Labor Economics, Spring 2002



Labor Economics, Spring 2002

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. A firm is currently in the short run and employing a fixed amount of capital, but hiring a variable amount of labor in a perfectly competitive labor market.

a. Use the marginal productivity theory of labor demand to predict the impact on the firm’s labor employment level of the following events. Explain why the change in employment occurs and show it in a graph.

➢ A decrease in the wage rate.

➢ An increase in the demand for the firm’s product.

➢ A lower tariff on imported goods.

b. Now assume the firm is operating in the long run and can adjust both labor and capital to the same 3 events. Predict the impact on the firm’s hiring of labor and capital. Explain why the changes occur and show in a graph.

2. Discuss both sides of the minimum wage issue. According to the theory of competitive labor markets, will an equal percentage increase in the minimum wage cause a larger or smaller reduction in employment in developed countries than in developing countries? Why would this be so?

3. Before the airline industry was deregulated, the Airline Pilots Association (ALPA) was generally regarded as one of the most successful unions in raising the wages of its members; the International Ladies Garment Worker’s Union (ILGWU), on the other hand, has had only limited success in raising wages.

a. Use the four laws of derived demand to explain this difference.

b. After deregulation of the airline industry over 40 new airlines began business. What was the likely effect of this on the elasticity of demand for airline pilots? Which law of derived demand does this involve?

4. 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 $400,000 over their life cycle and LP workers would be paid $200,000.

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

b. Then create a signaling model that would help Sam identify the HP from the LP workers by simply observing how many years of school they had completed. Assume that it takes an LP worker $33,333 to complete each year of school and it costs an HP worker $19,000 to complete each year of school. Explain to Sam how this would work

5. 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 1994 had fallen to 15.7%. Use specific factors and examples to explain the growth and decline of union membership in the U.S.

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