University of North Carolina, Economics 190, Spring, Quiz 2, March 20, 2003

1. A nondiscriminating monopsony will … employ fewer workers and pay a lower wage than a competitive industry would.

2. An increase in the minimum wage can raise both wages and employment if … the employer is a non-discriminating monopsony.

3. With a low discount rate, any given future stream of earnings … has a greater Present Value than with a high discount rate.

4. If ability and schooling are positively correlated then ability bias will tend to … overstate the return to schooling.

5. Roughly, how many workers in the U.S. are unionized today? About 1 in 8.

6. So-called “yellow-dog” contracts … made it a condition of employment that a worker agreed not to join a union.

7. Use a graph to show how the wage and employment level are determined by a (non-discriminating) monopsony. Label stuff.

Look at Figure 5-14 (p. 188) in the book- or check your notes. Note that while MCE=VMP determines the employment level, the firm only pays the wage that is necessary to attract enough workers. And we find that on the labor supply curve.

8. Why have labor economists been interested in identical twins?

[Here are some of the good answers I read. Note that a good answer can be short, as shown here.]

ü “They can examine how education varies the level of income where the ability is equal. This allows them to remove the ability bias.”

ü “Labor economists have been interested in identical twins because they wanted to get rid of ability bias. So they believed that using twins would eliminate the bias and determine the wage difference based on schooling.”

ü “Identical twins- in theory- have the same ability. Therefore, if they go to school for different amounts of years, labor economists can use them to determine the effect of schooling on future earnings.”

ü “Because twins get rid of the pesky ability bias. So an economist can go to identical twin conventions, and since the identical twins have the same genes, the economist can test stuff like returns on schooling.”

9. a) What is general on-the-job training?

ü “Training for skills that one can use on any job. These skills are not job/firm specific so the worker can take these skills elsewhere.”

ü “Training that is learned at one company but can be used at or transferred to jobs at other companies.”

ü “General on-the-job training is training that a worker can use at other places of employment. The skills learned are not job specific.”

b) Who ends up paying for it? The worker!

10. Earnings tend to increase with education. What is the ‘signaling’ interpretation of this relationship?

ü “Signaling interprets this relationship by saying that high ability people … go to school so that they can … signal potential employers that they should get higher wages than those people who don’t have as much schooling. Also, signaling says that those people with more education do not receive higher wages because their education actually trained or improved their abilities, but higher education is just an indication that they already have those skills/abilities.”

ü “The signaling interpretation of this relationship is that increased education does NOT make a worker more productive. The human capital interpretation believes the opposite, that workers do become more productive with higher education.”

ü “There are two types of people: h-prod and low prod. High prod signal they’re high prod by schooling, and earn better wages. Schooling is a mechanism for identification, not improvement.”