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1Modern Labor Economics, 12e (Ehrenberg/Smith) Chapter 8 Compensating Wage Differentials and Labor Markets1) 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. ...

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Modern Labor Economics, 12e (Ehrenberg/Smith) Chapter 8 Compensating Wage Differentials and Labor Markets 1) 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. Answer: D Question Status: Old 2) 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. Answer: A Question Status: Old 3) 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. Answer: C Question Status: Old 4) 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. Answer: C Question Status: Old 5) 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. Answer: C Question Status: Old

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6) 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. Answer: B Question Status: Old 7) 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: D Question Status: Old 8) 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. Answer: C Question Status: Old 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. Answer: A Question Status: Old 10) 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. Answer: B Question Status: Old

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11) 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. Answer: B Question Status: Old 12) 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: B Question Status: Old 13) 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: D Question Status: Old 14) 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. Answer: C Question Status: Old 15) 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. Answer: A Question Status: Old

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16) 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. Answer: A Question Status: Old 17) 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. Answer: B Question Status: Old 18) 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. Answer: B Question Status: Old 19) 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. Answer: C Question Status: Revised 20) 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. Answer: D Question Status: Old 4 Copyright © 2015 Pearson Education, Inc.

21) 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. Answer: D Question Status: Old 22) 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. Answer: B Question Status: Old 23) 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. Answer: C Question Status: Old 24) 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. Answer: A Question Status: Old 25) 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 Answer: B Question Status: Old

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26) 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. Answer: D Question Status: Revised 27) 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. Answer: A Question Status: New 28) 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. Answer: C Question Status: Old 29) 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. Answer: B Question Status: New

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30) 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 Answer: C Question Status: Old 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. Answer: D Question Status: Old 32) 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. Answer: C Question Status: Old 33) 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 Answer: A Question Status: Old

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34) 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 Answer: C Question Status: Old 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 B) when A) worker A has a more curved (bowed in) set of indifference curves. 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. Answer: A Question Status: Old 36) 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? Answer: Nonpecuniary refers to factors of a job that are non-monetary or unrelated to the rate of pay in the job. Examples of nonpecuniary aspects of a job include the cleanliness or dirtiness of the workplace, the flexibility of the work schedule, the amount of physical labor required, the type and amount of fringe benefits, the location of the workplace, the degree of autonomy, the degree of stress, the prestigiousness of the work, the degree of risk to personal safety, and the degree of boredom or intellectual engagement of the work. We would expect, other things being equal, jobs with more unpleasant or less desirable nonpecuniary aspects to pay more and jobs with more pleasant or desirable working conditions to pay less. Question Status: New 37) What is a compensating wage differential? What socially desirable ends does a compensating wage differential serve? Answer: A compensating wage differential is the extra wage (or wage premium) that must be paid in order to attract workers to a job with an undesirable working condition. A compensating wage differential serves a social need because it gives individuals the incentive to voluntarily do unpleasant or undesirable work. A compensating wage differential also serves as a reward to those individuals willing to accept undesirable or unpleasant jobs by paying more than what is paid to comparable workers in more pleasant or desirable jobs. Question Status: New

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38) The theory of compensating wage differentials rests on three assumptions. State and briefly explain each of the assumptions. Answer: The theory of compensating wage differentials predicts that individuals working jobs with poor working conditions earn higher wages than individuals working under more pleasant conditions. This prediction assumes first that workers are utility maximizers (as opposed to income maximizers). A compensating differential could be observed only if it is the case that some people prefer lower paying but more pleasant jobs. The second assumption that the theory relies on is that workers are well informed regarding relevant working conditions. Some undesirable working conditions are obvious, such as night or weekend work, physical stress, lack of autonomy, and so forth. Other poor working conditions may not be at all obvious, such as exposure to a toxic chemical or material that is not as yet recognized as a toxic substance. The third assumption that the theory relies on is that workers are mobile. Workers must have a range of jobs between which they can choose in order to be able to select job characteristics that match their preferences and avoid jobs that do not fit with their preferences. Question Status: New 39) What are the difficulties inherent in estimating compensating wage differentials empirically? Answer: One problem that researchers face in attempting to estimate a compensating wage differential is that the data must be sufficiently rich in details both about workers and job characteristics in order to properly hold other things equal. Such datasets are notoriously hard to come by. A second problem that confounds estimation of compensating wage differentials is that some job characteristics, while ostensibly disagreeable, are not viewed as disagreeable by everyone. For example, physically demanding work may be regarded by some as appealing rather than unpleasant and as a result we wouldn't observe a compensating differential for such work. Question Status: New 40) 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. Answer: The student should draw a graph with an indifference curve such as in Figure 8.1. The curve is positively sloped because an individual, in order to maintain a given level of utility, requires a greater rate of pay to compensate for assuming a higher level of risk to safety on the job. The indifference curve is convex from below because the individual requires progressively larger increments to the rate of pay for assuming a given increase in risk to safety as the risk to safety gets progressively greater. Question Status: New

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41) 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...