Problem Set 3
Selected Answers

1.    Wages would tend to equalize across markets if all jobs and workers were identical and also assuming perfect information and costless mobility.  If any of these conditions are not met, then persistent wage differentials could exist.

2.    Safe jobs will attract a larger number of employees. This will tend to depress wages in those jobs. Risky jobs must offer a compensating wage differential to attract a sufficient number of workers.

3.    The drug tests clearly represent an additional cost to the employer. However, if potential employees are aware of the periodic drug tests, you would expect that drug users would probably not apply for positions at this firm. If this happens, the firm may actually see their supervisory costs (checking on absenteeism, doped-up workers, etc.) decrease as they only hire in drug-free workers. If the supply response of drug-free workers is sufficiently large, the firm may be able to offer lower wages to these workers (presumably, these workers may be willing to accept a lower wage to avoid doped-up co-workers).

4.    Teacher salaries:
a) The salaries of central city teachers must rise to reflect the relative riskiness of the working conditions.
b) The better teachers will end up in the suburbs and the less-able teachers will end up in the central schools.

5.    Without any government requirements, we would expect that high paying jobs would offer lower levels of insurance coverage. If the government requires a minimum level of health insurance (valued at $5000), then we should expect wages to fall in order to compensate (at least in those jobs that were initially offering health insurance at levels below $5000).

6.    See #1 from above and then check your notes/text.

7.    This is for you to ponder.

8.    We did this as part of our lecture.

9.    Minimum wage effects:
a)    A higher minimum wage could cause some of the displaced teens to simply drop out of the labor force due to the inability to find a job (e.g., discouraged workers).  Since the unemployment rate only measures those that are actively seeking work, it's possible that the reduction in employment is matched by a drop in the measured number of unemployed.  For example, suppose that teen employment is initially E = 90 and the number of unemployed teens is U = 9.  The unemployment rate will be u = U/LF = 9/99 = 9.1%.  If, due to the minimum wage, employment falls to E = 80 and the ten displaced workers and one of the original unemployed workers simply give up searching for a job, we now have U = 8 and u = 9/88 = 9.1%.
b)   Think about the possible tradeoffs between on-the-job training and formal education.  A higher minimum wage may induce some young people to drop out of school to look for a job.  

10.  Read the text.

11.    a) False; b) False (a higher min. wage raises the price of a substitute labor); c) False (presumes that regulators have access to perfect information regarding the costs and benefits of workplace safety)

12.    Firms do have an incentive to provide job safety in that safer workplaces will not have to offer higher wages to attract workers.  However, if workers have imperfect information regarding potential workplace dangers, then compensating wage differentials may not properly reflect the probability of a workplace accident--in which case some type of government intervention may be worthwhile.

13.    a) Safety level of 4; b) Safety level of 4; c) Firm would object because 5 units of safety is not worth the extra cost; employees may object because their wages may be driven too low (due to the unreasonably higher degree of safety); d) Firm would increase safety to 5 units.

14.    This is for you to ponder.

15.    a)    The demand for licensed in-state hunting guides is artificially inflated due to this law.  The result is higher wages and employment for the guides.
b)    Unions often are very vocal advocates of higher minimum wages precisely because it raises the price of competing workers.
c)    Stringent examinations restrict the supply of dentists, thereby raising the wages of existing dentists.

16.    A non-sequential search strategy assumes that the worker can "go back" and accept a previous wage offer.  If this is possible then we would expect a longer search duration since the cost of rejecting any given offer is reduced by the fact that you can go back and accept it.

17.   Job search model.
a) If the offer-at-hand is relatively low, it pays to keep on searching. If the offer-at-hand is very high, it does not pay to keep on searching since it is unlikely that the next search will generate a higher wage offer.
b) The $5 indicates the "out of pocket" search costs. Even if the offer at hand is zero, it still costs money to get to the firm and learn about the details of the potential job offer. The slope equals $1 because the costs of search also vary directly with the opportunity cost of search, which is the wage offer at hand. If the wage offer at hand is $10, the opportunity cost from one more search equals $10; if the wage offer at hand is $11, the opportunity cost would be $11, and so on.
c) The asking wage is obtained by equating the MR of search to the MC of search, or 50 - 1.5w = 5 + w. Solving for w implies that the asking wage is $18. The worker, therefore, would not accept a job offer of $15.
d) If we equate the new MC to MR we find that the asking wage drops to $12. The worker would accept a wage offer of $15.

18.  You did this one for homework.

19.    Check your notes/text.