ECON 115 - Labor Economics Drake University, Spring 2017 William M. Boal

### Version A

I. Multiple choice

(1)d. (2)b. (3)b. (4)b. (5)error in question--correct answer is 0.4. (6)a. (7)b. (8)a. (9)c. (10)b. (11)d.

II. Problems

(1) [Measuring inequality: 15 pts]

1. TercileAnnual wage Share of earningsCumulative share
Lowest\$10 thousand 5 percent5 percent
Middle\$50 thousand 25 percent30 percent
Highest\$140 thousand 70 percent100 percent
2. Lorenz curve passes through (33,5) and (67,30).
3. Gini = 0.433.
4. 90-10 wage gap = 1300 percent.
5. 90-50 wage gap = 180 percent.
6. 50-10 wage gap = 400 percent.

(2) [Shifts in relative supply and demand: 10 pts]

1. decrease.
2. increase.
3. increase.
4. decrease.
5. decrease.
6. increase.
7. decrease.
8. increase.
9. decrease.
10. increase.

(3) [Joint migration decision: 6 pts]

1. Net gain from migration = \$320,000, positive, so they will move.
2. Penny's individual net gain is also positive, so she is neither a tied stayer nor a tied mover.
3. Leonard's individual net gain is negative. If single he would NOT move, so he is a tied mover.

(4) [Roy model: 6 pts]

1. Workers move if the net gain from migration is positive--that is, if wA < wB - moving cost . Substituting and solving for S gives S < 30.
2. Negatively selected, since workers from the low end of the distribution of S will move.

(5) [Immigration surplus: 8 pts]

1. \$13.
2. \$9.
3. Immigration surplus = area of triangle = \$80 million.
4. Transfer from domestic workers to employers = \$480 million.

(6) [Oaxaca decomposition: 6 pts]

1. Raw log wage differential is found by substituting each group's average schooling into its own wage equation, to give 3.4 - 2.2 = 1.2.
2. The log wage differential due to schooling equals the coefficient of schooling for green workers (who are not subject to discrimination) times the difference in average schooling = 0.15 (16-13) = 0.45.
3. The log wage differential due to discrimination is given by the difference in intercepts, plus the difference in slopes times blue workers' average schooling, or (1.0-0.9) + (0.15-0.10)13 = 0.75. Alternatively, the differential due to discrimination may be computed as the raw log wage differential minus the differential due to schooling.

(7) [Employer preference discrimination: 18 pts]

1. The firm that does not discriminate hires only blue workers because they are cheaper. Set VMP = price × MPE = \$10 and solve to get EB = 36. Substitute into production function to get q = 180 units. Compute profit as total revenue minus labor cost to get \$360.
2. This firm hires only green workers because it perceives blue workers' wage as 10 (1+0.6) = \$16, more expensive than green workers. Set VMP = price × MPE = \$15 and solve to get EG = 16. Substitute into production function to get q = 120 units. Compute profit as total revenue minus labor cost to get \$240.
3. This firm hires only blue workers because it perceives their wage as 10 (1+0.2) = \$12, still cheaper than green workers. Set VMP = price × MPE = \$12 and solve to get EB = 25. Substitute into production function to get q = 150 units. Compute profit as total revenue minus (true) labor cost to get \$350.

(8) [Monopsony wage discrimination: 12 pts] This is similar to problem (2) on Exam 2, but with two groups of workers.

1. MLCG = 6 + (2 EG / 10). MLCB = 2 + (2 EG / 5).
2. For each group, set VMP equal to MLC and solve for E. This gives EG = 70 and EB = 45.
3. Substitute into supply equations to get wG = \$13 and wB = \$11.
4. Substitute the minimum wage into the supply equation for each group to get EG = 90 and EB = 65.

III. Critical thinking

1. Autor, Katz and Kearney showed that both employment and average earnings in middle-skilled jobs decreased. Only a leftward shift in demand is compatible with both a decrease in employment and a decrease in average earnings.
2. Graph should show demand and supply for middle-skilled jobs. Graph should show a leftward shift in demand curve, while supply curve remains fixed. Result should be an decrease in equilibrium wage and a decrease in equilibrium employment of workers in middle-skilled jobs.
3. If computers increasingly can perform the routine tasks of middle-skilled jobs, then advancing computer technology caused this shift in demand.

### Version B

p>I. Multiple choice

(1)a. (2)c. (3)c. (4)a. (5)error in question--correct answer is 0.4. (6)b. (7)c. (8)d. (9)c. (10)d. (11)a.

II. Problems

(1) [Measuring inequality: 15 pts]

1. TercileAnnual wage Share of earningsCumulative share
Lowest\$20 thousand 10 percent10 percent
Middle\$60 thousand 30 percent40 percent
Highest\$120 thousand 60 percent100 percent
2. Lorenz curve passes through (33,10) and (67,40).
3. Gini = 0.333.
4. 90-10 wage gap = 500 percent.
5. 90-50 wage gap = 100 percent.
6. 50-10 wage gap = 200 percent.

(2) [Shifts in relative supply and demand: 10 pts]

1. increase.
2. decrease.
3. remain constant.
4. remain constant.
5. increase.
6. increase.
7. decrease.
8. increase.
9. decrease.
10. increase.

(3) [Joint migration decision: 6 pts]

1. Net gain from migration = -\$20,000, negative, so they will NOT move.
2. Penny's individual net gain is positive. If single, she would move, so is a tied stayer.
3. Leonard's individual net gain is negative, so he is neither a tied mover nor a tied stayer.

(4) [Roy model: 6 pts]

1. Workers move if the net gain from migration is positive--that is, if wA < wB - moving cost . Substituting and solving for S gives S > 80.
2. Positively selected, since workers from the high end of the distribution of S will move.

(5) [Immigration surplus: 8 pts]

1. \$15.
2. \$13.
3. Immigration surplus = area of triangle = \$20 million.
4. Transfer from domestic workers to employers = \$200 million.

(6) [Oaxaca decomposition: 6 pts]

1. Raw log wage differential is found by substituting each group's average schooling into its own wage equation, to give 2.8 - 2.3 = 0.5.
2. The log wage differential due to schooling equals the coefficient of schooling for green workers (who are not subject to discrimination) times the difference in average schooling = 0.12 (15-14) = 0.12.
3. The log wage differential due to discrimination is given by the difference in intercepts, plus the difference in slopes times blue workers' average schooling, or (1.0-0.9) + (0.12-0.10)14 = 0.38. Alternatively, the differential due to discrimination may be computed as the raw log wage differential minus the differential due to schooling.

(7) [Employer preference discrimination: 18 pts]

1. The firm that does not discriminate hires only blue workers because they are cheaper. Set VMP = price × MPE = \$10 and solve to get EB = 36. Substitute into production function to get q = 180 units. Compute profit as total revenue minus labor cost to get \$360.
2. This firm hires only blue workers because it perceives their wage as 10 (1+0.5) = \$15, still cheaper than green workers. Set VMP = price × MPE = \$15 and solve to get EB = 16. Substitute into production function to get q = 120 units. Compute profit as total revenue minus (true) labor cost to get \$320.
3. This firm hires only green workers because it perceives blue workers' wage as 10 (1+1.6) = \$25, more expensive than green workers. Set VMP = price × MPE = \$20 and solve to get EG = 9. Substitute into production function to get q = 90 units. Compute profit as total revenue minus labor cost to get \$180.

(8) [Monopsony wage discrimination: 12 pts] This is similar to problem (2) on Exam 2, but with two groups of workers.

1. MLCG = 8 + (2 EG / 20). MLCB = 4 + (2 EG / 10).
2. For each group, set VMP equal to MLC and solve for E. This gives EG = 120 and EB = 80.
3. Substitute into supply equations to get wG = \$14 and wB = \$12.
4. Substitute the minimum wage into the supply equation for each group to get EG = 140 and EB = 110.

III. Critical thinking

Same as Version A.