LABOR ECONOMICS TEST QUESTIONS AND SOLUTIONS, 9TH
EDITION BY GEORGE BORJAS|100% PASS!!
1.What three statuses are there on the LM? - ANSWER Employed, unemployed and inactive
2.What is the discouraged worker effect? - ANSWER Poor job finding opportunities → withdraw
from the labor market (=less search effort)
3.For whom is the discouraged worker effect the strongest and for whom not? - ANSWER
relatively strong for: low educated workers, young workers. Hardly any for: higher educate
workers, older workers.
4.What is the added worker effect? - ANSWER Household income ↓→ household labor
supply↑
This is because of spousal insurance, in practice often women because men already participate.
Leisure complementary: opposite effect, if men have more leisure time, women want to enjoy it
with them.
This is an income effect!
5.What is an institution? - ANSWER An institution is a system of laws, norms or conventions
resulting from a collective choice, and providing constraints or incentives which alter individual
choices over labor and pay.
Institutions create a wedge between the value of marginal labor and its remuneration.
6.Which two effects has a wage increase? - ANSWER When the wage increases more people will
enter the labor market and thus labor supply will increase. The effect of an increase in the wage
is ambiguous because it has two opposite effects:
1. Income effect: if the wage goes up then income goes up. With leisure as a normal good,
individuals will buy more leisure and thus the amount of working hours will be reduced
,2. Substitution effect: if the wage goes up, the price of leisure increases. Consumption of leisure
will decrease and the amount of working hours will increase.
7.What is the income effect? - ANSWER the change in consumption resulting from a change in
real income. income goes up, buy more leisure (if leisure is a normal good), and reduce working
hours
8.What is the substitution effect? - ANSWER the change in quantity demanded because of the
change in the relative price of the product price of leisure goes up, consumption goes down,
more working hours.
9.What is the effect of minimum wage? - ANSWER changes the slope of the LS, prevents firms
from hiring workers at a wage below min wage. LS curve makes an upward shift
10.What is the effect of tax on labor? - ANSWER Reduces both LS and LD. This means that there
is less employment and participation. Revenue
11.Why do labor market institutions exist? - ANSWER 1) efficiency
2) equity
3) policy failures
12.What is the lump of labor fallacy? - ANSWER The claim assumes that there is a fixed set of
"work" to be done, and that, if robots take over some of these jobs, there is simply less work to
be done for humans.
- Technology indeed substitutes for human labor, as it is intended to.
- But the assumption of a fixed set of "work" is false, especially in the longer run. Technology
also strongly complements labor, increases productivity, raises earnings and leads to new
demand for labor.
13.Why do quantity policies often not work? - ANSWER - Price (wages) as an adjustment
mechanism
,- Long-term unemployment rate is determined by institutions, not by the amount of labor
supply
14.What is the value of a job? - ANSWER Y -> the value of the labor product obtained when a
firm and a worker engage in production
marginal product of labor: the price of the good multiplied by the increase in output made
possible by hiring an additional worker
15.What is EPL and what negative effect does it has? - ANSWER Employment protection
legislation -> quantity policy
o Makes it costly to adjust number of workers to shocks
o Only payment in case of dismissal of workers → reducing incentive to shed labor
o Gives more power to trade unions in wage bargaining → higher wage → lower aggregate
employment
o EPL negatively affect employment
16.What is labor hoarding and what are the three signals? - ANSWER Employers retain their
workers so as to avoid future hiring costs.
There are different signals:
1. Productivity decline
2. Long-term 'stable relation' between GDP and Unemployment is broken
3. Employers survey
17.What is wage rigidity and what are the arguments? - ANSWER Wage is difficult to change
downward.
you have DRWR and DNWR
Arguments:
- Worker motivation
- Implicit wage insurance through employer
, - Worker preferences/bargaining power/unions
18.Are long-term unemployed on the margin of the labor market? - ANSWER Effect of LTU on
wage and on vacancies
LTU become divorced from the labor market
o No relation between wages and LTU (real wage Philips curve)
o No relation between vacancies and LTU (beveridge curve)
o Same results as Krueger finds in the US
Policy implications: The labor market cannot solve the LTU problem by itself → prevention
seems key
19.What is hysterisis? - ANSWER Cyclical unemployment workers could lose some of their skills,
making a cyclical shock persistent or even permanent.
Cyclical unemployment → long-term unemployment → discouraged → long-term discouraged
→ permanently out of the labor force?
Also productivity channel: productivity loss → lower labor supply or unemployment if (nominal)
wage rigidity.
20.What are the pros and cons of short term working schemes? - ANSWER Pro: conservation of
firm-specific capital
Con: inefficient firms are kept alive
21.What is a flexible labor market and what are the pros and cons? - ANSWER Unemployment
may rise quickly after (demand) shock. But may also decrease quickly when the economy
recovers.
Pro:
- More efficient economy (if it needs to be reorganized)
- Quick recovery: les chance of prolonged unemployment and hysteresis
Con:
- Volatile economy → household uncertainty
EDITION BY GEORGE BORJAS|100% PASS!!
1.What three statuses are there on the LM? - ANSWER Employed, unemployed and inactive
2.What is the discouraged worker effect? - ANSWER Poor job finding opportunities → withdraw
from the labor market (=less search effort)
3.For whom is the discouraged worker effect the strongest and for whom not? - ANSWER
relatively strong for: low educated workers, young workers. Hardly any for: higher educate
workers, older workers.
4.What is the added worker effect? - ANSWER Household income ↓→ household labor
supply↑
This is because of spousal insurance, in practice often women because men already participate.
Leisure complementary: opposite effect, if men have more leisure time, women want to enjoy it
with them.
This is an income effect!
5.What is an institution? - ANSWER An institution is a system of laws, norms or conventions
resulting from a collective choice, and providing constraints or incentives which alter individual
choices over labor and pay.
Institutions create a wedge between the value of marginal labor and its remuneration.
6.Which two effects has a wage increase? - ANSWER When the wage increases more people will
enter the labor market and thus labor supply will increase. The effect of an increase in the wage
is ambiguous because it has two opposite effects:
1. Income effect: if the wage goes up then income goes up. With leisure as a normal good,
individuals will buy more leisure and thus the amount of working hours will be reduced
,2. Substitution effect: if the wage goes up, the price of leisure increases. Consumption of leisure
will decrease and the amount of working hours will increase.
7.What is the income effect? - ANSWER the change in consumption resulting from a change in
real income. income goes up, buy more leisure (if leisure is a normal good), and reduce working
hours
8.What is the substitution effect? - ANSWER the change in quantity demanded because of the
change in the relative price of the product price of leisure goes up, consumption goes down,
more working hours.
9.What is the effect of minimum wage? - ANSWER changes the slope of the LS, prevents firms
from hiring workers at a wage below min wage. LS curve makes an upward shift
10.What is the effect of tax on labor? - ANSWER Reduces both LS and LD. This means that there
is less employment and participation. Revenue
11.Why do labor market institutions exist? - ANSWER 1) efficiency
2) equity
3) policy failures
12.What is the lump of labor fallacy? - ANSWER The claim assumes that there is a fixed set of
"work" to be done, and that, if robots take over some of these jobs, there is simply less work to
be done for humans.
- Technology indeed substitutes for human labor, as it is intended to.
- But the assumption of a fixed set of "work" is false, especially in the longer run. Technology
also strongly complements labor, increases productivity, raises earnings and leads to new
demand for labor.
13.Why do quantity policies often not work? - ANSWER - Price (wages) as an adjustment
mechanism
,- Long-term unemployment rate is determined by institutions, not by the amount of labor
supply
14.What is the value of a job? - ANSWER Y -> the value of the labor product obtained when a
firm and a worker engage in production
marginal product of labor: the price of the good multiplied by the increase in output made
possible by hiring an additional worker
15.What is EPL and what negative effect does it has? - ANSWER Employment protection
legislation -> quantity policy
o Makes it costly to adjust number of workers to shocks
o Only payment in case of dismissal of workers → reducing incentive to shed labor
o Gives more power to trade unions in wage bargaining → higher wage → lower aggregate
employment
o EPL negatively affect employment
16.What is labor hoarding and what are the three signals? - ANSWER Employers retain their
workers so as to avoid future hiring costs.
There are different signals:
1. Productivity decline
2. Long-term 'stable relation' between GDP and Unemployment is broken
3. Employers survey
17.What is wage rigidity and what are the arguments? - ANSWER Wage is difficult to change
downward.
you have DRWR and DNWR
Arguments:
- Worker motivation
- Implicit wage insurance through employer
, - Worker preferences/bargaining power/unions
18.Are long-term unemployed on the margin of the labor market? - ANSWER Effect of LTU on
wage and on vacancies
LTU become divorced from the labor market
o No relation between wages and LTU (real wage Philips curve)
o No relation between vacancies and LTU (beveridge curve)
o Same results as Krueger finds in the US
Policy implications: The labor market cannot solve the LTU problem by itself → prevention
seems key
19.What is hysterisis? - ANSWER Cyclical unemployment workers could lose some of their skills,
making a cyclical shock persistent or even permanent.
Cyclical unemployment → long-term unemployment → discouraged → long-term discouraged
→ permanently out of the labor force?
Also productivity channel: productivity loss → lower labor supply or unemployment if (nominal)
wage rigidity.
20.What are the pros and cons of short term working schemes? - ANSWER Pro: conservation of
firm-specific capital
Con: inefficient firms are kept alive
21.What is a flexible labor market and what are the pros and cons? - ANSWER Unemployment
may rise quickly after (demand) shock. But may also decrease quickly when the economy
recovers.
Pro:
- More efficient economy (if it needs to be reorganized)
- Quick recovery: les chance of prolonged unemployment and hysteresis
Con:
- Volatile economy → household uncertainty
