turnover and enable firms to recoup their quasi-fixed costs that are usually incurred early in the employee's tenure with the company.

The mandatory retirement age is such that the present value of the underpayment is equal to the present value of the overpayment. The termination date for the contract is established because employers do not want to run the risk of paying wages in excess of productivity for an indefinite period in which a contractual arrangement involving deferred wages could not persist.

417) 417.1) 417.2) 417.3) 417.4)

Section Break A B C D

Chapter 14: Unions and Collective Bargaining MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

418) The unionization rate will tend to be higher when all of the following apply, with theexception of: A) The higher the wage and the smaller the employment loss from becoming unionized B) The lower the costs of organizing labour into unions C) The greater the rents that the targeted firm earns in the product market D) The longer that the employee expects to be working at the firm E) The more competitive of the product market 419)

Over the past 90 years in Canada, the union density rate has tended to be characterized

by: A) B) C) D) E)

a mostly negative trend a mostly positive trend. a steadily positive trend. relative stability. a steadily negative trend.

420)

Which of the following countries has the highest value of union density?

A) Canada B) United States C) Japan D) France E) United Kingdom

421)

The costs to workers of unionization include all of the following, except: A) higher taxes.

B) union dues.

C) time devoted to union activities.

D) loss of pay during job action and strikes.

E) the possibility of a pay settlement that is not in the interests of certain members of the union.

422)

The overall strength of a union movement depends on all of the following factors, with theexception of: A) the economic environment (state of the business cycle).

B) the political climate.

C) the legal and regulatory climate in which unions might operate.

D) the activities of employers.

E) the strength of the union movement in neighbouring countries.

423)

The objective of lengthy and demanding entrance procedures to join a union or a professional group is to: A) directly raise the wage that union members receive.

B) shift the labour demand curve to the right.

C) shift the labour demand curve to the left.

D) shift the labour supply curve to the right.

E) shift the labour supply curve to the left.

424)

A plumber's union is an example of: A) a craft union.

B) an industrial union.

C) a public employee union.

D) an employee association.

E) a professional association.

425)

The bargaining power that a union has is most closely related to: A) the wage elasticity of labour demand.

B) the wage elasticity of labour supply.

C) the quantity demanded of labour.

D) the quantity supplied of labour.

E) the size of the bargaining unit.

426)

Which of the following statements regarding union incidence (or density) rates between 2000 and 2015 is true?

A) They declined in both the U.S. and in Canada.

B) They rose in both the U.S. and in Canada.

C) They declined in Canada but rose in the U.S. D) They declined in the U.S. but rose in Canada.

E) They were higher in the U.S. than they were in Canada.

427)

One recently published theory as to why unionization rates are much higher in Canada than in the U.S. is that: A) the demographic traits of the labour force in Canada are those that are associated with higher rates of unionization.

B) the industrial composition of the labour force in Canada is weighted toward those associated with higher rates of unionization.

C) Canadians' social and political values are relatively more collectivist and socially democratic in nature, and hence less individualistic and free-market oriented.

D) Canadians' social and political values are relatively less collectivist and social democratic in nature, and hence more individualistic and free-market oriented.

E) changes in the U.S. legal regime since the end of World War II related to unions have been less favourable to unionization.

428)

Approximately what percentage of Canadian paid workers was unionized in 2016?

A) 50% B) 10% C) 40% D) 60% E) 30%

429)

The evidence regarding the fairly recent decline in the rate of unionization in Canada has indicated that: A) shifts in the industrial and occupational composition of the labour force can explain much of it.

B) shifts in the demographic composition of the labour force can explain much of it.

C) there has been a fall in the likelihood that a worker with a given set of characteristics will be unionized (all of factors held constant) D) this trend has occurred in almost all countries.

E) workers find it easier to move between industries and countries.

430)

Which of the following statements concerning the iso-profit curve isfalse?

A) It shows all the wage-employment combinations that maximize profits.

B) It shows all the wage-employment combinations that yield the same level of profit for a firm.

C) The labour demand curve crosses an iso-profit curve at its lowest point.

D) Higher iso-profit curves represent lower levels of profits.

E) Iso-profit curves cannot intersect each other.

431)

A union would be more effective at bargaining a wage increase for its members: A) if the degree of substitutability between labour and capital is greater B) if the product demand is less elastic C) if the product demand is less responsive to a wage change.

D) if the share of labour costs in total costs is greater E) if the supply of capital is more elastic

432)

An efficient contract (in the Pareto sense) occurs at the: A) point of tangency between the union's iso-utility (or indifference) curve and the isoprofit curve.

B) point of tangency between the union's iso-utility (or indifference) curve and the isoquants of the firm.

C) point of tangency between the firm's isoprofit curve and the labour demand curve.

D) point of intersection between the firm's isoprofit curve and the labour demand curve.

E) point on the labour demand curve corresponding to the alternative wage.

433)

The primary mechanism by which industrial unions typically increase wage rates is: A) Restricting the supply of labour that is available to the firm B) increasing the demand for labour of the firm.

C) increasing the supply of labour of the firm.

D) decreasing the demand for labour of the firm.

E) imposing a wage rate above the equilibrium rate on the firm.

434)

Why do labour unions support increases in the minimum wage?

A) The minimum wages tend to increase the demand for unionized labour.

B) Their members benefit directly from the wage increase.

C) The minimum wages tend to increase the supply of unionized labour.

D) It bolsters their reputation of being the defenders of the interests of working people.

E) It improves the social welfare of its members.

435)

If the labour union acts to maximize the economic rent that its members receive, what will happen to employment and wages?

A) Employment will be higher than in the case of the absence of a labour union.

B) Wage will be lower than in the case of the absence of a labour union.

C) Employment will be lower than in the case of the absence of a labour union.

D) We cannot tell what the effect on employment would be, but wages will be higher than they would be in the absence of a union E) We cannot tell what the effect on wages would be, but employment will be higher than it would be in the absence of a union

436)

Which of the following types of economic behaviour best characterizes a labour union's function (purpose)?

A) Monopsony B) Price-taking C) Monopoly D) Oligopoly E) Monopolistic Competition

437)

If a firm operates in a perfectly competitive output market, then the higher wages negotiated by a union is likely to: A) increase the level of employment at the firm.

B) push the firm off of its labour demand curve and onto the contract curve.

C) lead to a Pareto-efficient contract D) reduce the level of employment at the firm.

E) cause it to pass on the cost of the higher wages to its customers in the form of higher product prices.

438)

If a union seeks to maximize the total wage bill received by its members: A) It should seek to attain the highest possible wage rate.

B) It should seek to attain the alternative wage rate.

C) It should seek to negotiate a Pareto-efficient contract.

D) It cannot be done without driving the firm bankrupt.

E) None of these above

439)

Which of the following statements isfalse?

A) The outcome that is chosen along the contract curve depends on the relative bargaining powers of the employer and the union B) Inefficient work rules that hamper productivity come at the expense of the firm's profits.

C) The firm is indifferent between the various wage/employment combinations that exist along the contract curve.

D) The labour demand curve intersects isoprofit curves at their maximum points.

E) The union prefers higher iso-utility or indifference curves to lower ones.

440)

According to the model of union behaviour, all of the following are possible objectives for union behaviour, with theexception of: A) maximizing the wage rate that its members receive.

B) maximizing the employment level for its members.

C) maximizing the wage bill (wage multiplied by employment) that its members receive.

D) maximizing the economic rent that its members receive.

E) improving the working conditions as much as possible.

441)

The median voter model pertains to which of the following aspects of analyzing union behaviour?

A) Determining the preferences of the union B) Determining the constraints under which the union negotiates C) Establishing an efficient contract D) Determining the bargaining strategy E) Determining the effective supply of labour

442)

Which of the following statements regarding Pareto- efficient contracts isfalse?

A) The set of efficient contracts lies to the right of the labour demand curve.

B) The set of efficient contracts is relevant for the "right-to-manage" bargaining regime.

C) Given a Pareto-efficient contract, it is impossible to make one party better off without making the other party worse off.

D) Pareto efficient contracts typically involve excessive staffing levels.

E) Pareto efficient contacts often involve work rules related to staffing

443)

The bargaining range for the union / employer negotiations refers to: A) the range for the negotiated wage such that the workers earn a decent living, and the firm is guaranteed a profit.

B) the range for the negotiated employment level such that the firm is not unprofitable and there are no unemployed workers.

C) the range of wages applying to the set of efficient contracts are the same as the range of wages applying to the set of inefficient contracts.

D) the range of wages such that the firm is not unprofitable and such that the workers receive at least the alternative wage.

E) None of these above

444)

What distinguishes the right-to-manage negotiating regime from the Pareto-efficient negotiating regime?

A) The first regime refers to the set of wage-employment outcomes that lie on the contract curve, while the second refers to the set of wage-employment outcomes that lie on the labour demand curve.

B) In the first regime, the parties bargain only over the wage, while in the second, they bargain over both wages and employment levels.

C) In the first regime, some of the union members might be unemployed, but that does not occur for the second regime.

D) The negotiated wage is always higher in the second regime than it is in the first regime.

E) In the first regime, there is a tradeoff between wages and employment levels, but that is not the case for the second regime.

445)

Which of the following statements regarding the labour demand curve isfalse?

A) It intersects the iso-profit curves at their highest points.

B) It represents Pareto-inefficient contracts.

C) It reflects the employer's unconstrained choice for the quantity demanded of labour given a wage level.

D) It is typically more wage elastic than the contract curve.

E) It represents a set of wage-employment outcomes such that it is impossible to make one party better off without making the other party worse off.

446)

In explaining which variables tend to increase union density and which ones tend to decrease it, researchers have appealed to which conceptual framework?

A) The theory of labour supply B) The institutional framework C) The supply and demand framework D) The theory of labour supply E) None of these above

447)

Which of the following statements regarding the preferences of the labour union with respect to wages and employment levels isfalse?

A) Empirical evidence indicates that they do not care much about employment levels B) They can vary across the membership C) There might be a difference between the preferences of the leadership and those of the members D) They can vary over time as the composition of the union's membership changes E) Empirical evidence indicates that they do care about the alternative wage level

448)

Consider the empirical research that has sought to explain the growth or decline in union density over time. What is the nature of the explanatory factors?

A) Economic only B) Economic, social, and legal C) Legal only D) Social and legal only E) Economic and social only

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

449) Assume that a labour strike ends and that the labour union is successful in negotiating a substantial raise in pay for its workers. Concerns are raised about the motivation of the union and the negative employment consequences of the expensive labour contract.

• Discuss the various possible objectives for the union. There are a number of alternative hypotheses concerning the variable that the union seeks to maximize.

• It is time for you to put on your anti-union hat. The opponents of labour unions typically cite the labour demand curve model to support their claim that the union is destroying jobs.

You should present a graph.

• Now it is time for you to put on your pro-union hat. Supporters of unions cite the efficient contract model to support the proposition that unions do not destroy jobs when they bargain for higher wages. If anything, they create jobs. Your analysis should include a graph, and you should clearly distinguish the implications that flow from this model from those that flow from the preceding one (the labour demand curve model). If the wage increase does not arise at the expense of employment, then what variable does the wage increase impinge on?

• As is often the case in this textbook, we are confronted with a series of models which give conflicting predictions. We have to appeal to empirical research in order to answer the question of whether unions bargain solely for higher wages, solely for higher employment levels, or perhaps for some other objective. What does the limited empirical evidence obtained thus far indicate? There is no need to go into the technical details.

• Assume that the labour demand model does apply after all, which places a constraint on the union's bargaining power. Does the union have any other course of action which could mitigate the disemployment effects associated with a negotiated wage increase? If so, explain.

SECTION BREAK. Answer all the part questions.

450) 450) 450.1) These four diagrams pertain to the objectives or the preferences of the union. In which

diagram do they seek to maximize the wage level?

A) a) B) b) C) c) D) d) E) All of them 450.2) These four diagrams consist of indifference curves showing the objectives or the

preferences of the union. In which diagram do they seek to maximize the employment level?

A) a) B) b) C) c) D) d) E) All of them

450.3) These four diagrams consist of indifference curves showing the objectives or the

preferences of the union. In which diagram do they seek to maximize the wage bill?

A) a) B) b) C) c) D) d) E) All of them 450.4) These four diagrams consist of indifference curves showing the objectives or the

preferences of the union. In which diagram do they seek to maximize the economic rent?

A) a) B) b) C) c) D) d) E) All of them 450.5) These four diagrams consist of indifference curves showing the objectives or the

preferences of the union. In which diagram do they seek to maximize the utility level?

A) a) B) b) C) c) D) d) E) All of them

451) 451)

451.1) In this figure, which of the following statements isfalse? U indicates an indifference

curve, DL indicates the labour demand curve, and Wa indicates the alternative wage.

A) a0 is the most likely outcome B) The union prefers outcome a3 to a0 C) We will not see any wage below Wa. D) a0 is the preferred outcome for the union E) a2 is the preferred outcome for the union

Answer Key Test name: chapter 14 418) 419) 420) 421) 422) 423) 424) 425) 426) 427) 428) 429) 430) 431) 432) 433) 434) 435) 436) 437) 438) 439) 440) 441) 442) 443) 444) 445) 446) 447) 448) 449)

E B A A E E A A A C E C A B A E A C C D E C E A B D B E C A B Short Answer

• Union objectives refer to the goals of the organization. The relationship between the preferences of the members, those of the union leaders, and the objectives of the organization as a whole depend on several factors, including (1) the information available to the rank-and-file about the available options, (2) the nature of the union's political decision-making process, and (3) the degree of homogeneity of the individual members' preferences. Union objectives also depend on the price level and the alternative wage available to union members in their best alternative job. What matters to union members is their real wage; that is, the wage rate relative to the cost of living. The benefits to union members of belonging to the union also depend on the union or contract wage relative to their best alternative wage.

• The general union utility function depends on the real union wage, total employment of union members, and the real alternative wage. Some special cases of this utility function that have been proposed include (1) maximizing the (real) wage rate, which places no weight on employment in union preferences; (2) maximizing employment, which places no weight on the union wage; (3) maximizing the wage bill, the product of employment and the wage rate, which ignores the alternative wage; and (4) maximizing economic rent, the product of employment and the difference between the union wage and the alternative wage. The latter is the most plausible of these special cases, and is analogous to the union acting as a monopoly seller of labour to the firm and maximizing the "total return" or profit.

• If the firm chooses employment subject to the negotiated wage rate, the union is constrained by the firm's labour demand curve. In this situation, the union's preferred wage-employment outcome occurs where the union indifference curve is tangent to the labour demand curve. The firm would prefer to pay the alternative wage—the minimum wage rate needed to attract labour to this sector. This leads to the "labour demand curve" or "right to manage" model in which the two parties negotiate the wage rate and the firm chooses employment. The negotiated wage will lie somewhere in the bargaining range, between the alternative wage and the union's preferred wage rate. A figure similar to figure 14.5 on page 439 should be provided with the answer.

Because unions generally care about the employment prospects of their members, we would expect the union to use its bargaining power to negotiate over employment as well as wages.

Therefore the result derived from the "labour demand curve" model is not Pareto efficient.

• In general, the firm and union can each benefit from negotiating a contract covering both wages and employment. Outcomes on the labour demand curve imply unexploited "gains from trade" that can be attained by exchanging a lower wage rate for increased employment such that both firm profits and union utility rise. The set of Pareto-efficient wage-employment contracts occurs where the union indifference curves are tangent to the firm's isoprofit curves, so that the rate at which the two parties are willing to exchange wages for employment is equalized at the margin. This set of Pareto efficient contracts, called the contract curve, lies to the right of the labour demand curve, thus implying that the higher wages that generally accompany unionization may not be associated with reduced employment.

• In principle, both the employer and union can benefit from negotiating over wages and employment, but in practice there are several obstacles to reaching efficient contracts. First, the

parties must reveal to each other sufficient information to realize that there are unexploited gains from trade. Second, because demand may shift several times during the term of the agreement, thus altering the contract curve and the efficient levels of wages and employment, the contract must stipulate the employment level under a variety of contingencies. Third, there is a need for costly monitoring because, for any given contract wage, the firm has an incentive to reduce employment to the labour demand curve, where profits are maximized at that wage rate. The costs of negotiating, monitoring, and enforcing such "contingent contracts" may be too high to make the effort worthwhile. Approximately efficient contracts may allow the firm and union to achieve most of the gains from trade associated with moving toward the contract curve without negotiating a fully contingent contract. These can be accomplished by tying employment to the output of the firm or to the use of other inputs. These arrangements allow employment to change in response to shifts in demand, but also constrain the firm to employ more workers than the profit-maximizing level at the contract wage.

• Empirical studies of union wage and employment determination face several challenges: (1) choosing an appropriate specification of union preferences, (2) the presence of two alternative models of wage and employment determination that are plausible on a priori grounds, and (3) the need for a theory of firm-union bargaining to predict the specific wage-employment outcome chosen by the parties. The earliest empirical studies assume that observed wage-employment outcomes lie on the labour demand curve and that the union is sufficiently powerful to achieve its preferred outcome. Another set of studies assumes that observed outcomes are efficient (i.e., on the contract curve). Recently scholars have begun the difficult task of incorporating bargaining theory into the empirical analysis of union wage and employment determination.

Studies of several unions and industries based on the labour demand curve model generally agree on a number of findings: (1) both employment and wages are important to unions, (2) union preferences display a diminishing marginal rate of substitution between wages and employment, (3) union preferences are sensitive to the alternative wage, and (4) unions generally place more weight on employment than wages.

• Several studies have attempted to test between the "labour demand curve" and "efficient contracts" models using contract-level data for specific unions and groups of firms. At this point there is not a consensus on which model performs best.

• Unions may be able to enhance their available wage-employment outcomes by relaxing the demand constraint—either by increasing labour demand (shifting the demand curve to the right) or making labour demand more inelastic (making employment less responsive to increases in the wage). Such policies may include support for restrictions on competition in the product market, opposition to deregulation, and support for wage fixing legislation such as minimum wage laws and "fair wage" provisions.

450) Section Break 450.1) A 450.2) B

450.3) 450.4) 450.5) 451) 451.1)

C D E Section Break D

Chapter 15: Union Impact on Wage and Nonwage Outcomes MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

452) The percentage difference in wages between union and otherwise comparable non-union workers is called: A) the marginal union-non-union product.

B) the union-non-union wage differential.

C) the unionization effect.

D) the union discrimination effect.

E) the union wage effect.

453)

The magnitude of the union-non-union wage differential depends on all of the following, except: A) the wage elasticity of labour demand in each sector.

B) the ability of the union to raise wages in the organized sector.

C) the elasticity of labour supply in the non-union sector.

D) the size of the union sector relative to the non-union sector.

E) the substitutability between two sectors of workers in the same industry.

454)

The primary sector of the dual labour market consists of firms and/or industries that doNOT exhibit which of the following characteristics?

A) Relatively large size B) Concentration in the output market C) A spot market for labour D) Generally stable and secure employment relationships E) Economic rents in the output market

455)

When some non-union employers raise wages in order to reduce the possibility that their employees will choose to become unionized, it is called: A) the anti-organization effect B) the displacement effect C) the threat effect D) the queuing effect E) the efficiency wage effect

456)

The term "queue" or "wait" unemployment is used to describe the fact that: A) Individuals may wait in a queue of jobless workers in order to obtain the first job to open up in the labour market.

B) All of the workers who are unable to obtain jobs in the union sector will wait for employment opportunities in the non-union sector.

C) Because union jobs pay relatively well, it may be rational for an unemployed worker to seek employment in the union sector rather than seek employment elsewhere.

D) The only jobs that are worth taking are those that workers queue up for.

E) All of the workers who are unable to obtain jobs in the primary labour market will seek employment in the secondary market.

457)

In the context of estimating the union wage effect, which of the following statements concerning "selection bias" isFALSE? A) Unionized workers might not have identical characteristics as non-unionized workers, insofar as their levels of marginal productivity are concerned.

B) Factors that are not observed by the researcher influence the outcome of whether or not the worker is represented by a union.

C) Whenever there is a queue of workers applying for union jobs, employers tend to hire the most productive of them.

D) Workers are hired into union jobs according to a randomized selection process.

E) Workers are hired into union jobs according to a systematic selection process.

458)

Fill in the blanks of the following sentence. Due to collective bargaining coverage, voluntary quitting, also known as , is reduced as a result of high wages, and hence workers seek to have more of a say, also known as , in their terms of employment.

A) exit, collective pressure B) selective unemployment, pressure tactics C) exit; voice D) voice; exit E) selective unemployment; union incidence (or union density)

459)

Which of the following statement regarding cross-sectional data and longitudinal data is correct?

A) Cross-sectional estimates compare different individuals over time.

B) Longitudinal data do not provide a way of removing the effects of person-specific characteristics.

C) Cross-sectional estimates compare different individuals at one point in time.

D) Longitudinal data compare different individuals at one point in time.

E) Both cross sectional and longitudinal data can provide repeated estimates over time.

460)

Fill in the blanks of the following sentence. As the fraction of the industry's labour force that is unionized , the possibility for the of non-union labour for union labour declines, reducing the for union labour.

A) decreases; comparison; supply B) decreases; combining the utilization; requirements C) increases; differentiation; demand D) increases; substitution; wage elasticity of demand E) increases; substitution; wage elasticity of supply

461)

Fill in the blanks of the following sentence. The wage differential between union workers and comparable non-union workers with unionized firm's or establishment's .

A) declines; size B) increases; degree of market power C) decreases; degree of market power D) declines; level of benefits E) increases; level of benefits

462)

Fill in the blanks of the following sentence. Compared to the case of an individual worker bargaining with his/her firm, the financial returns to additional amounts of education or experience are generally with collective bargaining, thus for the most skilled category, the non-union workers earn .

A) higher; relatively more B) lower; relatively less C) the same; the same D) higher; relatively less E) lower; relatively more

463)

Fill in the blanks of the following sentence. The distribution of wages among unionized workers is both _ on average and dispersed than the distribution of wages among non-unionized workers.

A) higher; more B) lower; less C) higher; less D) lower; more E) higher, equally

464)

In assessing the impact of unionization on the allocation of labour within the labour market in the two-sector framework, the area under the labour demand curve equals: A) the reduction in employment in the union sector.

B) the total value of the output produced over the relevant range of employment.

C) the deadweight burden stemming from unionization.

D) the gain in employment in the non-union sector.

E) the total loss of the output produced.

465)

In the context of the impact of unionization on the firm, ‘shock effects' assume that: A) Organizational slackness exists in the firm's production process.

B) The firm is a profit maximizer.

C) The net impact of the effects of unionization on a firm's productivity is ambiguous.

D) Unions impose many costly, inefficient practices on firms.

E) Working conditions are so shocking that the workers vote to unionize.

466)

Recent reviews of the impact of unions on employers' productivity levels tend to indicate that: A) The union effect on productivity is small and positive in the US. B) The union effect on productivity is large and positive in the US. C) The union effect on productivity is small and negative in the US. D) The union effect on productivity is large and negative in the US. E) The union effect on productivity is insignificant.

467)

468)

In an analysis of the union-non-union wage differential, a complication is the fact that: A) there are not very many unionized workers whose wages can be observed.

B) one has to consider the minimum wage as well.

C) unions can influence productivity.

D) unions can impact public policy.

E) Unions can have an impact on the wages of non-union workers.

In the case of Pareto-efficient bargaining between the firm and the union, which means that the wage-employment outcome lies to the right of the labour demand curve, the effect of the union on employment levels is: A) greater than what would otherwise be the case with the right-to-manage mechanism.

B) larger than what would be the case if the threat effect was present.

C) the same as would be the case if the wait-unemployment effect was present.

D) less than what would otherwise be the case with the right-to- manage mechanism.

E) Zero, as that factor is irrelevant for the determination of employment.

469)

In the context of empirical modeling the impact of unionization, the simultaneity issue refers to the fact that: A) union wages are determined at the same time as non-union wages, which renders the estimation of the union wage effect problematic.

B) the threat effect can operate at the same times as the wait-unemployment effect, which renders the estimation of the union wage effect problematic.

C) the union status of a worker and the union wage effect are jointly determined, which renders the estimation of the union wage effect problematic.

D) there is variation in the union wage impact across types of firms and workers, which renders the estimation of the union wage effect problematic.

E) longitudinal data is used, which renders the estimation of the union wage effect problematic.

470)

Over the past four decades or so, at least 25 studies have been published in Canada that deal with empirical estimates of the union / non-union wage differential. These estimates tend to indicate a value in the neighbourhood of: A) 0-10% B) 10-15% C) 10-25% D) 25-30% E) 30-40%

471)

Which of the following is NOT the finding from the empirical research on the wage impact of unions?

A) There are significant wage differentials between union and non-union workers.

B) Recent evidences show that union sector has a negative impact on non-union wages.

C) In unionized enterprises, wage differences among workers who differ according to various productivity-related characteristics are smaller than non-union enterprises.

D) The union-non-union wage differential is generally higher in the private than the public sector.

E) Unionization likely lowers the total compensation of CEOs as well as bonus and stock options.

472)

Which of the following is NOT a factor related to the deadweight loss associated with union wage impact?

A) the wage elasticity of labour supply in the unionized and non-unionized sectors B) the wage elasticity of labour demand in the unionized and non-unionized sectors C) the amount of queuing unemployment that might arise D) the extent to which firms and unions negotiate wage-employment outcomes to the right of the demand curve (pareto-efficient bargaining) E) All of the answer choices are associated with union wage impact.

473)

All of the following refer to statistical techniques employed to estimate the union/nonunion wage effect with the exception of: A) longitudinal studies B) instrumental variable analysis C) regression discontinuity D) case studies E) propensity score matching

474)

475)

In the context of estimating the union wage effect, "selection bias" refers to the fact that: A) the union status of a worker might have an impact on the union wage level, but the union wage level might have an impact on the union status of a worker, which would confound estimation of the union wage effect.

B) union workers are likely to be very similar to their non-union counterparts as far as their productivity levels are concerned, which would confound estimation of the union wage effect.

C) union workers might actually have unobservable attributes that cause their productivity levels to be higher than that of their non-union counterparts, which would confound estimation of the union wage effect.

D) the event of whether or not a worker is unionized is random, which would confound estimation of the union wage effect.

E) the actual union status of all workers might be mis-reported in the data on wages, which would confound estimation of the union wage effect

Which of the following statements regarding the empirical research for the union wage effect is true?

A) There is no significant difference between union and non-union wages B) The estimated value of the union non-union wage differential does not change much when different estimating procedures are concerned.

C) The union wage effect is larger in the public sector than it is in the private sector.

D) There is not much of a gender pattern E) Union wage effect has tended to diminish over time

476)

Which of the following describes the intuition behind the deadweight losses that might arise from a union wage?

A) When the labour union imposes a higher wage on the employer, the firm responds by reducing its quantity demanded of labour B) Sometimes the union will engage in Pareto efficient bargaining with the employer, which will result in lower employment levels C) Workers in the unionized sector are less productive than workers in the non-union sector D) Workers who are rationed out of the union sector have a lower marginal product when they are employed in the non-union sector E) Unions that engage in unduly aggressive bargaining risk driving their employer bankrupt

477)

What has the research dealing with the impact of unions on productivity tended to find?

A) Unambiguously negative because of the imposition of inefficient work practices B) Since there are potentially offsetting factors at work, the net effect is ambiguous.

C) Unambiguously positive because the high degree of capital intensity causes employers to quicken the pace of work D) Unambiguously positive because unionized workers exhibit lower degrees of turnover

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

478) It is time to play point-counterpoint. In the far corner, we have a representative from the Canadian Labour Congress. Opposing her in the near corner is a representative from the Canadian Federation of Independent Business.

• First, assume the role of union supporter. The assertion is that unions raise living standards for all workers at the expense of holders of capital—i.e., unions rob Peter to pay Paul.

Analyze this claim by applying the threat effect model of unionization in the two-sector framework. You should provide graphical analysis. Continuing in this role as a union supporter, what impact do you believe unions have on the distribution of wages? In other words, which groups of workers benefit the most from unionization? Does it reduce inequality throughout the economy?

• Now assume the other role. The assertion now is that unions raise the wages of unionized workers at the expense of workers in the non-union sector. In other words, unions rob Peter to pay Peter. Analyze this claim by applying the crowding model of unionization in the twosector framework. You should provide a graphical analysis.

• Now it is time to appeal to the empirical evidence. What have studies tended to show about the magnitude of the union-non-union wage differential? What does the evidence show concerning the impact of unions on the dispersion of wages throughout the economy? Which groups of workers tend to benefit the most and the least from unionization (i.e., blue-collar versus white-collar workers, higher-skill versus lower-skill workers, unionized versus nonunionized workers)?

• According to union ideology, wages should not be determined on an individual basis based on the individual worker's productivity. What factors should determine wages? What are the values that underlie most union wage structures?

SECTION BREAK. Answer all the part questions.

479) Assume that the following annual earnings (Y) equations were estimated separately for union (subscript U) and non-union (subscript N) workers. ED denotes years of education (averaging 12 for union workers and 14 for non-union workers), SEN denotes years of seniority with the company (averaging 10 for union workers and 8 for non-union workers).

YU = 22,000 + 1000 EDU + 1000 SENU; YN = 8000 + 2000 EDN + 500 SENN

479.1) What can we conclude given the values of the coefficients and the intercepts that appear

in those equations? All of the following statements with theexception of: A) Unions tend to bargain for a less compressed structure, as measured by the differential between the highest wage and the lowest one.

B) Unions reduce the returns to skill-based characteristics such as education.

C) The returns to seniority are higher in the unionized sector increases.

D) The union wage structure places relatively more weight on seniority and relatively less weight on education E) None of these above, as they are all correct.

479.2) Based on the information that is provided, what is the total union-non-union wage

differential?

A) 2000 B) 3000 C) 4000 D) 5000 E) 60000 479.3) What is the pure union earnings premium after adjusting the differences in their

characteristics but based on the non-union pay structure?

A) 2000 B) 3000 C) 4000 D) 5000 E) 7000

480) 480)

480.1) The figures that appear in as part of Reference 15-02 refer to various versions of

modelling of the union wage impact. Which of the following corresponds to the straightforward two-sector model?

A) a) B) b) C) c) D) d) E) None of these above

480.2) The figures that appear in as part of Reference 15-02 refer to various versions of

modelling of the union wage impact. Which of the following corresponds to the model with the threat effect?

A) a) B) b) C) c) D) d) E) None of these above 480.3) The figures that appear in as part of Reference 15-02 refer to various versions of

modelling of the union wage impact. Which of the following corresponds to the model with the vertical contract curve?

A) a) B) b) C) c) D) d) E) None of these above 480.4) The figures that appear in as part of Reference 15-02 refer to various versions of

modelling of the union wage impact. Which of the following corresponds to the model with wait unemployment?

A) a) B) b) C) c) D) d) E) None of these above

481) 481) 481.1) Which shows the wage dispersions among union and non-union workers. Which of the

following statements applies?

A) Union wages are higher on average, but they are less dispersed.

B) Union wages are lower on average, but they are less dispersed.

C) Union wages are higher on average, but they are more dispersed.

D) Union wages are lower on average, but they are more dispersed.

E) None of these above

Answer Key Test name: chapter 15 452) 453) 454) 455) 456) 457) 458) 459) 460) 461) 462) 463) 464) 465) 466) 467) 468) 469) 470) 471) 472) 473) 474) 475) 476) 477) 478)

B D C C C D C C D B B C B A A E D C C B E D C E D B Short Answer

• The textbook has a detailed explanation on union wage impact use two-sector model. To answer this question, a graph similar to Figure 15.1 (b) should be included. Generally speaking, There is a dual labour market with a primary sector consists of firms or industries that have characteristics which makes unionization likely and a secondary sector consists of firms or industries with the opposite characteristics. Contrary to the belief that union wage increases tend to depress the wage of unorganized workers is the perspective that non-union firms may raise the wages of non-union labour in order to compete with unionized firms for the work firms. It is also possible that some nonunion employers may raise wages in order to reduce the threat of their employees choosing to become unionized. This threat effect will be greater if the union wage premium is high, the nonunion sector is easy to organize, the potential union is aggressive, or the employers have a strong aversion to unionization. In such circumstances, non-union employees may be paid close to the union wage (perhaps even higher if the firm has a strong aversion to unionization) and provided with working conditions similar to those of union workers.

• To answer this question, we also use the two-sector model. To start with, there is already a wage differential between the primary sector and the secondary sector due to characteristic differences. The reduction in employment in the primary sector (relative to what employment would be in the absence of wage increases associated with unionization) creates a widening of the wage gap between the two sectors, as those who cannot obtain employment in the unionized sector crowd into the non-union labour market, depressing wages even further in the secondary sector. These low wages may in turn be a source of many of the phenomena, such as high absenteeism and frequent turnover that are characteristic of the secondary sector.

• Methodological problems associated with measuring the union impact include difficulties of controlling for other factors that influence wages, especially because employers have an incentive to alter items such as qualifications and job requirements in response to the higher union wage. Also, selection bias may occur if workers sort themselves (or are sorted by employers) into the union or non-union sector on the bases of unobserved factors; and reverse causality if high wages induce unionization. Although there are always exceptions, empirical studies on the impact of unions tend to find • The union-nonunion wage differential is likely around 15 percent, and within the range of 1025 percent.

• The union wage impact is falling in more recent years and now may be more in the neighbourhood of 10 percent.

• The impact on nonunion wages is likely small, although there is not a consensus as to whether it is positive or negative.

• The union impact is larger at low-skill levels and smaller at high-skill levels, as unions tend to garner flat wage increases but reduce the returns to factors related to skill levels such as education or training.

• The union impact tends to be higher in the private sector compared to the public sector, in small firms compared to large firms, for blue-collar compared to white-collar workers, when a

larger portion of the relevant jurisdiction is organized, and in recessions compared to booms.

• Unions tend to compress wage structures within the union sector, but they also create a unionnonunion wage differential that widens wage inequality, because of the distortions created by their wage and employment effects, unions create welfare losses to society as a whole but those losses are small. Union bargain for a wide range of factors in addition to wages such as nonwage benefits (discussions in chapter), employment or job security as well as work conditions.

Many studies have found that the union impact on fringe benefits tends to be greater than the impact on wages.

479) Section Break 479.1) A 479.2) C 479.3) E 480) Section Break 480.1) A 480.2) B 480.3) C 480.4) D 481) Section Break 481.1) A

Chapter 16: Unemployment: Meaning, Measurement, and Canada's Experience MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

482) The labour force participation rate gives the ratio of the: A) Working-age population that is either employed or is seeking work.

B) labour force to the employment level.

C) working age population that is employed vs. unemployed.

D) working age population that is seeking work vs. those not seeking work.

E) employed workers to the size of the labour force.

483)

The unemployment rate is expressed as: A) the fraction of the working-age population that is unemployed.

B) the number of jobless workers divided by the size of the labour force.

C) the number of unemployed workers divided by the number of employed workers.

D) one minus the fraction of the working-age population that is employed.

E) the number of unemployed workers divided by the size of the labour force.

484)

"Hidden unemployment" refers to situations in which workers are: A) unemployed but not collecting unemployment insurance benefits, and are thus not counted as officially unemployed.

B) working fewer hours than they desire to work, and these hours of unemployment are not counted towards the calculation of the official unemployment rate.

C) jobless and become so discouraged that they drop out of the labour force.

D) unemployed and are actively seeking work, but are missed by surveyors from Statistics Canada.

E) unemployed and actively seeking work but could not find any employment before their unemployment insurance benefits run out.

485)

Which of the following statements concerning the incidence of unemployment is true?

A) It tends to target all types of workers reasonably equally.

B) It tends to be concentrated among workers in certain demographic groups.

C) Older workers are as likely to be affected as younger workers.

D) It turns to be lower during the recession periods.

E) It is the same thing as the duration of unemployment.

486)

Workers become unemployed when all of the following events could occur, with theexception of: A) they lose their jobs due to layoffs.

B) they quit their jobs and do not find work immediately.

C) they re-enter the labour market after spending time in the non-market activities D) they re-enter the labour market after completing an educational degree.

E) they are jobless and decide that they will not actively seek work because they believe that no suitable work is available.

487)

Which of the following quantities does not refer to labour force dynamics?

A) Gross flows of workers in and out of employment B) Net flows of workers in and out of employment C) The average duration of unemployment D) The stock of long-term unemployed workers E) Net flows in and out of unemployment

488)

Which of the following statements concerning gross flows and net flows is true?

A) Net flows take account of workers moving in both directions between labour market states B) Gross flows are typically smaller in magnitude than net flows C) In a steady state, gross flows are equal to zero D) Only gross flows are relevant for determining the unemployment rate E) If the net flow is zero, then the gross flow is zero

489)

Which group of unemployed workers accounts for the greatest share of the flow into unemployment?

A) Job losers B) Retirees C) New and re-entrants into the labour force D) Job quitters E) Discouraged workers

490)

Fill in the blank in the sentence below. According to the "new view" or the "turnover view" of unemployment, .

A) employment instability plays a major role in a dynamic labour market B) unemployment is characterized primarily by a core of workers that have been jobless for a long time C) the unemployment rate is persistent over time D) the labour market is moving toward an equilibrium where full employment exists E) the incidence of unemployment is important, but the duration of unemployment is not

491)

Which of the following statements isfalse?

A) For much of the post-World War II period, unemployment rates in Canada behaved very similarly.

B) Since the mid-1980s, the unemployment rate in Canada has tended to exceed the rate in the United States.

C) Compared to most European countries, unemployment is higher in Canada.

D) Jobless Canadians are more likely than their American counterparts to declare that they are unemployed.

E) Unemployment in Canada was high by historical standards for most of the 1990s.

492)

Which of the following is thought to be the primary reason for the existence of the unemployment rate gap between the United States and Canada?

A) The aggregate demand conditions tend to be more favourable in the U.S. B) Wages are higher in Canada, which reduces the quantity demanded for labour.

C) The labour force in Canada has a higher concentration of demographic groups that tend to exhibit higher rates of unemployment.

D) There is a longer duration of unemployment in Canada relative to the U.S. E) There has been a relative increase among Canadians in the fraction of non-working time spent searching for work relative to Americans.

493)

An analysis of the incidence rates of unemployment and the average duration of unemployment across demographic groups reveals that: A) those groups with the highest incidence tend to exhibit the shortest durations and vice-versa.

B) those groups with the highest incidence tend to exhibit the longest durations and viceversa.

C) there is no apparent pattern.

D) the pattern of comparisons tend to change a lot over time.

E) data are not available in order to make these comparisons.

494)

All of the following are presented by Statistics Canada as supplementary measures of unemployment, with the exception of: A) counting only the long-term unemployed as unemployed.

B) counting all of the jobless as unemployed.

C) counting discouraged workers among the unemployed.

D) counting the under-employed among the unemployed.

E) counting those waiting to be recalled and those with future start dates for employment as unemployed.

495)

Which of the following characterizes developments in international differences in unemployment since the mid-1990s (in the industrialized world)?

A) Persistently high rates in Japan B) Relatively low rates in most English-speaking countries, and relatively high rates in much of continental Europe C) Relatively high rates in most English-speaking countries, and relatively low rates in much of continental Europe D) Persistently high rates in all of Europe, and the opposite in North America and Australia E) Unusually high rates of unemployment in Canada after the early 1980s

496)

What was the ball-park estimate for the labour force participation rate and the employment rate in Canada in 2019 (right before the pandemic hit).

A) 50% and 45%, respectively B) 70% and 65%, respectively C) 66 % and 62%, respectively D) 62% and 66%, respectively E) 70% and 75%, respectively

497)

Canada's official unemployment rate since the year 2000 has been in the range of: A) 5.5 to 7%.

B) 10 to 12%.

C) 4 to 6%.

D) 8 to 10%.

E) 7-9%.

498)

Which of the following is NOT a fact about unemployment during 2008-09 financial crisis?

A) Unemployment rates rose considerably worldwide.

B) Canadian unemployment rate was lower than that in the United States during the crisis.

C) Canadian unemployment rate in 2008-09 rose substantially and was higher than past recession in the 80s and 90s.

D) Hidden unemployment rose during the crisis.

E) All of the choices are correct.

499)

Suppose that the employment rate is observed to increase, but that the unemployment rate also increased. The likely explanation is that: A) The gross flows into unemployment were greater than the net flows into unemployment.

B) The increase in employment outstripped the increase the labour force.

C) The increase in the labour force outstripped the increase in employment.

D) The labour force participation rate grew to be higher than the employment rate.

E) This could not occur.

500)

What is the most controversial issue involved in measuring the extent of official unemployment?

A) It does not take account of the extent of low-wage employment.

B) Jobless people with a low degree of labour market attachment are classified as not in the labour force.

C) The data regarding employment are not always reliable.

D) The gross flows of workers into the state of unemployment are larger than the net flows into it.

E) It does not take account of the duration of unemployment.

501)

During normal labour market conditions, what is a typical value for the average duration of unemployment?

A) Six months B) Six weeks C) Nine months D) Three months E) None of these above

502)

503)

Which of the following statements isfalse?

A) Much of the time spent in the state of unemployment is accounted for by a minority of unemployed workers experiencing long durations B) The state of marginal labour force attachment includes discouraged workers and jobless workers waiting for specific job openings C) With the exception of recessions, unemployment is often viewed as being tied to employment instability and job turnover D) There is no ideal ‘one size fits all' measure of unemployment E) The state of unemployment is typically associated with low-income status

Shortly before the pandemic hit in 2020, the unemployment rate in Canada reached its lowest point since 1974. What was this value?

A) 7 % B) 5.7 % C) 4 % D) 9 % E) None of these above

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

504) The Great Depression had an enormous impact on how economists view the nature of unemployment. Until that time, the conventional view was the classical view. Unemployment was generally considered to be voluntary in nature and a disequilibrium situation. After the Great Depression, the conventional view became the Keynesian view, according to which unemployment was very static in nature and due to an equilibrium with too few jobs. In the 1970s, this conventional view was replaced by the "new view" attributed to Feldstein, which emphasized the dynamic nature of unemployment. The experience of the 1980s gave way to the current view — which is thought to apply in Canada and parts of Western Europe — called the "modified new view."

Describe each of these three views of the nature of unemployment. In each case, mention the economic events which caused economists to modify their view. The roles of both the incidence and the duration of unemployment and the role of labour force turnover are different in each case. Describe them. For each of the three cases, describe the distribution of the burden of unemployment. In other words, which groups of workers were particularly affected?

SECTION BREAK. Answer all the part questions.

The following data were drawn from the Labour Force Survey for February 2021:

505)

Working-age-population: 31.2 million Labour force: 20.2 million Employment: 18.5 million 505.1) In reference to exhibit 16-1, what was the unemployment rate?

A) 8.2 % B) 91.5 % C) 64.7 % D) 59.4 % E) Indeterminant

505.2) In reference to exhibit 16-1, what was the labour force participation rate?

A) 8.2 % B) 91.5 % C) 64.7 % D) 59.4 % E) Indeterminant 505.3) In reference to exhibit 16-1, what was the employment rate?

A) 8.2 % B) 91.5 % C) 64.7 % D) 59.4 % E) Indeterminant

Answer Key Test name: chapter 16 482) 483) 484) 485) 486) 487) 488) 489) 490) 491) 492) 493) 494) 495) 496) 497) 498) 499) 500) 501) 502) 503) 504)

C E C B E D A C A C E A B B C A D C B D E B Short Answer

Speaking, perspectives on unemployment have evolved substantially. During the 1970s, the traditional view—in which the unemployed were regarded as a mainly unchanging stock of individuals without work for a lengthy period—was challenged by a "new view" that emphasized the importance of employment stability and turnover in the labour market. Subsequent research modified this "turnover" view by noting that although the average duration of unemployment is fairly short, much of total unemployment is nonetheless accounted for by those experiencing long spells of joblessness. Furthermore, many unemployment spells end in labour force withdrawal rather than in employment, suggesting that unavailability of suitable employment is a reality for some workers.

The recent modification on the theory of unemployment is related to the distribution of unemployment across the population. The implications of a specific unemployment rate differ according to how widely the unemployment is distributed. For example, an unemployment rate of 8 percent could mean that 8 percent of the labour force is unemployed all year or that all of the labour force is unemployed for 8 percent of the year. The high rate of labour force turnover and the short average duration of unemployment led some analysts to believe that unemployment must be widely distributed among the labour force. In fact, this conclusion turns out not to be correct: unemployment is highly concentrated among a minority of the labour force. The reason for these apparently contradictory findings is that even though the average duration of unemployment is short, a minority of individuals suffer repeated spells of unemployment, sometimes interrupted by periods out of the labour force. For these individuals—the "chronically unemployed"—obtaining employment, especially durable employment, appears to be a difficult task.

505) 505.1) 505.2) 505.3)

Section Break A C D

Chapter 17: Unemployment: Causes and Consequences MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

506) The efficiency wage hypothesis states that firms can increase productivity and profits by: A) paying more than the competitive wage level.

B) paying lower wages.

C) paying wages that vary according to the marginal productivity of workers.

D) paying wages that vary according to the profitability of the firm.

E) paying wages that vary according to the reservation wages of workers.

507) In the efficiency wage model of the labour market: A) the firm selects only the employment level, taking the wage as given.

B) the firm selects only the wage level, taking the employment level as given.

C) the firm selects the employment level and the wage jointly.

D) the firm takes into account the labour market conditions outside the firm.

E) the firm selects neither the employment level nor the wage level.

508)

One of the findings of recent labour market research regarding unemployment is that: A) unemployment occurs primarily as a result of inefficient labour markets.

B) even in a well-functioning competitive economy, in which the number of workers equals the number of jobs, some workers can be jobless.

C) while there are a number of different types of unemployment, the primary source of unemployment is the business cycle.

D) in a competitive economy, the equilibrium level of unemployment is the frictional rate of unemployment.

E) cyclical unemployment is more stable than structural unemployment.

509)

Frictional unemployment arises: A) whenever friction between the firm and the worker lead to the worker leaving the firm.

B) whenever the number of workers willing to work at the going wage exceeds the number of workers that firms are willing to hire.

C) because skills are specific to a job, and there is some inertia in workers acquiring new skills.

D) when workers and firms need time to locate each other and to digest the information about the suitability and the value of the job match.

E) whenever there is a mismatch between the skills of jobless workers and the skills that employers desire for their vacant positions.

510)

Structural unemployment occurs because: A) the economy has its natural cycle of good times alternating with bad times.

B) information about available jobs for which the worker is qualified takes time to be transmitted.

C) skills that jobless workers have to offer are incompatible with the skills that firms require in order to fill their vacant positions.

D) many jobs are seasonal in nature, and the affected workers are unable to find jobs

during the off-season.

E) workers and firms need time to locate each other and to digest the information about the suitability and the value of the job match.

511)

According to the theory of job search, unemployment can be viewed as: A) a human capital investment in acquiring information regarding the availability of jobs.

B) involuntary in the sense that the jobless workers are willing to work at the going wage.

C) voluntary in the sense that the jobless workers would be employed if the transactions wage were lowered.

D) being persistent over time.

E) a result of a risk-sharing arrangement between the worker and the firm.

512)

The most important way in which unemployment insurance benefits can have the effect of raising the rate of unemployment is by: A) reducing the cost of being jobless, thus prolonging jobless durations.

B) encouraging workers to quit their jobs.

C) reducing the benefits gained from working.

D) raising the cost of employing labour through the channel of payroll taxes to fund the program.

E) encouraging workers to work part time.

513)

In regards to able-minded and able-bodied individuals, those who are jobless and out of the labour force: A) are deemed to be insufficiently productive to be hired at the going wage.

B) have chosen not to supply labour at the going wage.

C) have a reservation wage that is higher than the going wage.

D) are involuntarily unemployed.

E) are voluntarily unemployed.

514)

The persistence of high levels of unemployment, especially in parts of continental Europe, is explained in part by all of the following factors, with theexception of: A) insider-outsider models of wage setting that keep wages above equilibrium levels.

B) the loss of human capital experienced by displaced, long-term unemployed workers.

C) certain features of the unemployment insurance regimes.

D) flexibility in the labour market.

E) the high costs associated with labour force turnover

515)

The theory of unemployment "hysteresis" is associated with all of the following, with theexception of: A) individuals who have been unemployed for a long time may suffer a deterioration in their labour market skills.

B) short-run adverse shocks to the labour market that may have persistent effects.

C) in a recession, many of the long-term unemployed experience a decline in the intensity of their search effort.

D) efficiency wages that may cause the actual wage paid to be higher than the equilibrium wage.

E) a natural rate of unemployment that can rise in response to high actual unemployment.

516)

The condition for the equilibrium level of efficiency wage is that: A) the marginal benefit of job search is equal to the marginal cost of job search.

B) the elasticity of the workers' output with respect to the wage is equal to one.

C) the rate of change in the aggregate wage is stabilized when the actual rate of unemployment is equal to the natural rate.

D) the job vacancy rate is equal to the unemployment rate.

E) the efficiency of the labour force is maximized.

All of the following are considered to be potential sources of ‘high-wage' unemployment, with the exception of: A) Job search and matching B) implicit contracts.

C) efficiency wages.

D) insider-outsider theory.

E) structural unemployment.

517)

518)

The "stopping rule" is associated with which type of unemployment?

Demand-deficient unemployment High-wage unemployment Search unemployment Persistent unemployment None of the choices is correct.

A) B) C) D) E)

519)

Which of the following factors does NOT play a key role in determining the value of the optimal search?

A) Dispersion of wage offers B) The expected duration of the job C) Institutional mechanisms related to the diffusion of labour market information D) The size of the labour force.

E) Social insurance benefits

520)

Canada's unemployment insurance system (called "Employment Insurance" is thought to have which of the following as an influence on labour supply?

A) A positive impact by reducing the length of employment spells of workers who do qualify B) A positive impact by raising the incomes of beneficiaries C) A positive impact by lowering reservation wages D) No impact at all E) A positive impact by drawing workers with marginal labour force attachment into the labour force

521)

Relative to the unemployment insurance programs of other countries, the salient feature of Canada's unemployment insurance program (called "Employment Insurance") is that: A) it awards generous benefits to part-year workers.

B) The benefits replace a high fraction of the wage of the lost job.

C) the duration of benefit entitlement period is long.

D) the premiums that workers and firms pay are high.

E) it is relatively generous to older laid-off workers who have been permanently laid off.

522)

523)

An important economic variable in implicit contract theory is: A) moral hazard behaviour.

B) productivity of workers.

C) risk-sharing behaviour.

D) adverse selection behaviour.

E) The diffusion of labour market information

In the insider-outsider theory, what is NOT considered as a factor boosting the power of insiders?

A) Turnover costs B) Firm-specific training and work experience C) Low unemployment rates D) A lack of cooperation between incumbent employees and potential new hires E) Bargaining power of incumbent workers

524)

What are the effects of the EI (Employment Insurance) system on labour supply based on the income-leisure choice model?

A) More-generous EI will tend to increase labour force participation but to decrease weeks worked.

B) More-generous EI will tend to decrease labour force participation and to decrease the number of weeks worked.

C) More-generous EI will tend to decrease labour force participation but to increase the number of weeks worked.

D) More-generous EI will tend to increase labour force participation and to increase the number of weeks worked.

E) More-generous EI will tend to increase labour force participation but the effect on the number of weeks worked is ambiguous.

Which of the following is NOT derived from the recent research regarding ‘displaced workers'?

A) Displaced workers suffer long term earnings losses.

B) A major part of the earnings loss arises from re-employment at wages substantially below their pre-displacement levels.

C) Older displaced workers are less likely to become re-employed than their younger counterparts.

D) Among permanent job losers in Canada, displaced workers represent a large percentage.

525)

526)

Which model is most relevant for displaced workers?

The implicit contract approach The insider-outsider approach The job search approach The competitive labour market None of these above 527) Within the job search framework, which of the following events is likely to cause a large increase in the expected duration of unemployment?

A) An increase in the marginal benefit of job search coupled with an increase in the marginal cost of job search B) An increase in the marginal benefit of job search coupled with a decrease in the marginal cost of job search C) A decrease in the marginal benefit of job search coupled with an increase in the marginal cost of job search D) And decrease in the marginal benefit of job search coupled with a decrease in the marginal cost of job search E) None of these above A) B) C) D) E)

528)

According to the competitive labour market, unemployment is characterized by which of the following?

A) At the transactions wage, there is excess quantity supplied of workers B) An efficiency wage is being paid

C) Insiders have negotiated wages that do not favour the interests of outsiders D) An implicit contract is in effect E) Search frictions are in effect 529)

The job search framework might be able to explain why: A) Insiders tend to exhibit lower unemployment rates than outsiders B) Unemployment displays a very counter-cyclical pattern over time C) Young workers have much higher unemployment rates than their older counterparts D) Wages tend to adjust pretty quickly to shocks and changes in the labour market E) Structural unemployment can be quite persistent over time

530)

Sectoral shifts are most closely associated with which category of unemployment?

A) High-wage unemployment B) Seasonal unemployment C) Cyclical unemployment D) Frictional unemployment E) Structural unemployment In the implicit contract framework, A) Wages are flexible; and during bad times, layoffs are lower than what would be the case in a purely competitive labour market B) Wages are rigid and lower than what would be the case in a purely competitive labour market; layoffs are lower than what would be the case in a purely competitive labour market C) Wages are rigid and higher than what would be the case in a purely competitive labour market D) There tends to be a dispersion of wage offers facing the workers E) Unemployment that exceeds the level that would be generated by the competitive labour market can be explained.

531)

532)

The impact of unemployment on the duration of jobless spells is thought to be: A) Positive B) Negative C) Neutral D) Ambiguous E) Unknown

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

533) Aside from constitutional issues, few policies are more uniquely Canadian than the unemployment insurance program, now named the Employment Insurance program. This wide-reaching program has profound effects in many of Canada's labour markets. As the textbook indicates, there have been numerous commissions over the years that have recommended reform, most of which have not been implemented. Your mission here is to summarize the extensive literature, both theoretical and empirical, concerning the role that unemployment insurance plays in labour markets.

• What are the primary economic effects of Canada's UI program on the job search activity of unemployed Canadians? Although you should resort to the job search approach as your analytical framework, keep your analysis to an intuitive, non-technical, non-graphical level.

• What are the primary economic effects of the UI program on firm behaviour, particularly on layoff decisions? You should resort to the implicit contract approach as your analytical framework.

• What are the effects on the labour supply behaviour of those who are not currently eligible, especially those with low labour force attachment?

• What is the overall effect of the UI program on labour force participation and unemployment? Is it positive or negative, and why?

Answer Key Test name: chapter 17 506) 507) 508) 509) 510) 511) 512) 513) 514) 515) 516) 517) 518) 519) 520) 521) 522) 523) 524) 525) 526) 527) 528) 529) 530) 531) 532) 533)

A C B D C A A B D D B A C D E A C C E D C B A C E B A Short Answer

Briefly, UI can affect the incidence and duration of search unemployment by altering the costs and benefits of job search. Several cases need to be considered, depending on whether the individual is (1) employed, (2) unemployed and eligible for UI benefits, and (3) not eligible for benefits. For the employed, an increase in the benefit rate makes unemployed search more attractive relative to employed search; as a consequence, the incidence of unemployment is predicted to rise. For the unemployed who are eligible for benefits (because of a previous spell of employment), an increase in the benefit rate lowers the marginal cost of search. According to the theory of optimal search, the expected or average duration of job search will increase. When UI benefits are exhausted, there is often a "spike" in the probability of leaving unemployment, and is often interpreted as indicating that unemployed UI recipients search more intensively or become more likely to accept job offers as benefit exhaustion approaches.

Implicit contract explicitly explains phenomena such as rigid wages and the use of quantity adjustments (layoffs and rehires) rather than wage adjustments to respond to variations in product demand. In the case demand fluctuations, firms can temporarily lay off workers, who can claim benefits from UI program as a substitution of income loss and waiting for the recall from the firm. In this case, both firms and workers are better off under the UI system.

UI also affects employment and unemployment through its impact on labour force participation.

This aspect was analyzed in Chapter 3 using the income-leisure choice model as well. The analysis applies to situations in which employees can adjust their weeks of employment and nonemployment in response to the incentives inherent in the UI system. The many individuals for whom a job entails being employed throughout the year do not fit in this category. The relevant group consists of those who work less than a full year, either because the worker quits or is laid off after a certain period of employment or because the job itself is short term in nature, as is the case in much seasonal work. The first paragraph of the suggested answer showed that more generous UI will decrease weeks worked by those who, prior to the change, worked more than the minimum number of weeks required to qualify for benefits, whereas more generous UI will increase weeks of employment for those who previously did not qualify. Most of the latter group would have been out of the labour force prior to the change; for these individuals, higher UI benefits make labour force participation sufficiently attractive to obtain at least enough employment to qualify for benefits.

In summary, the UI system has numerous effects on labour force behaviour. A substantial amount of empirical research has been devoted to estimating the size of these effects. Although there are some offsetting influences, the overall impact of a more generous UI benefit structure is to increase unemployment. This does not imply that improvements in UI generosity are undesirable or that changes that to some extent "tighten up" the UI program are desirable; it simply points up the fact that such changes affect our aggregate unemployment rate and that this should be considered in interpreting this statistic. More generally, the trade-offs inherent in the UI system need to be recognized in the design of UI financing and benefits. The more generous the benefit structure, the greater the insurance value of the program but also the larger the

adverse incentive effects and the amount of induced unemployment. Optimal UI design must strike a balance between these social costs and benefits.

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