CHAPTER REVIEW

FACTS AND TOOLS

Question 18.7

1. In Chapter 3, we listed six important demand shifters. Since the demand for labor is like the demand for any other good, those same factors apply here. Let’s look at factors that might shift the demand for janitors at the McDonald’s we discussed. For each of the following cases, state whether labor demand will rise or fall, and also state which of the six factors seems to be causing the shift in demand.

  1. A new junior high school opens up across the street from the McDonald’s.

  2. Customers become much more concerned about clean restaurants: They’ll walk out if there’s dirt on the floor.

  3. As robots like the Roomba vacuum cleaner become cheaper, the McDonald’s buys some robots to do half of the janitors’ work.

Question 18.8

2. Now let’s do the same with shifts in Joe’s labor supply from Figure 18.2. We listed five important supply shifters in Chapter 3. For each example, state whether you think Joe’s labor supply will tend to increase or decrease as a result of the change, and state which of the five factors seem to cause the supply shift.

  1. The government raises Joe’s income tax rate, so now he pays 20% of his wages to the government instead of the old 10%.

  2. The price of comfortable work shoes falls dramatically. Now, his feet won’t ache nearly as much after a full day of work.

    347

  3. While in Las Vegas for the weekend, Joe wins a $1 million jackpot.

Question 18.9

3. Let’s apply the idea of compensating differentials to janitorial jobs. Suppose there are two quite similar restaurants in the same town, OrangeBee’s and the City Inn. Both have the same demand for janitorial labor. But all the janitors in town know that it’s much more fun to work at City Inn.

  1. Which restaurant will pay a higher wage for janitors? Why?

  2. Which restaurant will hire more janitors? Why?

Question 18.10

4. According to the theory of compensating differentials, which low-skilled jobs in the United States will tend to pay the most:

  1. The safe jobs or the dangerous jobs?

  2. The fun jobs or the boring jobs?

  3. The dead-end jobs or the first-rung-on-the-ladder jobs?

Question 18.11

5. As mentioned, OSHA fines companies for unsafe workplaces. At the same time, the labor market also “fines” companies that give their workers dangerous jobs. The fines of the marketplace are larger than the U.S. government’s fines by about what factor: a factor of 10, of 100, of 1,000, or of 10,000?

Question 18.12

6. The director of human resources at ToyCo is hiring new engineers. She’s got a stack of 250 applications, and she’s going to do a little research. She sits down and does a little cyber-snooping on all 250, and she finds the following:

  1. Of the 150 who have Facebook pages, 50 are holding a bottle of beer in their profile photo, and 100 aren’t.

  2. Of the 100 who have their own Web sites, 20 have more than two typos.

  3. Of the 150 who have Facebook pages, 25 have at least two friends who have apparently spent time in prison, according to a quick check of public records.

  1. Each of these are cases of sending bad signals. In each case, describe what you think these might be signals of.

  2. In each case, is the bad signal 100% correct? For example, is every applicant with three or four typos on their personal Web site worse than every applicant with an error-free page?

  3. In each case, is the bad signal probably better or probably worse than having no signal at all? In other words, should the bad signal get at least a little bit of weight in the balance if the HR director’s only goal is to hire the best workers?

Question 18.13

7. It is commonly said that women earn 80 cents for every dollar that a man earns, even when doing the same job. Let’s assume this is literally true in order to see how an entrepreneur would respond to this fact.

  1. Netrovia, a battery manufacturer, has an all-male workforce. It pays $10 million per year in salary to these men, and has annual profits of $1 million. You’ve just been hired as an outside consultant to help Netrovia raise its profits. Your advice is to fire all the men and replace them with women. If Netrovia followed your advice, what would Netrovia’s salary costs fall to? How much would this decision raise Netrovia’s profits?

  2. After your success at Netrovia, you start getting a lot more consulting jobs. You give the same advice to all the companies looking to boost profits: Fire your men and hire an all-female workforce for 20% less. What will this do to the demand for female labor? And what will this tend to do to women’s wages?

Question 18.14

8. Michael Lynn, a social psychologist in Cornell’s School of Hotel Administration, has spent years studying tipping (his homepage has well tested advice on how to increase your tips). He finds that men tip more when they have a female server, while women tend to tip more when they have a male server. This sounds a lot like discrimination by customers.

  1. If this is a fact, who will tend to apply for jobs waiting tables at truck stops: mostly men or mostly women?

  2. If this is a fact, who will tend to apply for jobs waiting tables at steakhouses: mostly men or mostly women?

  3. If this is a fact, who will tend to apply for jobs waiting tables at vegetarian restaurants: mostly men or mostly women?

  4. In these three cases, does your experience match up with what this simple theory predicts? If there’s a contradiction, what do you think the simple model is missing?

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Question 18.15

9. True or false?

  1. The marginal product of labor is the amount of extra profit that a firm will earn if it hires one more worker.

  2. The benefit of having a college education has increased since the 1960s.

  3. The wage gap between high school graduates and high school dropouts is insignificant.

  4. By definition, a labor supply curve cannot have a negative slope.

  5. Compensating differentials is a government program that pays injured workers.

  6. The main reason that an immigrant earns more when he moves from Algeria to France is because the French have strong labor unions.

  7. If customers are racist and sexist, then self-interest will tend to push entrepreneurs to engage in racist and sexist hiring.

  8. If some employers are bigots but others are not, the bigoted employers will be able to hire good workers for less money and will tend to drive the fair-minded employers out of business.

THINKING AND PROBLEM SOLVING

Question 18.16

1. Construction jobs in New Chongqing pay $20 per hour. The job isn’t that safe: a lot of sharp objects, a lot of ways to fall off a building. The city council of New Chongqing decides to set some job safety regulations for the construction industry. Let’s assume that the government enforces these new regulations effectively and fairly, so that half as many workers get hurt on the job. Let’s also assume that the city council makes the taxpayers pay the cost of making these jobs safer, so there’s no noticeable shift in the labor demand curve.

  1. After these new job safety regulations come into effect, will workers be more willing to take these jobs than before or less willing than before?

  2. Is that like a rise in the supply of labor or like a fall in the supply of labor?

  3. Let’s put it all together: What will these job safety regulations do to the wage for construction jobs in New Chongqing?

  4. What principle from this chapter does this illustrate?

  5. In the United States, OSHA doesn’t make taxpayers pay the cost of making jobs safer. Instead, OSHA requires employers to spend the money themselves to make their firm’s jobs safer. Thus, OSHA requirements work like a tax on labor demand. What would this probably do to the demand curve for construction labor: Would it increase or decrease construction labor demand?

Question 18.17

2. One way to think about wages for different jobs is to see it as another application of the law of one price. We came across this law when we discussed speculation in Chapter 7, and it came up again when we discussed international trade in Chapter 9. The basic idea is that the supply of workers will keep adjusting until jobs that need the same kinds of workers earn the same wage. If similar workers earned different wages, then the workers in the low-paid jobs would reduce their labor supply, and the workers in the high-paid jobs would face more competition from those low-paid workers.

Let’s look at 100 computer programmers who are trying to decide whether to work for one of two companies: Robotron or Korrexia. To keep things simple, assume that both companies are equally fun to work for, so you don’t need to worry about compensating differentials here. The marginal product of labor (per additional hour of work) is in the following table:

Number of Programmers per Firm

Robotron’s MPL ($)

Korrexia’s MPL ($)

  10

200

110

  20

150

  80

  30

120

  60

  40

110

  50

  50

  80

  40

  60

  60

  20

  70

  50

  10

  80

  40

    0

  90

  20

    0

100

  10

    0

349

  1. These two firms are the whole market for programmer labor. In the next table, estimate the programmer demand curve by adding up the quantity of programmers demanded at each wage. For example, at a wage of $80 per hour, Robotron would hire 50 workers (since the first 50 workers have a MPL ≥ 80) and Korrexia 20, so the total demand is 70 workers.

    Wage ($)

    Number of Programmers Demanded

    200

    10

    150

    120

    110

      80

    50 + 20 = 70

      60

      50

      40

      20

      10

  2. The programmers in this town are going to work at one of these two places for sure: Their labor supply is vertical, or in other words, perfectly inelastic, with supply = 100. So, what will the equilibrium wage be? Just as in Figure 18.1, the numbers may not work out exactly—so use your judgment to come up with a good answer.

  3. Now, head back to the first table: About how many programmers will work at Robotron and how many at Korrexia? Again, use your judgment to come up with a good answer.

  4. Suppose 50 more programmers come to town. What will the wage be now? And how many will work at each firm?

Question 18.18

3. We’ve seen what happens when job safety regulations are imposed. Now let’s see what happens when they’re taken away.

  1. If a radical free-market, antiregulation government comes to power in the land of Pelerania, and it begins dismantling job safety regulations, what will this tend to do to the supply of labor for dangerous jobs in Pelerania: Will it increase or decrease?

  2. Will that push wages in dangerous jobs up or down?

  3. What will this do to the supply of labor in safer jobs? And to the number of people working in safer jobs?

  4. Overall, will employers have to pay for their decision to offer dangerous jobs, or will they have a free lunch handed to them by the new government?

Question 18.19

4. As we saw, unions can raise wages in a sector of the economy by restricting the number of workers in that sector. Let’s see what tends to happen to the workers who don’t get jobs in those favored unionized sectors. We’ll recycle the computer programmer data to illustrate:

Number of Programmers per Firm

Robotron’s MPL ($)

Korrexia’s MPL ($)

  10

200

110

  20

150

  80

  30

120

  60

  40

110

  50

  50

  80

  40

  60

  60

  20

  70

  50

  10

  80

  40

    0

  90

  20

    0

100

  10

    0

  1. As before, there are 100 workers. In 2084, after decades of complaining about low wages, the programmers at Robotron have a secret-ballot vote and form a union. Their new union bargains for a wage of $80 per hour, and the newly unionized programmers are very excited. How many workers will Robotron hire at the new, higher wage?

  2. How many Robotron workers just got laid off? Compare your answer to part a against the answer to question 2c to find out.

  3. A natural choice for the other programmers is to look for work at Korrexia: As before, the remaining workers have perfectly inelastic labor supply, so all 100 workers are going to work at one of the two firms. What’s the wage for the nonunion Korrexia workers? How many programmers work for Korrexia?

    350

  4. You might think that one solution is to unionize both firms and lift wages for all the programmers. If the unions negotiate a high-wage contract and unionized wages rise to $110 at both firms, how many of the 100 workers will have jobs?

Question 18.20

5. Suppose that we tax CEO salaries very highly, as some are proposing in the United States. What is your prediction about CEO perks such as jets and in-house chefs?

Question 18.21

6.

  1. The average person doesn’t like working the night shift. According to the theory of compensating differentials, are night-shift wages probably higher or lower than day-shift wages?

  2. Most companies do their high-skilled work during the day shift: The big meetings, the major deliveries, the crucial repair work—all get done during the day. As a result, firms prefer to hire workers with more human capital during day-shift work, and they prefer to hire less-skilled workers at night. According to the theory of human capital, are night-shift wages probably higher or lower than day-shift wages?

  3. Just based on these two theories, will night-shift work pay more than day-shift work on average, will it pay less on average, or can’t you tell with the information given?

  4. Economist Peter Kostiuk, in a 1990 article in the Journal of Political Economy, wanted to see whether the theory of compensating differentials was true for U.S. workers. He had information on the wages, education backgrounds, and work experience of U.S. workers, and he knew whether they worked the day shift or the night shift. On average, those who worked the night shift actually earned about 4% less than workers on the day shift. Is this probably because of compensating differentials, or is it probably because of human capital differences?

  5. Kostiuk then used statistical techniques to simulate how much a typical low-skilled worker would earn if he were switched from the day shift to the night shift. The answer? The low-skilled worker would earn 44% more money, on average. Is this 44% wage increase caused by lower supply of night-shift labor, or is it caused by a higher demand for night-shift labor?

Question 18.22

7. True or false? Morticians are paid lower wages than other workers because very few people want to work with dead bodies.

Question 18.23

8. One way that Jim Crow segregation laws operated was by providing worse government schools for black students. This widened the human capital gap between black workers and white workers (this human capital gap has narrowed dramatically since the successes of the 1960s Civil Rights Movement). Would this form of government segregation tend to increase statistical discrimination on the basis of race or lower it? How can you tell?

Question 18.24

9. In the United States, it’s legal to work for free: We call this an “unpaid internship.”

  1. Why will college students take these zero-wage jobs when they could get a minimum wage job instead?

  2. Which idea in this chapter does this sound like?

  3. Just for thought: Why do you think federal law allows people to work for free, but not for $1 per hour? Is it just an oversight on the part of government, or do you think there’s some grand design at work?

CHALLENGES

Question 18.25

1. In the decades after the Civil War, most streetcar companies in the South discriminated against one class of citizens: smokers. Customers who wanted to smoke had to ride in the back of the car. Around 1900, many governments in the South passed laws mandating segregation by race instead. As Jennifer Roback documented in the Journal of Economic History in 1986, many streetcar operators protested against this new form of segregation. Assuming that these entrepreneurs were driven by self-interest alone rather than a desire for equality, why would they do that?

Question 18.26

2. We mentioned that “a [college] degree signals… something good about the job candidate, namely that they have enough intelligence, competence, and conscientiousness to earn a college degree.” This view, put forward by Nobel laureate Michael Spence, is unsurprisingly known as the signaling theory of education. Taken to the extreme, signaling theorists say that you suffer through college not because you get valuable job skills, but only because it’s a good way to prove that you were already smart and capable before you started college.

351

  1. Suppose you want to prove this theory wrong: You want to show that college courses really do make you a better worker, just like the human capital theorists say. How would you go about proving that? Remember, just showing that college graduates earn more isn’t evidence!

  2. If that’s too difficult, at least explain why the following plausible-sounding tests of human capital vs. signaling aren’t very good tests at all:

    1. Looking at wages of people with degrees compared with people without degrees

    2. Comparing wages for people whose parents can afford college with wages for people whose parents can’t afford college

Question 18.27

3. In a market economy, firms with more workers can make and sell more output—that goes without saying. The marginal product of labor tells you how much extra revenue each extra worker generates. Economists tend to use one particular equation to sum up the link between workers, revenue, and the marginal product of labor: We call it the production function. Let’s practice with it just a little here.

  1. At Dunder Mifflin, the hourly revenue production function works like this:

    This is a way of saying that in order to sell product, you actually need workers to do work. Use this formula to fill out the “Total Revenue” column in the next table.

    Number of Workers

    Total Revenue ($)

    Marginal Product of Labor ($)

    0

        0

    N/A

    1

    100

    100

    2

    141

      41

    3

    4

    5

  2. As we mentioned in the chapter, the marginal product of labor is the extra revenue that’s generated by each extra worker. It’s the change in revenue from adding one more worker. Fill out that column, as well.

  3. If the market wage for semiskilled workers is $25 per hour, how many workers should Dunder Mifflin hire?

Question 18.28

4. In Chapter 8, we analyzed a minimum wage in the usual way, as a price floor, and we showed that a minimum wage creates unemployment. Now suppose that firms must pay the minimum wage but they can adjust the working conditions, such as increasing the pace of work, reducing lunch breaks, cutting back on employee discounts, and so forth. Will the minimum wage create (as much) unemployment if firms adjust in this way? (Hint: Think of the balance in Figure 18.7.)

!launch! WORK IT OUT

One way to think about wages for different jobs is to see it as another application of the law of one price. We came across this law when we discussed speculation in Chapter 7, and it came up again when we discussed international trade in Chapter 9. The basic idea is that the supply of workers will keep adjusting until jobs that need the same kinds of workers earn the same wage. If similar workers earned different wages, then the workers in the low-paid jobs would reduce their labor supply, and the workers in the high-paid jobs would face more competition from those low-paid workers.

Let’s look at 100 computer programmers who are trying to decide whether to work for one of two companies: Robotron or Korrexia. To keep things simple, assume that both companies are equally fun to work for, so you don’t need to worry about compensating differentials here. The marginal product of labor (per additional hour of work) is in the following table:

352

Number of Programmers per Firm

Robotron’s MPL ($)

Korrexia’s MPL ($)

  10

100

  55

  20

  75

  40

  30

  60

  30

  40

  55

  25

  50

  40

  20

  60

  30

  10

  70

  25

    5

  80

  20

    0

  90

  10

    0

100

    5

    0

  1. These two firms are the whole market for programmer labor. In the next table, estimate the programmer demand curve by adding up the quantity of programmers demanded at each wage. For example, at a wage of $40 per hour, Robotron would hire 50 workers (since the first 50 workers have a MPL ≥ 40) and Korrexia 20, so the total demand is 70 workers.

    Wage ($)

    Number of Programmers Demanded

    100

    10

      75

      60

      55

      40

    50 + 20 = 70

      30

      25

      20

      10

        5

  2. The programmers in this town are going to work at one of these two places for sure: Their labor supply is vertical, or in other words, perfectly inelastic, with supply = 100. So, what will the equilibrium wage be? Just as in Figure 18.1, the numbers may not work out exactly—so use your judgment to come up with a good answer.

  3. Now, head back to the first table: About how many programmers will work at Robotron and how many at Korrexia? Again, use your judgment to come up with a good answer.

  4. Suppose 50 more programmers come to town. What will the wage be now? And how many will work at each firm?