Deck 14: Attracting and Retaining Qualified Employees

Question 1

What roles do human capital and compensating differentials play in shaping the wage that a firm will pay a new employee?

Answer 1

When individuals increase their human capital through acquisition of new skills, they may move into different labor market segments. The wage in each labor market segment will be determined by firms' demand for these skills and the relative supply of workers who have the skills. That is, wages for employees, especially new employees, are set in the labor market. When the dot-com boom busted, highly specialized people experienced plummeting wages due to a fall in the demand for computing professionals. Jobs with undesirable characteristics will command higher wages, which are called compensating differentials. The supply of new employees will be lower for these types of positions and thus the equilibrium wages will be higher.

Question 2

The owners of Market Analysts, a business and economics consulting firm, are big believers in paying benchmark competitive wages. They pay all (non-legally specified) compensation in wages. If the employee wants a benefit, the company has an insurance program but it comes out of the paycheck. Market Analysts tends to hire very young workers just out of college. They are energetic and work hard, but after two years they tend to leave for other firms, taking valuable training lessons with them. If Market Analysts want to keep its employees, what changes should it make to the terms of employment offered to new employees?

Answer 2

The problem is that the overall level of compensation (salary and fringe benefits) is high enough to attract recent college graduates, but the compensation package is not great enough in order to retain more experienced workers. This firm has to offer a more competitive package of monetary compensation and fringe benefits in order to keep their employees. Young college graduates may have different preferences for fringe benefits than slight more experienced employees who are starting families. This firm's human resources compensation packages are quite competitive for entry level workers, but do not provide more experienced enough fringe benefits in order to keep them around. This firm should discover what benefits employees want in order to remain on the job. On the graph below, any compensation offer of salary-only on the vertical axis is not meeting the displayed reservation level of utility for the experienced worker. An offer of (F*,S*) would be the cost-minimizing way to keep these valuable employees.

Question 3

The Occupational Safety and Heath Administration attempts to stop safety violations in business through inspections and fines. Though workers are supposed to earn a premium wage for working in more risky environment, why might the OSHA inspections be a good idea?

A) Employees might not have good information about the level of danger.
B) Employees may already understand the risks that they are exposed to on the job.
C) Inspections and fines may raise the costs of production significantly.
D) There are never any societal costs (externalities) to dangerous working conditions.

Answer 3

A

Question 4

Always Round Tire tries to base its promotions on seniority (where education and training requirements are not necessary). The company finds that this system seems to work most of the time with shop floor supervisors and team managers. But the system breaks down for higher-level positions. Why?

Question 5

What are internal labor markets and what is an important characteristic in these markets?

Question 6

The value of human capital is determined by:

A) special team of experts in each college and university.
B) a ranking system of the relative value of different sorts of education to society.
C) the forces of supply and demand in the market.
D) an investment board at the New York Stock Exchange.

Question 7

Since the Internet became a common tool for business, employees at Plain Truth Advertising have maintained a semi-secret web site where wages of employees are published and comparative salaries of friends at other advertising agencies are also published. Employees at Plain Truth have noticed that wage dispersion of similarly ranked employees has shrunk dramatically in the past five years. What happened?

Question 8

In Mexico, many garment or sewing shops found they could entice many young people to work for them if they offered clean, air conditioned work areas with high-quality locker rooms to clean up in after the work day. Typically, traditional garment shops had to offer ____________ to get workers to apply for the hard, repetitive, and somewhat dangerous work.

A) benchmark competitive wages
B) compensating differentials
C) monopoly wages
D) wages based on human capital development of each employee

Question 9

What are efficiency wages and why are they important in internal labor markets?

Question 10

The salary gains from specific training in human capital tend to go to the:

A) employing firm, not the individual.
B) federal government in higher taxes.
C) individual, not the employing firm.
D) parents, since they paid the education in the first place.

Question 11

How can firms survive in the long run if mandatory retirement is illegal, and if firms are stuck with older workers whose productivity might technically have fallen over time?

Question 12

Draw a graph showing the trade-off between salary and benefits. Show the employee's indifference and the firm's isocost curve. Label the equilibrium salary/benefits combination. Discuss what would happen as individual taxes fall or as firm payroll taxes rise.

Question 13

Fred Powell of TruLite makes a verbal pledge to every new employee that he will not lay off employees after they have worked for TruLite for two years and that TruLite will make all promotions internally. Why would Powell make such a pledge? Why is the pledge oral?

Question 14

The salary gains from general training in human capital tend to go to the:

A) employing firm, not the individual.
B) federal government in higher taxes.
C) individual, not the employing firm.
D) parents, since they paid the education in the first place.

Question 15

Explain the effect of self-selection on compensating wage differential.

Question 16

There are several assumptions that are the basis of the operation of the benchmark competitive labor market. Which of the following is not one of these assumptions?

A) Wage rates are costlessly observable.
B) All jobs are identical.
C) There are no long term contracts.
D) Compensation is made up of wages and benefits.

Question 17

If an prospective employee is not offered her reservation utility or reservation wage, then she will:

A) tend to look for another job or withdraw from the labor market.
B) seek a larger benefit package.
C) use the job as the basis for a career, assuming that wages will increase beyond the marginal revenue product over time.
D) accept the job because a wage below the reservation utility is very attractive.

Question 18

If a firm in a competitive labor market offers less than the market wage rate if it will

A) be able to attract a large number of employees because the marginal revenue product is low.
B) find that it has broken a federal wage law.
C) attract too few employees.
D) find that the supply is greater than the demand.

Question 19

In the benchmark competitive case, the firm will expand the hiring of employees until the marginal revenue product is:

A) less than the market wage rate.
B) equal to the market wage rate.
C) greater than the market wage rate.
D) the universe of the market wage rate.

Question 20

The extra wage that is paid to an individual to attract her to a less desirable job is called:

A) the benchmark competitive wage.
B) the general training human capital difference.
C) the specific training human capital difference.
D) a compensating differential.

Question 21

In the basic competitive model of labor markets we assume that:

A) individuals are not identical in training and skills, and jobs are not identical.
B) not all individuals are identical in training and skills, but all jobs are identical.
C) individuals are identical in training and skills, but not all jobs are identical.
D) individuals are identical in training and skills, and all jobs are identical.

Question 22

When a firm makes verbal promises about future working conditions, benefits and raises, and promotions, it is offering:

A) an implicit labor contract.
B) an explicit labor contract.
C) a human capital contract.
D) compensating differential.

Question 23

When rates of pay and job assignments are determined by administrative rules and implicit promises of management, then the firm is operating in:

A) an internal labor market.
B) a competitive labor market.
C) a human capital market.
D) a risk sharing market.

Question 24

The costs of recruiting new employees, training the new employees, and suffering the initial low productivity of new employees when old employees leave is called:

A) the efficiency wage.
B) the benchmark wage.
C) turnover costs.
D) marginal costs of long term training.

Question 25

In an internal labor market, employees often spend too much time lobbying for promotions or for preferred job assignments. This is called:

A) an administrative cost.
B) market costs.
C) influence costs.
D) human capital costs.

Question 26

Which of the following is not a lower-cost benefit of an internal labor market?

A) Promotion to higher level jobs is restricted to insiders.
B) The development of firm specific human capital.
C) The cultivation of long term employee motivation.
D) Management's ability to learn about employee's best attributes.

Question 27

Human capital is a term that characterizes:

A) the number of workers in a company who are productive.
B) firms that sell their products to customers directly.
C) individuals who buy skills from the companies the work for.
D) individuals with a set of skills that they rent to employers.

Question 28

In the basic competitive model of labor markets we see that:

A) individual firms and workers can exert a lot of influence over the wage rate.
B) individual workers have a lot of control over the wages received.
C) individual firms have a lot of control over the wages paid.
D) individual firms and workers have no control over the wage rate paid and received.

Question 29

The Peter Principle is a ______ component of an internal promotion and advancement system for employees.

A) bad
B) inverted
C) competitive
D) good

Question 30

Cafeteria benefit plans suffer from two defects:

A) cost of administration and employee decisions.
B) cost of administration and adverse selection.
C) employee decision-making and adverse selection.
D) employee decision-making and free riders.

Question 31

The gains from specific training goes to:

A) neither to the firms, nor to the employees, but to the training institute.
B) both firms and employees.
C) firms, not employees.
D) employees, not firms.

Question 32

For a given compensation potential (isocost curve), an employee with a large family will more likely pick a wage/benefit mix that emphasizes:

A) wages.
B) incentive piece rates.
C) risk averse commission plans.
D) benefits.

Question 33

To help with motivation, long-term productivity, and retention, firms with internal labor markets tend to offer all of the following except which of the following?

A) Efficiency wages.
B) Benchmark competitive wages.
C) Pay based on job seniority.
D) Internally based promotion systems.

Question 34

Large company-paid employee benefits packages can alter behavior and encourage:

A) output enhancement.
B) shirking.
C) incentive pay packages.
D) compensating differentials.

Question 35

If a firm is inundated by qualified employees when it advertises a job opening and the firm's quit rate is unusually low, then the firm is probably paying:

A) a below market wage.
B) a market wage.
C) an above market wage.
D) no wage at all.

Question 36

The gains from general training goes to:

A) neither to the firms, nor to the employees, but to the training institute.
B) both firms and employees.
C) firms, not employees.
D) employees, not firms.

Question 37

When a company is very dependent on firm-specific human capital, it makes sense for the company to:

A) use only benchmark competitive wage rates.
B) offer compensating differentials for hardships.
C) develop programs for sending employees to the local university.
D) create a extensive internal labor system for career advancement.

Question 38

The typical salary/benefit mix for full-time workers in US business is:

A) 90% salary, 10% benefits.
B) 75% salary, 25% benefits.
C) 55% salary, 45% benefits.
D) 100% salary, benefits are illegal.

Question 39

In the basic competitive model of labor markets we assume that:

A) all compensation is either monetary or given as fringe benefits.
B) all compensation is monetary. There are lots of fringe benefits included.
C) all compensation is monetary. There are some fringe benefits included.
D) all compensation is monetary. There are no fringe benefits.

Question 40

When a firm focuses on hiring only for entry-level jobs and it tends to promote from within the firm, then the firm is said to:

A) use the benchmark competitive labor market.
B) have an internal labor market.
C) hire based on human capital.
D) use compensating differentials.

Question 41

We know that a firm is paying way below the market if:

A) the number of applications for a job posting is high and the quit rate is low.
B) the number of applications for a job posting and the quit rate are high.
C) the number of applications for a job posting and the quit rate are low.
D) the number of applications for a job posting is low and the quit rate is high.

Question 42

Self-selection:

A) has nothing to do with compensating wage differential.
B) leaves the compensating wage differential unchanged.
C) increases the compensating wage differential.
D) reduces the compensating wage differential.

Question 43

Over ½ of all the men and ¼ of all the women in the US:

A) work for the same employer for at least 5 years.
B) work for the same employer for at least 10 years.
C) work for the same employer for at least 15 years.
D) work for the same employer for at least 20 years.

Question 44

A waiter in an all-night restaurant in a dangerous location receiving a higher wage rate is receiving:

A) a part of reality captured by the competitive model.
B) returns to general training.
C) returns to specific human capital.
D) compensating wage differential.