Final Exam Flashcards
(27 cards)
What are the benefits/costs if It is increasingly the case that full-time undergraduate students need
five years to complete all of the requirements for a bachelor’s degree.
An increase in the time required to complete a bachelor’s degree increases the costs of school, both directly (tuition, books, fees) and indirectly through opportunity costs of time (forgone wages). Increasing the costs of school, all else equal, reduces the returns to education. With higher costs and a reduction in the period of time over which the individual will reap the benefits to the investment (assuming a fixed age at retirement), some individuals who had previously chosen to go to college may now decide it is not economically worthwhile to do so.
What are the benefits/costs if The real earnings of college-trained workers increase while those of high school-trained workers decrease.
An increase in real earnings for college graduates accompanied by a decrease in those for high school graduates impacts both the costs and benefits of getting a college education. The opportunity cost of attending college, determined by foregone earnings, is reduced and the benefits of a college education, determined by the incremental earnings of college graduates compared to high school graduates are increased. Reducing the costs and increasing the benefits of college, all else equal, increases the return to education and makes it likely that additional individuals will find it profitable to attend college.
Why did women in the past invest less in a college education than men? What changed this tendency?
The primary reason why women have traditionally invested less in their human capital than men is because women have historically had shorter work lives than men. Although less true in recent years, the traditional pattern was for women to exit the labor force, often for a considerable period, once married or after having children. This made the benefits associated with human capital investments such as formal education or on-the-job training less worthwhile because it reduced the time to recoup the costs incurred from undertaking these investments.
Recently, women have been investing more in their human capital primarily because women’s labor force attachment has been increasing. This is due, in part, to the increasing societal acceptance of working women and mothers. A decrease in discrimination has also contributed to the rise in human capital investment. Declining birth rates, due potentially in part to the availability and ease of contraception (the pill), decreases the probability and length of work disruptions which in turn has made human capital investments more worthwhile. In terms of Figure 8-3 in the text, these changes mean that profile HG will shift to the left (there will be less depreciation of skills and more time to reap benefits), and so gross benefits will be larger.
- Jill is planning the timing of her on-the-job training investments over the life cycle. What happens to Jill’s OJT investments at every age if
(a) the market-determined rental rate to an efficiency unit falls?
The marginal revenue of investing in OJT declines, so Jill will invest less at each age as the return to making the investment has fallen.
- Jill is planning the timing of her on-the-job training investments over the life cycle. What happens to Jill’s OJT investments at every age if
(b) Jill’s discount rate decreases?
If Jill’s discount rate decreases, she becomes more “future-oriented” (or, if you like, less “present-oriented”), increasing the future benefits associated with OJT. Thus, her OJT investments increase as she places greater value on the benefits from making the investment than before her discount rate fell.
- Jill is planning the timing of her on-the-job training investments over the life cycle. What happens to Jill’s OJT investments at every age if
(c) the government passes legislation delaying the retirement age until age 70.
The marginal revenue of investing in OJT increases because the payoff period to the investment is longer. Thus, she undertakes more OJT in this case.
- Jill is planning the timing of her on-the-job training investments over the life cycle. What happens to Jill’s OJT investments at every age if
(d) technological progress is such that much of the OJT acquired at any given age becomes obsolete within the next 10 years.
The marginal revenue to investing in OJT declines since the period to reap the benefits has diminished. and so the amount of OJT acquired falls.
What are the main reasons why women frequently invested less in-on-the-job training than men? What changed this tendency? What government or employer policies would be likely to accelerate this change?
Women frequently invested less in on-the-job-training because, given women’s greater labor market interruptions due to raising children, it did not make economic sense (according to the benefit-cost calculation) to incur the costs when the expected benefit horizon was short. Firm-specific training, in particular, is only beneficial to the individual if she remains with the firm but is not valuable if she leaves, so women would particularly avoid it. As women have anticipated working more continuously (and at the same firm, especially given policy changes as discussed below), this has changed the calculation. In other words, O-J-T has become an increasingly valuable career investment.
There are several government and employer policies that would likely accelerate the human capital accumulation of women. One group of such measures are family leave policies that provide both male and female employees with the ability to take a short period of time away from work for child care or family emergencies without the threat of job loss. Thus, employees who anticipate an interrupted work life may still find it worthwhile to invest in human capital if they believe that short disruptions will not force them to sever their ties to their employers. Effective enforcement of anti-discrimination legislation also increases the benefits to women of accumulating human capital.
- It is claimed that employers are reluctant to hire women for some jobs because of their higher expected quit rates. Assuming women are more likely to quit, use human capital theory to explain what kind of jobs an employer would be especially reluctant to hire women for. Explain the reasons for the employer’s reluctance. How valid do you think such employer assumptions about women are today?
Assuming women are more likely to quit than men, human capital theory predicts that women will not be offered jobs that require a high degree of firm-specific training. Since the costs of such training are borne by both the worker and the firm, firms are more likely to lose their share of the investment in firm-specific training if they provide such training to women compared to men. Thus, women will be relegated to jobs that require little or no firm-specific training, although, at least in theory, women would not be disadvantaged in terms of jobs that require general training, since the costs associated with this type of training are borne entirely by the employee.
Although female participation rates are approaching those of men, women are still more likely to experience labor force disruptions and will probably continue to have higher quit rates on average. This suggests that the assumption that women are more likely to quit than men probably has some validity. However, it is likely that these differences have diminished considerably as women have become more firmly attached to the labor force.
Suppose you are given data about a firm indicating that the average wage of male employees is $15/hr and the average wage for females is $10.50/hr. Define labor market discrimination against women. Does the preceding data prove that the firm discriminates against women? What kind of additional information would you need to determine whether such discrimination exists
Labor market discrimination against women exists when two equally qualified individuals are treated differently solely on the basis of sex. The data above does not prove that the firm discriminates against women because information about the qualifications of the firm’s workers, both male and female, is not provided. To determine whether the firm discriminates against women one needs not only average wages of men and women but information about worker qualifications, such as average levels of education, experience and other relevant qualifications that are associated with the productivity of workers at the firm.
Much of the measured gender gap in wages disappears when industry and occupation controls are included in wage regressions. Does this suggest that there is not much gender discrimination in wage? Explain.
Not necessarily. If women are excluded from high-paying industries and occupations, then the gender distribution across industries and occupations are part of a discriminatory labor market. Or it may be that occupations that are traditionally “female” are simply undervalued because of gender stereotypes. On the other hand, the distribution across jobs may be the result of free choices and differences in preferences across gender. In this case, then one should control for industry and occupation when measuring the extent of discrimination in labor markets.
Suppose the rental rate of capital increases. Use the ideas of scale and substitution effects to explain the effect of the rental rate increase on the firm’s use of capital and labor in the long-run. Can you say for sure whether the use of labor increases or decreases? Can you say for sure whether the use capital increase or decreases? Explain.
The substitution effect of an increase in r is that the firm will want to substitute away from capital and into labor (a decrease in K and an increase in L). The scale effect is that, since costs have increased the firm will want to produce less output. Holding the substitution effect fixed, this means the firm will want less of all inputs. Since both the scale and substitution effects imply the firm will reduce use of capital, K definitely falls. But whether L increases or decreases depends on which effect is larger—the substitution effect or the scale effect.
Use the neoclassical model of labor supply (the “labor-leisure model”) to provide 2 possible reasons for the increase in women’s labor force participation in the US over the past several decades. Be sure to provide an explanation for each reason.
1) Since women’s education attainment has increased over time, their market wage has increased and since we know that a wage increase can only have a positive substitution effect on LFP, this can explain women’s greater LFP
2) Since fertility rates have fallen over this period, the value of non-market time has fallen (women’s indifference curves have become flatter. This would move the utility-maximizing choice away from the corner solution of no participation and into the middle of the BC which means women participate in the labor market.
- (10 points) True, False or Uncertain: A person will reduce their labor supply in response to an increase in their spouse’s wage. Explain.
Uncertain: It might since, if the spouse responds to the wage by working more, the increase in the spouse’s non-wage income will have a pure income effect, reducing hours. But we can’t be sure the spouse will work more hours so we can’t be sure if the person’s non-wage income increases or decreases. Also, there is the issue of the sign of the “cross-wage” substitution effect. Suppose the spouse does work more. Then the person may choose to work more since they can’t spend as much time in leisure with their spouse. But note the “may”—economic theory doesn’t necessarily predict this response so the person’s response can’t be “signed” with certainty.
- (10 points) Explain the “’gains to specialization” argument for marriage. Discuss the impact of falling fertility rates on this argument.
A married couple needs to decide how to allocate time between market production and home production. If they want to maximize their output (beyond what each could produce on their own), each person can/will specialize in the activity in which they have a comparative advantage. One of the married couple will be relatively better and caring for children. When there are children, being able to take advantage of the gains to specialization will have more value. If fertility rates are falling then the relative comparative advantage falls, reducing the (economic) value of marriage.
- (10 points) We know that over time marriage rates for relatively less educated people have fallen faster than for relatively more educated people. What are possible economic explanations for this?
One possible economic explanation is that modern appliances have reduced the need for time spent in home production and increased the value of joint leisure time (“shared consumption”)
If more educated individuals are more likely to enjoy the “public goods”—like children– from marriage, then they have more incentive to get and stay married. For example, evidence from the ATUS shows the more educated women spend more time caring for children (this in spite of the fact that they also earn a (relatively) high labor market wage ).
More educated
- (20 points) Moe and Curly are both high school graduates. They each start a job right after graduating high school. Both jobs require on-the-job training lasting 1 year. Moe’s training increases his “general human capital” while Curly receives training building skills that are specific to his current employer
a) (10 pts.) True, False or Uncertain: Moe’s earnings profile will be steeper than Curly’s. Explain
True. Because Moe’s training is general, it will raises his MP at all possible employers. Thus, the current employer will need to pay Moe a wage = MP after the training period in order to keep Moe from quitting to work for another employer. Because Moe will receive all the returns to the OJT investment, Moe will pay all the costs (in the form of a lower wage in the training period). Curly, on the other hand receives training that will only increase his productivity at his current employer. Thus the employer won’t necessarily need to raise Curly’s wage after the training period since no other employer would be willing to pay a wage higher the Curly’s pre-training productivity. By this argument Curly’s earnings profile is flat. But a more realistic argument recognizes that, by sharing the costs and benefits of the investment in SHC, both Curly’s incentive to quit after the training period and the firm’s willingness to layoff Curly are reduced, meaning both can receive some of the return to the investment in SHC (the “quasi-rent”). The costs and returns are shared by Curly receiving a higher wage than his MP during the training period but receiving a lower wage (but still greater than what he could earn elsewhere) after the training period.
- (20 points) Moe and Curly are both high school graduates. They each start a job right after graduating high school. Both jobs require on-the-job training lasting 1 year. Moe’s training increases his “general human capital” while Curly receives training building skills that are specific to his current employer
b) (10 pts.) True, False or Uncertain: Both Moe and Curly are less likely to quit their jobs after completing their training. Explain
False. Moe’s GHC has no impact on turnover. If he quits he can earn the same wage anywhere which was true before being trained. And since he paid for the training and receives all the return, the employer loses nothing by Moe leaving (either because he quits or because he is fired)
In Curly’s case, on the other hand, the investment in SHC creates a quasi-rent that is shared between Curly and his employer. Each only receives the benefit of this quasi-rent as long as the relationship holds. Thus there is both a reduced incentive to quit for Curly and a reduced incentive to layoff by the firm.
- (20 points) We know that, while still significant, the extent of gender occupational segregation has fallen over time.
a) (10 pts.) Provide an economic explanation for both the existence of gender segregation and for why it is diminishing.
An economic explanation considers the costs and benefits of decisions. Suppose some jobs require more investment in SHC. Then these jobs are more valuable to people who plan on staying long-term with the employer (and these workers are more valuable to the employer). Historically, women were less “attached” to the labor market than men (that is, they had lower LFP and they would be more apt to leave the labor market if they married and/or had children). This meant that occupations which required SHC less desirable to women and women would be less desirable hires for these jobs for the employer.
Moreover, jobs vary by the nature of the work—some jobs are dirty or dangerous or require strength. If women are more risk-averse than men, or if women simply have different preferences concerning the work environment, then there would be gender sorting into different occupations.
Finally, social norms can affect decisions of individuals and employers. For example, if nursing is seen as a “women’s job” then men are less likely to seek such careers.
The degree of segregation is diminishing, arguably, for several reasons. One is that marriage rates are falling, and marriages occur at later ages. Also, fertility rates are falling, which reduces the value of non-market work (and technology changes—like microwave ovens!—are also reducing the value of time in non-market production). This means that women can (and, in some cases, must) spend more time in the labor market. Thus, jobs that require SHC are becoming more desirable. Social norms are changing—it is becoming more acceptable for women with children to be in the labor force and it is (slowly) becoming more acceptable for men to contribute more to household production. While we haven’t emphasized this in the course, yet, anti-discrimination laws and diminishing discriminatory attitudes are making time spent in the labor market more rewarding for women, which opens opportunities in certain careers and occupations that would not have existed in the past.
- (10 points) Compare and contrast the age-earnings profile of high school graduates and college graduates. Use human capital theory (of both education and on-the-job training) to explain the shapes of these profiles
Earnings profiles for both high school graduates and college graduates are upward-sloping (i.e., rise with age) and are concave. This does not mean, however, that they are the same. College earnings are higher than high school earnings. And they are steeper (and while not really discussed in class, college earnings “peak” later in a person’s career). The profiles for each look basically like this (please pardon my (lack of) abilities to draw in PowerPoint):
According to HC theory, investments in education increase a person’s human capital, making them more productive in the labor market. Since wages are determined by productivity, earnings for college graduates are greater than earnings for high school graduates. Earnings rise with age, according to HC theory, because of investments in OJT, which raise productivity. Since the college earnings profile is steeper, we conclude that college grads receive more OJT than HS grads (that schooling is a “perquisite” for OJT). The reason the profiles are concave, according to HC theory, is the timing of investments in OJT. The younger a person is the longer they have to reap the return on any investment. Thus investments at young ages have more value than investments at older ages, causing people to invest more intensively at younger ages. Which, of course, means earnings grow fastest at these ages. But the optimal level of investment falls as a person ages, and so the rate of increase in earnings diminishes with diminishing investments in OJT. Eventually OJT will stop altogether and depreciation of HC will result in earnings actually falling as a person nears retirement age.
- (10 points) It is a “stylized fact” of labor markets that turnover falls with tenure (seniority) on a job. Provide a “human capital” and a “job-matching” explanation for this.
Job-match theory: There is imperfect information in labor markets. Each worker-firm “match” is unique. The quality of the match will determine the individual’s productivity with that employer. But the quality of the match is an “experience good”—the person would have to actually work at that employer for both the employer and employee to know the quality of the match. Thus, people will “job-shop”—take a job to determine the quality of the match. If it is a bad match they quit (or get let go) and they search for a new match. This continues until a good match is found, at which time turnover stops. This theory suggests that turnover doesn’t actually fall with tenure (seniority) on a job and that it only looks that way in a cross-section of data (people in a good match had low probability of turnover from day 1).
- (10 points) True, False or Uncertain: A married couple making a joint family decision will choose to migrate only if both individually gain financially from the move. Explain.
False. At least according to the theory we learned (and there is empirical evidence that supports the theory). Married couples making joint decisions will migrate is the combined changes in income (net of moving costs) are positive. Thus, it is possible to have “tied-movers” or “tied-stayers”. A tied-mover is someone whose own earnings fall when the couple moves, but family earnings increase because the spouse received an increase in income bigger than the tied-movers drop in earnings (plus moving costs). A tied-stayer is one who would receive an increase in earnings if the couple migrated, but not larger enough to offset moving costs plus the loss in spouse’s earnings from the move.
- (10 points) Historically women, on average, acquired less education than men. But this has changed with average educational attainment for women having caught up and even surpassing men’s educational attainment. Provide an economic explanation for both the historical fact (women acquiring less education) and for the change in women’s educational attainment over time.
Historically, women have had relatively low rates of labor force participation. The social norm was that women would get married, have children and then specialize in non-market production in a household and men would specialize in market production. In such a situation the “return” to investments in education were low for women. Also, even if women wanted to work, social norms and discrimination would bar them from certain, relatively high-paying occupations, reducing the value of any investment in human capital. As we know, marriage rates are falling, fertility rates are falling, gender occupational segregation is falling and the wage gap, even when controlling for education is falling. All these changes mean that the return to any investment in HC will be increasing for women. Thus, HC theory would predict greater investments in HC. And since education can be understood as an investment in HC, this explains the relative increase in education acquired by women over time. Why women’s educational attainment, on average, has surpassed men’s is harder to explain.
1) True, False or Uncertain: Ceteris Paribus, younger people are less likely to migrate because they have not built the human capital skills needed to find a job in a new location. Explain;
False. Younger people are more apt to move than older people (ceteris paribus) for at least a couple of different reasons. The decision to move is based on a cost-benefit analysis—does the present value of the benefits outweigh the present value of the costs? If a person is considering a move there must be some benefit (else they wouldn’t be considering the move!). Some moving costs are “upfront”. The longer the person has to accrue the benefits the more likely the PV of benefits will outweigh these costs. This is one reason why younger people are more likely to migrate. Also, younger people likely face less psychic and monetary costs to mobbing (less likely to have house to sell, less likely to have children who won’t want to move, etc.). Finally younger people likely have less specific human capital built in their local job and so they have less to lose by moving.
