Deck 8: Compensating Wage Differentials and Labor Markets

Question 1

With the assumptions made in our model,OSHA standards that decrease risk levels in the workplace should establish the allowable risk levels

A) to ensure the highest degree of health and safety protection for all workers.
B) so that they will not result in higher costs/lower profits for employers.
C) by focusing on jobs currently paying the largest compensating wage differentials.
D) by weighing the costs of safety programs against the value workers or other beneficiaries attached to the benefits of reduced risk.

Answer 1

D

Question 2

On a graph of wage rates versus risk of injury,indifference curves are convex because

A) risk of injury decreases workers' utility.
B) each additional dollar of pay increases utility more than the previous dollar.
C) utility is constant on indifference curves.
D) at low levels of risk, a worker is less willing to give up wages for increased safety.

Answer 2

D

Question 3

The offer curve describes

A) different wage offers a firm will make to workers of different education levels.
B) different wage-and-risk level offers made by different firms.
C) different wage-and-risk levels available to one firm.
D) different risk levels associated with the same wage level.

Answer 3

B

Question 4

Lawyers work in pleasant surroundings at low risk of injury,but they generally receive higher pay than construction workers.This is because

A) construction workers don't receive a compensating wage differential for their risk of injury and less pleasant surroundings.
B) lawyers and construction workers are not comparable due to different preferences.
C) lawyers and construction workers are not comparable due to different education levels.
D) lawyers' work must be considered unpleasant by many workers.

Question 5

A steeply sloped isoprofit curve,with wages on the vertical axis and risk of injury on the horizontal axis,indicates that

A) injury levels can be reduced easily and inexpensively.
B) it would be very expensive to increase safety in the workplace.
C) the industry is very competitive.
D) the industry will pay only small compensating differentials.

Question 6

When talking about compensating wage differentials,we relax our earlier assumption of

A) utility maximization by workers.
B) profit maximization by firms.
C) income maximization by workers.
D) identical non-pecuniary benefits.

Question 7

If workers on the third shift make $1 per hour more than workers on the first shift,then

A) working during the day is worth less than $1 per hour to all workers.
B) working during the day is worth exactly $1 per hour to all first shift workers.
C) working during the day is worth more than $1 per hour to all third shift workers.
D) working during the day is worth at least $1 per hour to all first shift workers.

Question 8

When workers indifference curves are drawn for wage rates versus injury risk,

A) the indifference curves slope downwards because a higher wage is required to accept a higher risk of injury.
B) the indifference curves slope upwards because a higher wage is required to accept a higher risk of injury.
C) utility increases as a worker moves to the right along an indifference curve.
D) utility decreases as a worker moves to the right along an indifference curve.

Question 9

Along an isoprofit curve,

A) the difference between total costs and total revenues is constant.
B) the firm's level of safety is constant.
C) the firm's level of wages is constant.
D) the firm's safety costs are constant.

Question 10

One problem with using worker willingness-to-pay figures to set safety standards is that

A) the utility of other parties may be affected by worker safety levels.
B) workers' preferences cannot be translated into monetary terms.
C) the use of safety equipment will decrease workers' utility.
D) willingness-to-pay figures usually decrease over time.

Question 11

If comparable workers are paid an extra $1.00 per hour to work outdoors,then

A) the value of indoor work is at least $1.00 per hour to all workers.
B) the value of indoor work is more than $1.00 per hour to all workers.
C) the value of indoor work is worth at least $1.00 per hour to some workers.
D) the value of indoor work is $1.00 per hour to all workers.

Question 12

Introduction of a benefit that turns out to decrease productivity would cause a firm's isoprofit curve to

A) flatten.
B) become steeper.
C) remain unchanged.
D) become convex.

Question 13

A compensating wage differential is

A) an extra wage that compensates workers for undesirable working conditions.
B) an extra wage that is above the equilibrium wage.
C) an extra wage that will make all workers willing to accept undesirable working conditions.
D) an extra wage that implies firms are no longer maximizing profits.

Question 14

High-paying jobs are also associated with generous benefits because

A) benefits which cost $100 generally increase utility by more than $100 in cash.
B) high-paid workers can benefit from the tax advantages given to benefits.
C) employers know how to spend money better than their employees.
D) high-paid workers are risk neutral.

Question 15

Employers make contributions to pension funds on behalf of employees.In many instances,however,a worker is not entitled to collect from the pension unless she has worked for the firm a minimum number of years.Once the worker has worked the necessary number of years to be eligible to collect from the pension fund,the worker is said to be vested in the pension fund.A governmentally mandated change in vesting to make all workers become fully vested sooner would

A) increase utility of all workers.
B) increase utility of workers who plan to stay with a company for the length of their time in the labor force.
C) probably cause firms affected by the legislation to decrease wages.
D) probably cause firms not affected by the legislation to increase wages.

Question 16

When we state that compensating wage differentials exist for comparable workers,we do NOT assume that

A) workers have several jobs to choose from.
B) workers maximize utility.
C) workers maximize income.
D) workers accurately assess the non-pecuniary benefits of jobs.

Question 17

Firm A's isoprofit curves are flatter than those of firm B.Therefore,

A) firm A will be willing to pay a larger compensating differential than firm B.
B) firm B will be willing to pay a larger compensating differential than firm A.
C) both firms will pay the same compensating differential, but firm B will have higher profits than firm A.
D) risk is more costly to reduce in firm A than in firm B.

Question 18

If a firm reduces the risk in its workplace,then

A) the firm will be able to pay higher wages.
B) the firm will be able to increase profits.
C) the firm will likely pay lower wages to make up for the cost of increased safety.
D) the firm will see a decrease in total costs.

Question 19

If a worker does not have good information and thinks that risks are lower than they actually are,then OSHA regulations which increase safety standards in the workplace

A) decrease utility for the worker.
B) increase utility for the worker.
C) could increase or decrease utility for the worker.
D) move the worker to his highest possible utility level.

Question 20

Workers' indifference curves for wage rates versus benefits will be

A) downward sloping.
B) upward sloping.
C) downward sloping and concave.
D) upward sloping and convex.

Question 21

In the context of the models presented in the text,why are low-income workers more likely to take dangerous jobs?

A) Low-income workers are more easily exploited by employers.
B) Safety is an inferior good.
C) Low-income workers are not willing to pay as much for more safety as high-income workers.
D) All of the above

Question 22

Suppose workers at a firm are willing to pay (in foregone after-tax wages )$1200 a year in order to get a fringe benefit.The worker's tax bracket is 40% (so that for every $1000 a firm pays a worker,they get $600 in after-tax take home pay).If a firm gives the worker the fringe benefit and workers reduce their after-tax wage by $1200,how much is wage paid by the firm being reduced by?

A) $2000
B) $3000
C) $1200
D) $720

Question 23

Utility maximizing workers are interested in both the pecuniary and nonpecuniary aspects of their jobs.What is meant by nonpecuniary in this context? Give some examples of nonpecuniary aspects of a job.How would the nonpecuniary aspects of a job affect compensation?

Question 24

Assume that all workers prefer to work 40 hours a week at a given wage.If real estate jobs asks workers to rotate between working 20 hours a week and 60 hours a week,which of these workers is likely to work for the lowest relative average hourly pay in real estate?

A) workers with large income effects
B) workers with small income effects
C) workers with large substitution effects
D) workers with small substitution effects

Question 25

Recent research suggests that single mothers with young children likely have indifference curves (wage on the vertical axis and risk of injury on the horizontal axis)that are

A) about as steep as indifference curves of single men, implying equally risky behavior by both groups.
B) steeper than indifference curves of married women with children, implying that single mothers take less risky but lower paying jobs.
C) flatter than the indifference curves of their own mothers, implying a generational shift in preferences for working.
D) flatter than indifference curves of married women without children, implying that single mothers will take risky jobs in order to feed their children.

Question 26

A firm offers the optimal mix of wages and benefits.It is paying $5 an hour in wages and $3 in benefits.The minimum wage is then increased from $5.15 to $7 an hour.Assume all workers have the same utility curves (and have the usual shape).If the firm continues to spend $8 an hour on workers,then

A) workers will be better off.
B) workers will be as well off as before.
C) workers will be worse off.
D) it is impossible to determine if workers are better or worse off without knowing if benefits are a normal or inferior good.

Question 27

A risk-averse worker gains ________ utility from a job with possible layoffs than from one with no layoffs when the two jobs have the same number of expected hours of work and wage rate.

A) more
B) less
C) at least as much
D) the same amount of

Question 28

Predictable layoffs

A) will not increase utility for any workers.
B) decrease utility of all workers.
C) decrease utility of risk-averse workers.
D) imply that leisure is an inferior good to all workers.

Question 29

An offer curve is made up of

A) the various wages one company is willing to pay at different levels of risk.
B) the various wages one worker is willing to accept at various levels of risk.
C) the wages paid by various companies at various risk levels.
D) the wages paid by various companies and potentially accepted by various workers at different risk levels.

Question 30

Holding all other factors constant,workers who are strongly averse to risk will tend to have jobs paying

A) average wages.
B) below average wages.
C) above average wages.
D) at least average wages.

Question 31

Firm A offers the same pension to all workers,regardless of how many hours they work.Workers value the pension at $10,000 a year (and it costs Firm A $10,000 to provide the benefit).Firm B does not offer a pension but is like Firm A in all other job characteristics.The labor market is competitive and all workers have comparable skills.If there are workers in both jobs,then

A) workers that prefer working shorter hours are more likely to work for Firm B.
B) all workers will prefer working for Firm A.
C) all workers will be indifferent between working for Firm A and Firm B.
D) workers that prefer working long hours are more likely to work for Firm B.

Question 32

If predictable layoffs prevent workers from working as many hours as they desire,then we would expect to see

A) increased wages to workers in industries with predictable layoffs.
B) decreased wages to workers in industries with predictable layoffs.
C) average wages in industries with predictable layoffs.
D) either increased or decreased wages in industries with predictable layoffs.

Question 33

What are the difficulties inherent in estimating compensating wage differentials empirically?

Question 34

The theory of compensating wage differentials rests on three assumptions.State and briefly explain each of the assumptions.

Question 35

Worker A and Worker B both prefer to work 8 hours a day when their hourly wage is $12 an hour.They are currently working 8 hours a day and getting $12 an hour.Another employer wants to employ them only 6 hours a day (and requires them to not work in another job).Worker A will demand a higher wage to take the 6 hour job (compared to Worker

A) worker A has a more curved (bowed in) set of indifference curves.
B) when
B) worker A has a less curved (less bowed in) set of indifference curves.
C) worker A has a higher income elasticity of demand for leisure.
D) worker A has a lower income elasticity of demand for leisure.

Question 36

What is a compensating wage differential? What socially desirable ends does a compensating wage differential serve?

Question 37

If all workers like nice working conditions and labor markets are competitive (such that workers are mobile and fully informed),then in equilibrium

A) no worker will be in a job that does not have nice working conditions.
B) workers will prefer to work in jobs with nice working conditions.
C) workers will prefer to work in jobs without nice working conditions.
D) workers will be indifferent between jobs with and without nice working conditions.

Question 38

Researchers have found that individuals that work night shifts,other things equal,are paid

A) a compensating wage differential of about 4%.
B) about 8% less than they would be paid during the day because they have less seniority than day shift workers.
C) about the same amount that they would be paid during the day; therefore, working at night is not an undesirable working condition.
D) time and a half because they work at night.

Question 39

Graph an indifference curve for an individual that depends on the wage rate (on the vertical axis)and on the risk of injury on the job (on the horizontal axis).Explain why the indifference curve looks as you have drawn it.

Question 40

Worker X is paid $20,000 more in a dangerous job than what Worker X could make in safe jobs.Worker X values the job characteristic of safety at $15,000.If the government makes Worker X's job safe and if safe jobs continue to pay their current wage,then,assuming markets are competitive and wages can easily adjust

A) Worker X will be $20,000 worse off.
B) Worker X will be $15,000 better off.
C) Worker X will be $5000 worse off.
D) Worker X will be $20,000 better off.

Question 41

The Occupational Safety and Health Administration is tasked with implementing and enforcing federal safety and health standards.Why are federal safety and health standards necessary in the workplace? Use the hedonic model to answer the question.

Question 42

Suppose that working condition X is an undesirable working condition.Justin and Jessica both have distaste for working condition X,but Justin's aversion to working condition X is greater than Jessica's aversion.Draw a graph with a representative indifference curve for both Justin and Jessica,with the wage rate on the vertical axis and the level of working condition X on the horizontal axis.Explain why the indifference curves look as you have drawn them.

Question 43

Suppose that firm profitability depends inversely on the wage rate and directly on the level of workplace disamenity X.Consider two firms that differ in their ability to reduce the level of workplace disamenity X.With the wage rate on the vertical axis and X on the horizontal axis,draw a graph of the offer curve.Explain the basis of the offer curve that you've sketched.

Question 44

What are the major insights of the hedonic model of compensating wage differentials?

Question 45

Assume that safety in the workplace is costly to provide for a manufacturing firm.Draw an isoprofit curve map for the firm with the wage rate on the vertical axis and risk of injury on the horizontal axis.Explain why the graph looks as you have drawn it.