Labour Market Economics Canadian

8th Edition Benjamin Test Bank

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Consider the diagram for a labour market in which the relevant job attribute is the instability of the
hours. In other words, less stable jobs are characterized by irregular hours, with no guarantee of a
full time job, but with the possibility of overtime hours some weeks. What would the curves look
like?
A) Positively sloped isoprofit and isoutility curves
B) Positively sloped isoprofit curves and negatively sloped isoutility curves
C) Negatively sloped isoprofit and isoutility curves
D) Negatively sloped isoprofit curves and positively sloped isoutility curves
E) The model cannot be used for this situation
Answer: A

2) Consider the diagram for a labour market in which the relevant job attribute is job safety. Why are
the isoprofit curves concave, i.e., bowed in towards the origin?
A) Because the marginal rate of transformation between wages and safety is decreasing as a firm
introduces more sophisticated safety procedure.
B) Because paying higher wages and providing a safer environment for the workers are both costly
for the employer
C) Because a firm's profit decreases if it provides a safer environment for the workers.
D) Because there is a negative trade-off between job safety and wages
E) Because the marginal rate of transformation between wages and safety is increasing as a firm
introduces more sophisticated safety procedure.
Answer: A

3) Which of the following statements does not pertain to wage structures?

A) The wage premiums that compensate workers for working jobs with undesirable characteristics
B) The relative prices of labour that are utilized in order to allocate labour to its most efficient use
C) The lowest wage levels at which workers will accept jobs having certain attributes
D) The relative prices of labour that are used to remunerate human capital
E) None of the answer choices are correct.
Answer: D

4) Which of the following is not a way in which high wages may induce higher productivity?
A) Through greater intensity of work effort
B) Through lower levels of turn over
C) Through reductions in absenteeism
D) Through improved morale
E) Through higher levels of job safety and improved working conditions
Answer: E

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5) An isoprofit schedule is defined as:
A) The various combinations of wages and safety that the firm can provide and maintain the same
level of profits.
B) The various combinations of safety initiatives and wages that the firm can provide and still earn
profit.
C) The variation between profit and loss margins that a firm earns as a function of changing wage
and job safety levels.
D) The various combinations of wages and safety that the firm can provide and maintain the same
level of costs.
E) The various combinations of wages and safety that the firm can provide and maintain the same
level of utility for the labour force.
Answer: A

6) The isoprofit schedule exhibits a(n) ________ between wages and job safety levels.
A) increasing marginal rate of substitution
B) diminishing marginal rate of substitution
C) constant tradeoff
D) diminishing marginal rate of transformation
E) increasing marginal rate of transformation
Answer: D

7) The employers' offer curve shows which of the following?

A) the maximum compensating wages that will be offered in the labour market for various levels
of safety
B) the wage levels offered by employers that are dependent on the required levels of safety and
health
C) the employers' profit-maximizating wages that combines wage and safety levels
D) the minimum compensating wages that will be offered in the labour market for various levels
of safety
E) the employers' preferred combination of wage and safety levels
Answer: A

8) The curvature of the isoutility curve illustrates:

A) the diminishing marginal rate of technical substitution between wages and job safety.
B) the law of diminishing marginal returns applied to wages.
C) a diminishing marginal rate of transformation between wages and job safety.
D) the amount of safety that can be exchanged for wages on the labour market.
E) a diminishing marginal rate of substitution between wages and job safety.
Answer: E

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9) Compensating premiums for job-related risks are normally paid (ceteris paribus) in the form of:
A) certificates of appreciation for working at a tough job.
B) higher degrees of job security.
C) higher wages.
D) time off the job with pay.
E) longer coffee breaks at Tim Hortons.
Answer: C

10) The more ________ the individual, the more he/she requires a ________ compensating wage
differential in return for accepting a riskier work environment.
A) risk-averse; larger
B) risk-averse; smaller
C) risk-neutral; larger
D) risk-loving; larger
E) risk-neutral; smaller
Answer: A

11) Higher isoprofit schedules would imply profits that are ________ the normal, competitive level.
A) greater than or equal to
B) equal to
C) higher than
D) below
E) None of the answer choices are correct.
Answer: D

12) The slope of the wage-safety locus gives:

A) The change in the wage premium that the labour market yields for differences in the preference
of the workers.
B) The change in the wage premium that the market yields for differences in the safety standards
of firms.
C) The change in the wage premium that the labour market yields for differences in the salary of
each worker.
D) The change in the wage premium that the labour market yields for differences in the degree of
risk of the job.
E) The change in profitability that is associated with different combinations of wages and job
safety.
Answer: D

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13) In wage-job safety space, workers' indifference (or isoutility) curves slope downwards because:
A) Workers require a higher compensating wage in order to avoid risky jobs.
B) Workers require a higher compensating wage in order to remain indifferent to the additional
risk.
C) Lower wages are required in order to keep profits constant if a higher degree of job safety is
required.
D) Employers will compensate them for their aversion to risk.
E) More hours of labour are supplied when wages are increased.
Answer: B

14) In
the context of empirical research on compensating differentials, omitted variable bias may exist
when:
A) Samples have selection issues.
B) The information about factors that are correlated with job risk is imperfect.
C) Irrelevant variables are included in the equation.
D) Important variables are not controlled for in the measurement of the wage-risk tradeoff.
E) Employers attempt to hide crucial safety information from their employees.
Answer: D

15) In the context of job related risk, the term "value of life" refers to:
A) people's willingness to pay to save a person's life.
B) more leisure time.
C) people's willingness to pay in order to reduce the risk of death from a job-related accident to
zero.
D) the value that is placed on the possibility of death in a working environment.
E) the average amount of awards in law suits involving wrongful death.
Answer: C

16) How do economists go about estimating the value of life in the context of job safety regulation?
A) They estimate the difference between profits that are earned by firms with dangerous working
conditions versus those with safer working conditions.
B) They take the amounts that are rewarded to victims' families in wrongful death law suits.
C) They never engage in such an exercise, as life is infinitely precious and thus no value can be
placed upon it.
D) They add up the cost of implementing all of the job safety features in firms that have excellent
job safety records.
E) They estimate the compensating wage differential that workers in a dangerous occupation
receive for the level of risk that they assume, and then extrapolate that figure for a scenario in
which the risk is reduced to zero.
Answer: E

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17) Insearching for empirical evidence of the existence of compensating differentials, all of the
following problems are potentially an issue except:
A) error-in-variables problems for the risk variable
B) sample selection bias for the wage equation
C) omitted variable bias in the wage equation
D) simultaneous equation bias problem
E) the wage-safety locus problem
Answer: E

18) Which of the classical economists was the first to analyze the topic of compensating wage
differentials?
A) John Stuart Mill
B) Alfred Marshall
C) David Ricardo
D) Adam Smith
E) John Maynard Keynes
Answer: D

19) With reference to behavioural economics, in the context of compensating differentials, all of the
following statements apply except that:
A) It is based on laboratory experiments in which the choices of workers are observed.
B) The labour market will generate compensating differentials in order to deal with job-related
amenities and disamenities.
C) It makes a case for government intervention and regulation in the workplace.
D) It investigates how individuals make job-related choices (such as working conditions) based on
imperfect information.
E) It gives reasons for why people ignore major infrequent risks or possible disamenties of the job.
Answer: B

20) What does the empirical evidence regarding compensating differentials tend to reveal?
A) Itis hard to find the evidence to support the theory of compensating differentials.
B) There is evidence of the existence of both positive and negative differentials for a wide range
of job amenities and disamenities.
C) They do exist in situations of job safety and work hazards.
D) They do not exist.
E) There is evidence that they exist, but the methodology is so fraught with pitfalls that the
evidence is not deemed to be credible.
Answer: C

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21) Which of the following regarding attracting doctors to rural community is NOT correct?
A) The theory of compensating wages explains that the doctors will move to rural community as
long as a premium is paid.
B) Given the tight budget constraints, government cannot afford to pay the doctors a premium to
attract them in the rural community.
C) Most of the doctors prefer to work and live in the urban area.
D) If moves to rural community, doctors have to pay higher taxes on the salary premia paid by the
government.
E) Rural community does not usually have fully staffed and equipped hospitals.
Answer: D

22) Regarding empirical research on compensating wage differential, which of the following is NOT
correct?
A) Compensating wage premiums are paid for work hazards and they increase with the
seriousness of the risk.
B) Empirical evidences support that individuals would have to be compensated for bearing the
risk of unemployment.
C) Compensating wage premiums are larger in nonunion than in union environments.
D) Empirical evidence shows that overall compensation inequality increased even more than wage
inequality.
E) People in poorer countries are willing (more realistically, constrained) to take on more risk in
return for smaller wage increases than are people in richer countries.
Answer: C

23) Which of the following regarding family-friendly workplace practice is correct?

A) One cannot use the theory of compensating wage differentials to explain family-friendly
workplace practice since it is not a job characteristic.
B) Empirical research finds little evidences to support the use of the theory of compensating wage
differentials to explain family-friendly workplace practice.
C) One cannot use the theory of compensating wage differentials to explain family-friendly
workplace practice since people are not willing to accept lower wages in return to
family-friendly work environment.
D) Practices as the availability of parental leave, flexible working hours, job sharing, and taking
time off work and making it up later are all part of the family-friendly workplace programs
advocated by the government.
E) None of the answer choices are correct.
Answer: D

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 24) Which of the following is correct?
A) In a competitive market, a legislated increase in safety will drive some firms out of the
business.
B) In a competitive market, a legislated increase in safety will make people better off.
C) In a competitive market, imposing safety regulation is easy since all firms will adopt it right
away due to the market competition.
D) In a competitive market, the firm will bear the costs of a legislated increase in safety
regulations.
E) In a competitive market, the application of uniform safety standard will not help weed out the
firms that have low safety technologies.
Answer: E

25) Which of the following is NOT a problem related to the empirical studies of compensating wage
differentials?
A) Simultaneous equation bias
B) Errors-in-variables problems
C) Sample selection bias
D) Specification bias
E) Omitted variables bias
Answer: D

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

26) • Explain in general, intuitive terms the theory of compensating differentials. There is no need to provide a
graphical analysis or to furnish technical details. Your response should address the following issues:
(1) Explain how it fits onto the primary, neo-classical approach to labour economics.
(2) What are the primary elements (what are the curves in this model actually reflecting)?
(3) What are the two primary implications?

• Illustrate this theory by describing the following phenomena:

• very low wages in the child care sector
• very high wages in the mining sector
• high wages in construction
• Explain why an economist like Adam Smith who subscribes to free-market ideology would find this
model so appealing.
Answer: The theory of compensating differentials uses neoclassical approach to explain why wages can be
expected to differ across individuals, especially individuals with equal productivity characteristics.

The model of compensating wage differentials can be applied to any job characteristic, but the most
common application is workplace safety. Firms can choose their production technology to offer
workers greater safety, or they can economize on safety and offer the savings to workers in the
form of higher wages. For any firm, there will generally be a tradeoff in offering more safety
or higher wages, holding constant the level of profits. In the broader labour market, however,
the competition between firms for workers will imply that for any level of safety, the technologically
highest possible wage will be offered, while firms earn zero economic profits. The resulting "menu" of
wage-safety combinations is called the employers' offer curve.
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Workers have preferences over combinations of wages and workplace safety. Obviously, they would
like more of both, but at any level of utility, workers are willing to accept some additional risk
in exchange for higher wages. Not all workers have the same attitudes toward workplace risk
and will put different values on workplace safety. Workers will sort across firms according to
their relative tastes for wages or safety. Those who are least tolerant of risk will choose to work for
those firms offering more safety, at the price of lower wages, while those who are less concerned about
safety will work at the riskier, but higher-paying jobs.

In comparing wages across jobs with different levels of safety, the resulting equilibrium choices of
workers and firms will yield a "market wage-safety locus." Given that most workers value safety (i.e.,
on the margin are willing to buy some additional safety in
the form of lower wages at some price), and that safety is costly for firms to supply, we expect that the
wage-safety locus will show a negative relationship between wages and safety; that is, that wages will
be lower for safer jobs, all else equal.

In general, wages will be higher for some individuals in order to compensate them for doing unpleasan
jobs (or incurring additional costs of employment), while others will willingly accept lower pay for job
with more amenities. Sectors such as child care services, office clergies are low risk sectors, which
average wage is lower than sectors which are high risk, such as mining and construction.

This model is very appealing to many economists who advocate free market competition. In particular,
competitive markets can yield the optimal amount of these characteristics, with compensating wages
being the price that equilibrates markets. This ensures that the need of employers to carry on
production in a manner that may involve undesirable working conditions is required to
confront the need of workers for desirable conditions, and vice versa. This also implies, for
example, that the optimal amount of safety is not zero; people are seldom willing to pay the
price of attaining that otherwise desirable state. In such competitive markets, regulations
setting a uniform standard, such as a health and safety standard run the risk of making the
parties worse off, largely because compensating wages will adjust in a fashion that workers
themselves would not have accepted for the improved working conditions.

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Answer Key
Testname: UNTITLED75

1) A
2) A
3) D
4) E
5) A
6) D
7) A
8) E
9) C
10) A
11) D
12) D
13) B
14) D
15) C
16) E
17) E
18) D
19) B
20) C
21) D
22) C
23) D
24) E
25) D
26) Thetheory of compensating differentials uses neoclassical approach to explain why wages can be expected to diffe
across individuals, especially individuals with equal productivity characteristics.

The model of compensating wage differentials can be applied to any job characteristic, but the most common
application is workplace safety. Firms can choose their production technology to offer workers greater safety,
or they can economize on safety and offer the savings to workers in the form of higher wages. For any
firm, there will generally be a tradeoff in offering more safety or higher wages, holding constant the level
of profits. In the broader labour market, however, the competition between firms for workers will imply that
for any level of safety, the technologically highest possible wage will be offered, while firms earn zero economic
profits. The resulting "menu" of wage-safety combinations is called the employers' offer curve.
Workers have preferences over combinations of wages and workplace safety. Obviously, they would like more of
both, but at any level of utility, workers are willing to accept some additional risk in exchange for higher
wages. Not all workers have the same attitudes toward workplace risk and will put different values on
workplace safety. Workers will sort across firms according to their relative tastes for wages or safety.
Those who are least tolerant of risk will choose to work for those firms offering more safety, at the price of lower
wages, while those who are less concerned about safety will work at the riskier, but higher-paying jobs.

In comparing wages across jobs with different levels of safety, the resulting equilibrium choices of workers and firm
will yield a "market wage-safety locus." Given that most workers value safety (i.e., on the margin are willing to buy
some additional safety in
the form of lower wages at some price), and that safety is costly for firms to supply, we expect that the wage-safety
9
Answer Key
Testname: UNTITLED75

locus will show a negative relationship between wages and safety; that is, that wages will be lower for safer jobs, al
else equal.

In general, wages will be higher for some individuals in order to compensate them for doing unpleasant jobs (or
incurring additional costs of employment), while others will willingly accept lower pay for jobs with more amenitie
Sectors such as child care services, office clergies are low risk sectors, which average wage is lower than sectors
which are high risk, such as mining and construction.

This model is very appealing to many economists who advocate free market competition. In particular, competitive
markets can yield the optimal amount of these characteristics, with compensating wages being the price that
equilibrates markets. This ensures that the need of employers to carry on production in a manner that may
involve undesirable working conditions is required to confront the need of workers for desirable
conditions, and vice versa. This also implies, for example, that the optimal amount of safety is not zero;
people are seldom willing to pay the price of attaining that otherwise desirable state. In such competitive
markets, regulations setting a uniform standard, such as a health and safety standard run the risk of making
the parties worse off, largely because compensating wages will adjust in a fashion that workers themselves
would not have accepted for the improved working conditions.

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