CBE Labor Economics 3 — Questions and Answers
Question 1: Human capital theory predicts that workers who invest in additional education will:
- Earn lower wages due to signaling costs
- Earn higher wages reflecting increased productivity (Correct answer)
- Face higher unemployment rates
- Reduce labor supply in their sector
Correct answer: Earn higher wages reflecting increased productivity
Human capital investments like education raise worker productivity, leading to higher lifetime earnings that compensate for training costs.
Question 2: The crowding hypothesis in labor economics argues that occupational segregation by gender causes:
- Higher wages for women in female-dominated occupations
- Lower wages in occupations where women are concentrated due to excess supply (Correct answer)
- Equal wages across all occupations
- Higher productivity in female-dominated sectors
Correct answer: Lower wages in occupations where women are concentrated due to excess supply
Crowding women into a narrow set of occupations increases labor supply in those fields, depressing wages below competitive levels.
Question 3: Which of the following is an example of a negative externality that might justify minimum wage legislation?
- Workers receiving wages below subsistence require public assistance, imposing costs on taxpayers (Correct answer)
- Higher wages reduce firm profits
- Minimum wages cause unemployment among teenagers
- Workers choose leisure over work at higher wages
Correct answer: Workers receiving wages below subsistence require public assistance, imposing costs on taxpayers
When employers pay wages insufficient for subsistence, workers rely on public transfers, shifting costs to taxpayers — an externality argument for minimum wages.
Question 4: Structural unemployment arises primarily from:
- Seasonal fluctuations in output
- A mismatch between workers' skills and available job requirements (Correct answer)
- Workers voluntarily searching for better jobs
- Cyclical downturns in aggregate demand
Correct answer: A mismatch between workers' skills and available job requirements
Structural unemployment reflects a persistent mismatch between the skills workers have and the skills employers need, often due to technological change.
Question 5: Under a monopsony in the labor market, the equilibrium wage compared to a competitive market wage is:
- Higher, because monopsonists face upward-sloping supply
- Lower, because the monopsonist restricts hiring below the competitive level (Correct answer)
- Equal, because market forces still determine wages
- Indeterminate without information on elasticity
Correct answer: Lower, because the monopsonist restricts hiring below the competitive level
A monopsonist maximizes profit by hiring where MRP = MCL, which is below the competitive quantity, resulting in a wage below competitive levels.
Question 6: The backward-bending labor supply curve occurs when:
- Wages fall below the subsistence level
- The income effect of a wage increase dominates the substitution effect, reducing hours worked (Correct answer)
- Workers face a legal cap on weekly hours
- Firms impose mandatory overtime
Correct answer: The income effect of a wage increase dominates the substitution effect, reducing hours worked
At high wage levels, workers are wealthy enough that the income effect (preferring leisure) outweighs the substitution effect (working more), bending supply backward.
Question 7: Specific human capital, unlike general human capital, is training that:
- Raises productivity equally at all firms
- Is paid for exclusively by the government
- Raises a worker's productivity only at the current employer (Correct answer)
- Transfers perfectly across industries
Correct answer: Raises a worker's productivity only at the current employer
Specific human capital has value only at the firm that provided the training, giving both the worker and the firm an incentive to share training costs.
CBE Labor Economics 3
Human capital theory predicts that workers who invest in additional education will: