Labor Economics, Spring 2002



Labor Economics, Spring 2003

Exam 2

Please respond to question #1 and then choose 2 of the remaining questions. Each response will be graded out of 100% and your final score will be the average of these 3 responses. Well-written, thorough responses, with evidence presented to support your position, will be given extra consideration.

1. Thoroughly discuss both sides of the minimum wage issue. In particular, address the effects of the minimum wage on (a) the accumulation/investment of human capital and (b) the poverty rate.

2. Wal-Mart recruits young men and women into their management training program, but Sam is having a difficult time separating the high productivity workers (HP) from the low productivity workers (LP). These productivity differences exist since birth, and have nothing to do with how much schooling a particular worker gets. If Sam could identify them, HP workers would be paid $600,000 over their life cycle and LP workers would be paid $250,000.

a. First create a pooled equilibrium and discuss its advantages and disadvantages.

b. Then create a signaling model that would help Sam to perfectly identify and separate the HP from the LP workers by simply observing how many years of school they had completed. Assume that it takes an LP worker $38,000 to complete each year of school and it costs an HP worker $28,000 to complete each year of school. Explain to Sam how this would work

c. Throughout the application and interviewing process, how do job applicants try to signal to employers that they are HP workers?

3. Organized labor in the U.S. has a colorful, often violent history. Due to a variety of events both in the U.S. and abroad, pieces of legislation and industrial makeup, union membership among workers has enjoyed success and it has suffered defeat. Membership in 1930 was 11.6% of the nonagricultural employment, which grew to 33.2% in 1955, but by 1999 had fallen to 15.3%. Use specific factors and examples from the readings and videos to explain the growth and decline of union membership in the U.S.

4. Unions certainly have an impact on wages and actively further this agenda in many ways. Please respond to the following wage related situations.

a. In a survey of business firms in the Chicago area, workers who belonged to a union earned $110 more a week than nonunion workers. Does this $110 in earnings differential represent the true amount by which union bargaining power was able to raise wages? Discuss the reasons why or why not.

b. The UAW has lobbied Congress to adopt a “domestic content” bill that would require the auto companies to buy most of their parts and components from U.S. suppliers (many of whom are organized by the UAW). Why does the UAW desire such a bill? What effect would it have on the wages of their members and why?

c. Do public sector unions (i.e. government employees) have an advantage or disadvantage relative to unions in the private sector in winning higher wages for their members? Why?

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