Labor Final Exam Questions: LABOR II 1) a. Develop a model of immigrant adjustment. b. Compare earnings of immigrants with native-born workers.

c. Under what circumstances might immigrants earn more than native born, other things the same? 2) Compare and contrast Beckers tastes for discrimination and Phelps statistical discrimination. What are their strengths and weaknesses? 3) a. Develop a model (with zero discrimination) why some minority groups earn more and some earn less than the majority. b. What are some implications? c. Is it consistent with data for US? 4) Why is female labor supply in US less than that of men? b. why has the gap narrowed post WWII? c. Does it explain trends for earnings of women relative to men in labor force? d. Why might a gap still persist? LABOR 1 1) During the typical recession, layoffs increase more for young, low schooling, new immigrant, and female workers compared with prime age (35-44), high ed, NB, male workers. Why? 2) One small sector of an economy has high rates of fatal accidents. Firms in the sector differ in death rates and worker differ in attitudes towards workplace fatalities. a. How are waged determined and workers allocated? b. What is effect of safety standards that stop high-fatality firms from operating? c. What is effect of workers compensation program that gives death benefits finances out of general tax revenues? d. What is the effect of minimum wage? 3) LONG econometric problem LABOR 1 1) People with more HC (school, experience, etc.) behave differently. a) work more hours/year b) have more pleasant jobs c) healthier d) more likely to migrate and migrate longer distances 2) What is the effect of the following government regulations? a) increase on min wage on employment, unemployment, investment in on-thejob training and workplace safety in a competitive industry b) abolishment of mandatory retirement c) prohibit employers from giving jobs with high repetitive motion injuries d) raising the minimum schooling age from 16 to 19 effect on HC, welfare, & distribution of earnings.

3) Another LONG econometric problem.

2) Compare and contrast Beckers tastes for discrimination and Phelps statistical discrimination. What are their strengths and weaknesses? Beckers model explains most of the differences in wages between different groups. If people are rational and there is perfect information, then there it is impossible to disagree with it. Beckers model shows how market competition for: 1. labor, 2. capital, or 3. product sales, will make discrimination costly for whoever has a taste for it. Beckers model would eliminate discrimination under perfect competition, but in the real world where there are economic profits, discriminators can spend profits in the form of discrimination if they wish. Empirically, there appears to be more discrimination in regulated monopolies than in more competitive industries. One weakness of both models is that they not explain how there appears to be so much persistent wage discrimination in labor markets, nor why discrimination fluctuates when it does. Upon the passage of the civil rights act in the late 60s there appears to have been a large, rapid decrease in labor market discrimination. It is unlikely that the civil rights act changed the costliness of discrimination by that much. Perhaps there were social forces that changed peoples tastes for discrimination at that time, but if discrimination was costly before the Civil Rights Act, then it seems odd that discrimination decreased so much, so rapidly. Furthermore, there appears to have been a slight increase in discrimination in the past 15 years or so. Neither model can explain why discrimination decreased so much after the civil rights act, then why it stopped decreasing and actually increased slightly. However, the problem might be that we do not directly measure discrimination. We measure the variables that explain human capital and then the residual is interpreted to be some measure of discrimination. However, part of the residual could be measurement error, or an omitted variable (such as enthusiasm), so it is impossible to know for certain if discrimination has changed as much as the residual has. Phelps modifies Beckers model by examining what happens when there is imperfect information and statistical differences in productivity between minority groups. In this case, if gathering information about differences in ability is costly, then a rational employer will use other characteristics (such as race) as a signal of ability and discriminate against workers who belong to the group with lower average ability.

In this case a rational self-interested employer will pay group A a lower wage than group B if they cannot determine the difference in ability between the two groups. This is the basis for doing racial profiling. If group B is much more likely to traffic drugs, then that group should be searched for drugs more frequently. The police should increase searches of group B until the percentage of the people searched who are caught with drugs is the same for both groups. One difference of Phelps model is that it would not predict segregation as there would be in the case of customer discrimination or worker discrimination under Beckers model. The primary problem with Phelps model is that it is hard to explain why information about differences in ability is so costly in the labor market. A difference in productivity of merely $.5/hr would translate into $1000/year with a npv (infinite horizon) of $20k. Beckers model teaches that there is an incentive for employers to match pay with productivity. An employer that figures out how to directly distinguish ability would be more profitable. Employers have the option to hire a worker for a trial period and fire him later if he does not work out. Additionally, employers could hire at a lower wage and quickly promote those workers who are found to be more productive. Alan Kreuger found support for statistical discrimination when comparing new graduates of ivy-league and state schools. Employers pay higher wages to ivy-league graduates since they have imperfect information about the different ability of new graduates without work experience. However, after XXX (about 10) years, there is no significant difference in pay between graduates when admission criteria is used as explanitory variables. The SAT scores explain most of the difference in wages between the two groups at that point. If differences in ability between groups is erroneous, then wages will equalize due to market forces (perfect competition) because employers who are more erroroneous will be put out of business by employers who are less.

3) a. Develop a model (with zero discrimination) why some minority groups earn more and some earn less than the majority. Compensating wage differentials: HC, pleasantness of job, uncertainty of employment, trust/effort (pay more if difficult to detect shirkers). Social Networks: Most hotels in CA run by Indians. Church attendance correlated with higher earnings. 50% of jobs come from social networks. Some groups may send signal of trust through social networks (employers pay more if difficult to detect shirkers). Ethiopian social networks may steer Ethiopians into cab-driving, whereas Chinese social networks may steer them into restaurants and Poles into masonry. There is a certain amount of path dependence. Bias: Individuals in some minority groups tend to change identity when they become high income or more educated: Native Americans sometimes change ethnic identity readily. b. What are some implications? Suppose we take Jews as an example. There are a couple of historical reasons Jews invest highly in human capital: 1) the destruction of the temple and subsequent decree that all Jewish men must learn to read the Torah. 2) the persecution that forced frequent moving from place to place favoring human capital over other investment because human capital is more portable and nearly impossible to steal). This investment in human capital leads to higher income than the majority. However, the statistics showing higher income are somewhat biased because they do not take into account the cost of acquiring human capital. Ceteris paribus, a group of people who invest

more in HC will have the same lifetime real NPV of earnings at equilibrium as a group of people who do not. GRAPH Labor income is about 75% of economy B MP, B W A Time

(1 r )
Bt t =1

(w

w At
t

=0 people will move from job A to job B if job B pays more until there

is no econ rent for moving to the other job and the return is equalized. However, there is no ceteris paribus in this example. High education high income people tend to have fewer children than lower income low education people. This increases the difference between the two groups. People with fewer children will be able to afford more investment in HC than people with many children. Indeed, people with many children can become stuck in a cycle of poverty where poverty #kids investment HC poverty c. Is it consistent with data for US?
Yes. Jewish mothers have nearly optimal labor supply with regard to maximizing investment in HC for their children. Work before birth of first child. Stay home while infant. Go to work part time in early childhood, and work full time again as the children get older and need less time, but more market goods. Other compensating wage differentials are the ability of Navajos to work in remote RR projects in the wilderness (such as hot desert) without seeing family for long periods. Navajos get paid more for this work because it is hard to find anyone else who is willing to do the work except for with a very high wage. The Navajos find it less unpleasant than many other groups because of their background living in remote deserts. Plus they have a cultural bond with the rest of the workers on the team that a non-navajo would find difficult to create.

4) a. Why is female labor supply in US less than that of men?

discrimination, crowding of womens employment (stereotyping of employment), child bearing/rearing, biological ability (such as upper body strength). If any of these are present, there will be lower wages for women and so more women would opt to remain out of the labor supply. Most men and women get married at some point. If men get even slightly higher wage and a couple decides to divide labor between home and market labor, then if there is increasing productivity due to experience in either or both home production and market work, (but skills are not transferrable between market and home production sectors), then a small initial difference in pay will result in path dependence which results in wide divergence in pay over time. Some would suggest that including biological ability is a sexist thing to do. However, there clearly are statistically significant differences in ability between men and women. One intriguing difference is that men appear to be more competitive and more aggressive. For example, one study of new MBA graduates found that offering salaries were nearly the same. However, most male graduates asked for more money an

few female graduates did and that explained nearly the entire pay differential between male and female graduates of the MBA program. Another example is that boys run faster in races if they are in a group than when they are alone. Girls do not. When only girls are running against other girls, they actually run slower than when alone! When it is a mixed-sex group, girls run the same speed as when alone and boys run the fastest.

b. why has the gap narrowed post WWII? premium for upper body strength technology available for home production (washing machines, refrigerators, TV-dinners), which decreases the marginal productivity of home production and frees up time for market work. Women substitute market inputs for their labor in home production. discrimination (arguable). There has certainly been less job stereotyping and more educational achievement for women. Whether this is caused by increased ROI in HC or by decreased discrimination is impossible to say. However, there appears to be a decline in the pay gap between men and women after adjusting for HC. lifespan (increases years of life after kids are grown in which work is possible without sacrificing time at home with the kids) divorce makes market work more desirable for women as a form of insurance against having no skills if divorced. fertility quality children (tastes requires more market goods and less time for kids???) inequality????? mens labor supply (income effect dominating the substitution effect) BUT taxes and womens wage (income effect) counter the trend. c. Does your reasoning explain trends for earnings of women relative to men in labor force? Yes. The force that increases the female labor supply relative to men is the increase in womens wages relative to men. d. Why might a gap still persist?
Women who expect to have lower returns on HC investment would invest less for any of the four reasons above.

b. The gap has narrowed since WWII because technology relative earnings of people with higher physical strength (men) created labor-saving devices in the home which decreased the amount of time needed for home production. inequality since the 1970s may have increased the desire of lower income households to catch up with the Jonses and sacrifice leisure or home goods for higher market income. As low-skilled wages dropped relative to high-skilled workers, low-income families have increasingly wanted two incomes. This is certainly often expressed as the reason women say they are working. They say they cant make it on one salary.

 also, increased inequality may make it easier for middle and upper income families to hire lower income people to do household work which increases lfp of high-income women. Family size reduce home production and time off for child bearing Divorce increase need for women to increase labor market HC Crowding social occupational stereotypes declining. lifespan increases return on investment in HC (increased years are after child-rearing is done) status of women c. Relative earnings have increased over time due to the above factors increasing the return on investment in HC for women.

i,r ) Marg rate of return on HC

S(r=discount rate????) Marginal Interest cost of funds D(i=marginal rate of return $ invested in HC

d. All reasons in part a still apply. Partly there is a lag in earnings. Women are now more educated than men, but older women are not, so there is greater earnings difference among older cohorts. The greater lfp of women has brought in more low-productivity (low experience, intermittent laborers, part-time) women. The high- productivity women had been motivated by their higher wages to enter the labor market earlier. Increasing numbers of low- productivity women increases the wage differential, ceterus paribus. 1) During the typical recession, layoffs increase more for young, low schooling, new immigrant, and female workers compared with prime age (35-44), high ed, NB, male workers. Why? Young workers typically have lower marginal productivity than their wage rate because the firm is investing in their firm-specific HC. A rational manager who is philanthropically minded might also realize that young workers might have less disutility from a layoff because they have higher returns on education and might have a less preference for staying on the job since continuing education is a more attractive alternative for them during a recession. Workers in their prime usually have dependents to worry about too.

Different forms of HC are complementary. High schooling workers often have higher ability to acquire firm-specific training. Low schooling workers get less firm-specific HC training, so even if their wage is lower than their marginal productivity, it is closer to it. In a recession as marginal productivity declines for all workers, it will go below their wage sooner. Also, firms have invested less in low firm-specific HC workers, so there is less value retaining them as an investment in future productivity. Old workers are also more likely to be let go in a cyclical recession if their marginal productivity drops below their wage because there is less future time for a return on keeping their firm-specific HC around. New immigrant workers will have less general HC than NB and since forms of HC are complementary, firms will invest less firm specific HC. Like young workers, they will have had less time with any firm and like low education workers, their general HC will be lower than NB, so firms will invest less in their firm-specific training. Female workers who take time off for child bearing/raising will have less investment in firm-specific HC (less experience and less general HC) and so will be laid off sooner. Philanthropic managers might also consider their work to be more dispensable to their family if the managers know that their husbands have higher earnings. Men are less likely to have working spouses and a philanthropic manager would be less inclined to lay off these men. 2) One small sector of an economy has high rates of fatal accidents. Firms in the sector differ in death rates and worker differ in attitudes towards workplace fatalities. a. How are waged determined and workers allocated? Firms can tradeoff safety or wages which are both costly. We can draw iso-profit lines to represent the maximum safety/wage combination that a firm can afford given their technology. Different firms will have different technologies which give a comparative advantage to different firms at different levels of safety/wage. Workers get utility from both safety and wages, and for an iso-utility level there would be a curved indifference curve for each worker. A worker whose preference is to live fast (high wage) and die young would tend to have a flatter curve and choose more dangerous, high-wage firms and visa versa. A 99-year old might be willing to do a job for $1million which has near certain death within a few years live-fast die SOON If workers risk preference is normally distributed, then we can draw a bell-curve which shows their distribution given an increasing wage differential for two jobs Wrisky-Wsafe. Some people might even love risk so much they would be willing to work at a risky job for less money than a boring, safe job. From this we can derive a labor supply curve. The intersection w/ demand shows wage and rent for people in the risky job and rent for people in the safe job. b. What is effect of safety standards that stop high-fatality firms from operating?

This would create a vertical line which prevents high-wage/high-risk firms from being able to operate. It will reduce the utility of the live-fast die young people. c. What is effect of workers compensation program that gives death benefits finances out of general tax revenues? It would rotate out the envelope of technologies that are present in a free market which would increase utility and real wages for the live-fast die young people because it would be a subsidy for the higher-risk occupations. It would probably also increase the number of fatalities. d. What is the effect of minimum wage? The minimum wage (if it was high enough) would ironically eliminate the safest jobs because those companies would not be able to afford both high safety and the higher wage. It will decrease utility for people who wanted the safest jobs. 1) People with more HC (school, experience, etc.) behave differently. e) work more hours/year f) have more pleasant jobs g) healthier h) more likely to migrate and migrate longer distances 2) What is the effect of the following government regulations? a) increase on min wage on employment, unemployment, investment in on-thejob training and workplace safety in a competitive industry employment unemployment (however, because there are rational expectations, the top of the labor supply bends left at the market eqbm and some people drop out of the labor force because they do not want to spend time and money on search costs to get a job. safety on the job training (general training could be financed by the worker though especially likely in the case of general training where workers would finance training through point X below.) - For firm specific training, (where the pay is a line somewhere between the line for job B and job A) the wage would have to become flatter (in the below graph) which would be worse for firms with a good reputation and firms that have a low interest cost of funds and less harmful for firms that do not which are already paying a flatter wage rate.
2 jobs, A & B -B, training mp, for general training, w=mp -A, w=mp, 0roi for training -Min wage

MP, W

X The employer would be forced to pay min-wage until point X, whereupon the wage would be equal to the MP.

b) abolishment of mandatory retirement 1. When mandatory retirement is due to sticky wages that do not decrease in response to declining productivity in old age, this would increase unemployment (or decrease wages) among workers who are approaching the former age of mandatory retirement. 2. Employers would have an incentive to buy out older workers and pay them some fraction of the difference between their productivity and their wage for the remainder of their expected tenure at work. Employers can save money by paying these workers to quit and the workers can gain utility by quitting and either getting another job that only pays their MP or by increasing their leisure (retirement). The real wage after age 65 when a worker is forgoing SSI is actually less because of the increased opportunity cost of working, so a worker has that added incentive to take the buy out package and retire. c) prohibit employers from giving jobs with high repetitive motion injuries This would decrease utility for workers who prefer the higher wages in the relatively injury prone jobs. It would reduce injuries, but the reduction in wages would be too great to be worth the tradeoff for the workers who had chosen those jobs. d) raising the minimum schooling age from 16 to 19 effect on HC, welfare, & distribution of earnings. This would increase education (& HC), but it would reduce welfare because people who do not value schooling past age 16 would be forced to forgo three years of wages, and have to pay the psychic and financial cost of school. For them, the benefits are less than the cost. The distribution of earnings would also be flatter because HC levels would be flatter. The increased supply of people with 19 years of schooling would reduce returns on that schooling and that would reduce the benefit for all people with 19 years of schooling. Even though earnings would be more equal, real economic welfare would become less equal because the people who are forced to endure more schooling are financing unproductive increases in their schooling that have a ROI that is less than the cost. The only way to justify this is if education has externalities that benefit society or if individuals are not optimally calculating their ROI in education. Both are plausible. GRAPH WS/WU vs S/U.