MEcon Master of Economics Labor Economics and Human Capital 1 — Questions and Answers
Question 1: Human capital theory, associated with Gary Becker, views investment in education as:
- A consumption good with no return
- An investment that raises productivity and lifetime earnings (Correct answer)
- A government expenditure that crowds out private investment
- A signal to employers with no productivity effect
Correct answer: An investment that raises productivity and lifetime earnings
Human capital theory treats education and training as investments that enhance worker productivity, raising wages commensurate with the skills acquired.
Question 2: Signaling theory (Spence) argues that education's primary labor market role may be to:
- Raise worker productivity directly
- Signal innate ability to employers who cannot observe it directly (Correct answer)
- Reduce income inequality through skill formation
- Increase the supply of skilled workers
Correct answer: Signal innate ability to employers who cannot observe it directly
Spence's signaling model holds that if high-ability workers can obtain credentials more cheaply, education serves as a credible signal of pre-existing ability, even with no productivity effect.
Question 3: The compensating wage differential theory predicts that jobs with higher risk or less desirable conditions will pay:
- Lower wages because workers accept any job
- Higher wages to compensate workers for undesirable attributes (Correct answer)
- The same as identical safer jobs
- Wages set by union contracts irrespective of conditions
Correct answer: Higher wages to compensate workers for undesirable attributes
Compensating differentials are wage premiums required to attract workers to less desirable jobs; they reflect worker valuations of job characteristics in a competitive labor market.
Question 4: The natural rate of unemployment includes:
- Only cyclical unemployment
- Frictional and structural unemployment but not cyclical unemployment (Correct answer)
- All forms of unemployment at a given time
- Zero unemployment in a perfectly efficient economy
Correct answer: Frictional and structural unemployment but not cyclical unemployment
The natural rate (NAIRU) is the unemployment consistent with stable inflation, comprising frictional unemployment (job search) and structural unemployment (skill-job mismatches), but excluding cyclical unemployment.
Question 5: Monopsony in labor markets results in:
- Wages above the competitive level and efficient employment
- Wages below the competitive level and employment below the efficient level (Correct answer)
- Wages equal to marginal product and optimal output
- Higher wages due to employer competition for workers
Correct answer: Wages below the competitive level and employment below the efficient level
A wage-setting monopsonist faces an upward-sloping labor supply curve, leading it to restrict hiring to keep wages down — resulting in both lower wages and underemployment relative to a competitive market.
Question 6: Efficiency wage theory proposes that paying wages above the market-clearing level:
- Is always irrational for firms
- Raises worker productivity and reduces turnover, justifying the cost (Correct answer)
- Creates unemployment deliberately
- Is only effective in unionized workplaces
Correct answer: Raises worker productivity and reduces turnover, justifying the cost
Efficiency wages can be profit-maximizing if higher pay elicits greater effort, reduces shirking, lowers costly turnover, or attracts higher-quality applicants.
MEcon Master of Economics Labor Economics and Human Capital 1
Human capital theory, associated with Gary Becker, views investment in education as: