ILRLE2400 Exam 3

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investment, life-time

Many labor supply choices require a substantial initial _____ on the part of the worker investments, by definition, entail an initial cost that one hopes to recoup over some period of time. Thus, for many labor supply decisions, current wages and working conditions are not the only deciding factors. Modeling these decisions requires developing a framework that incorporates and a ______-____ perspective.

investments, cost

Workers undertake three major kinds of labor market _______: education and training, migration and search for new jobs, all three investments involve an initial ____ and all three are made in the hope and expectation that the investment will pay off into the future.

human capital

To emphasize the essential similarity of these investments to other kinds of investments, economists refer to them as investments in ____ ____, a term that conceptualizes workers as embodying a set of skills that can be rented out to employers.

capital, increase

The knowledge and skills a worker has, which come from education and training, including the learning that experience yields, generate a certain stock of productive _____. The value of this productive capital is derived from how much these skills can earn in the labor market. Job search and migration are activities that _____ the value of one’s human capital by increasing the wage (price) received for a given stock of skills.


Society’s total _____ is a combination of human and nonhuman capital. human capital includes accumulated investments in such activities as education, job training, migration, whereas nonhuman capital includes society’s stock of natural resources, buildings and machines.

others, students, on the job training

Investment in the knowledge and skills of workers takes place in 3 stages: 1. in early childhood, the acquisition of human capital is largely determined by the decisions of _____. Parental resources and guidance plus cultural environment and early schooling experiences help to influence basic language and math skills, attitudes toward learning and general health and life expectancy, which themselves affect the ability to work. 2. teenagers and young adults go through a stage in which they acquire knowledge and skills as full time ____ in high school, college, or vocational training programs. 3. After entering the labor market, worker’s additions to their human capital generally take place on a part time basis,through _____ the ___ training, night school or participation in relatively short, formal training programs.

learn, future, financial

Individuals decisions about investing in human capital are affected by the ease and the speed with which they _____, their aspirations and their expectations about the ____ and their access to ____ resources

forgone earnings

An investment in human capital entails costs that are born in the ___ term with the expectation that benefits will accrue into the future. We can divide the costs of adding to human capital into three categories: 1. there are out of pocket or ____ expenses, including tuition costs, and expenditures on books or other supplies 2. _____ _____ that arise because during the investment period it is impossible to work at least not full time 3. _____ losses that occur because learning is difficult and tedious

earnings, job

in the case of educational and training investments made by workers, the expected returns are in the form of higher future _____, increased ___ satisfaction over their lifetime and a greater appreciation of new market activities and interests. even if we could quantify all the future benefits, summer them over the relevant years is not a straight forward procedure because of the work involved in receiving these investment returns.

future benefits, risk, more

when an investment decision is made, the investor commits to a current outlay of expenses in turn for a stream of expected _____ ___ Investment returns are relatively subject to an element of ____, because no one can predict the future with certainty but they are also delayed in the sense that they typically flow in over what may be a very long time period. the investor needs to compare the value of the current investment outlays with the current value of expected returns but in doing so must take into account effects of the ____ in returns. money received now is worth ____ than money to be received in the future.


After a year, someone could have their principal (B0) plus ___ on their principal. B1= B0(1 + r), B0= B1/(1+r)


the procedure for taking a future value and transforming it into its present value is called _______. If the future return is only a year away, we discount (divide) it by the factor (1+r) to calculate its present value equivalent. if we were to take the present sum of B0 and invest it, after one year, it would equal B1= B0(1+R). At the end of that first year, we could take our new asset, B1 and invest it for another year at interest rate r. At the end of two years, then, we would have the sum B2: B2= B1 + b1(r)= b1(1 +r) b2= B0(1+r) +Bo(1+r)(r)= B0(1+r)(1+R)= B0(1+r)^2

law of compound interest

in the second period, interest is earned both on the original principal and the interest earned in the first period B2= B0(1+r)^2 Bo= B2/(1+r)^2 to find the present value of a benefit to be received in two years requires that we discount the future benefit by (1+r)^2. If the benefit were to be received in 3 years, it would be (1+r)^3. The discount factors rise exponentially, reflecting that current funds can earn compound interest if left invested at interest rate r.


If a human capital investment yields a return of B1 in the first year, b2 in the second and so forth for T years, the sum of these benefits has a PV that is calculated as following: PV= B1/1+R + B2/(1+r)^2 + B3(1+r)^3 +…… Where the interest rate of discount rate is r. As long as r is positive, benefits in the future will be progressively discount. The _____ r is, the greater the weight placed on future benefits.


Our model of human capital investment assumes that people are utility maximizing and take a lifetime perspective when making choices about education and training. They are therefore assumed to compare the near term investment costs (c) with the present value of the expected future benefits when making a decision. Investment is attractive is the present value of future benefits exceeds the ______ B1/1+r + b2/(1+r)^2….. > c

future earnings

internal rate of return

utility maximization requires that people continue to make additional human capital investment as long as the condition is met and that they stop only when the benefits of additional investment are equal to or less than additional costs there are two ways we can measure whether the criterion are met: 1. using the present value method, we can specify a value of the discount rate, "r" and then determine how the present value of the ___ compares to the costs. 2. _____ rate of _____ method- this asks how large could the discount rate be and still render the investment profitable? clearly if the benefits are so large that even a really high discount rate would render investment profitable, then the project is worthwhile.


We calculate this internal rate of return by settling the present value of benefits equal to costs, solving for r and then comparing r to the rate of return for other _____

cost, benefit

The marginal costs for each additional unit of human capital are ssumed to be constant. The present value of the marginal benefits is shown as declining, because each additional year of school means fewer years over which benefits can be collected, the utility maximizing amount of human capital for any individual is shown as that amount for which marginal ___ equals marginal ______


those who find learning to be especially arduous will implicitly attach a higher marginal psychic cost to acquiring human capital. Individuals with higher MC will acquire _____ levels of human capital. Similarly, those who expect smaller future benefits from additional human capital investments will acquire ____ human capital.


the demand for a college education as measured by the percentage of graduating high school seniors who enroll in colleges in surprisingly variable. Have both ____ overall for male and women since 1970’s but have had periods of decline.

cost, benefits

people attend ____ when they believe that they will be better off by doing so. For some, at least part of the benefits may be short term, they like the courses of the lifestyle of a student and to this extent, college is at least partially a consumption good. The consumption benefits of college are unlikely to change much over the course of a decade, so changes in college attendance rates over relatively short periods of time probably reflect changes in marginal ____ or ____ associated with the investment aspects of college attendance.


gross benefits

A person attending college has in some broad sense, a choice between two streams of earnings over his lifetime. Stream A begins immediately but does not rise very ____. It is the earnings stream of a HS graduate. Stream B (graduate of college) has a negative income for the first four years, owing to college tuition costs, followed by a period that the salary is probably less than what the high school graduate is making but witless off and rises above Stream A. Obviously, the earnings of the college graduate would have to rise above those of high school graduates in order to induce more to invest in a college education (unless the consumption related returns were large) the ____ ____- the difference in earnings between the two streams- must total much more than the costs because such returns are in the future and are therefore discounted


4 predictions concerning the demand for education: 1. ____ oriented people are less likely to go to college than forward looking people, other things equal 2. most college students will be ____ 3. college attendance will ____ if the costs of college rise other things equal 4. college attendance will ____ if the gap between the earnings of college graduates and high school graduates widens (other things equal)

present oriented


although we all discount the future somewhat with respect to the present, psychologists use the term ____-_____ to describe people who do not weigh future events or outcomes very heavily. in terms of equations, a present oriented person is one who has a very ____ discount rate supposed we were to calculate investment returns using the present value method. If r is large, the present value of benefits associated with college will be lower than is r is smaller. Thus, a present oriented person would impute smaller benefits to college attendance than one who is less present oriented, and those who are present oriented would be less likely to attend college.



using the internal rate of return method for evaluating the soundness of a college education, we would arrive at the same result the prediction that present oriented people are ____ likely to attend college than forward looking people is difficult to substantiate because the rates of discount that people use in making investment decisions can rarely be quantified. The model does suggest that people who have a high propensity to invest in education will also engage in other forward looking behavior. people with many years of schooling have ____ mortality rates, fewer symptoms of disease, and a greater tendency to report themselves to be in good health. The effort of education on health is independent of income, which appears to have no effect on its own health status except at the lowest poverty levels. better educated people undergoing surgery chose the same doctors, enter the hospital at the same stage as disease and have the same length of stay as less educated people of equal _____. what may cause this correlation is a more forward looking attitude among those who have obtained more education. People with lower discount rates will be more likely to attend college and then will also be more likely to adopt forward looking habits of health.


given similar yearly benefits of going to college, young people have a _____ present value of total benefits than older workers, simply because they have a longer remaining work life ahead of them, T is greater for younger people than for older ones. younger people have a greater propensity then older people to obtain a college education or engage in other forms of training activity.

forgone earnings

human capital investments are more likely when costs are _____, the major movement by costs of college attendance are ____ _____ and the direct costs of tuition, books and fees. Thus, if forgone earnings or tuition costs fall, other things equal, we would expect a rise in college enrollments. potential college students vary in their access to the funds required to pay for tuition, books, fees. Some obtain all or part of these funds from the generosity of others, while others must bear the costs of taking out loans or generating their own funds through working. Put differently, there are wide differences in how costly it is to obtain the funds needed for college and those who find it very costly or impossible to obtain such funds are said to be ____- ______ subsidized low interest government loans to college students and publicly funded universities are two major ways in which society has tried to deal with credit constraints facing potential college students. Most studies find that relaxing these constraints (making borrowing easier or cheaper) increases college attendance and that the public policies undertaken in the US to relax the constraint have been largely successful.


the costs of college attendance are an additional reason older people are less likely to attend than younger ones. As workers age, their greater experiences and maturity result in higher wage and therefore greater opportunity costs of college attendance. College attendance by military veterans has been responsive to educational subsidies for which they are eligible. Students who have greater aptitude for the kind of learning that college demands are ____ likely to attend than those for whom learning is more difficult. Acquisition of human capital of powerfully affected by family background. the parental investments and family environments that affect the ability to learn if one regards family background as another form of constraint that can affect the cost of acquiring human capital, much more attention to publicly funded investments in early childhood education and environment may be necessary to relax this constraint.


if status with ones peers is enhanced by studying and getting good grades, the costs of studying are _____, while the opposite occurs if status is reduced by academic achievement.


the fourth prediction is that the demand for education is positively related to the increase in expected lifetime earnings that a college education allows. However, the expected benefits for any individual are rather uncertain. average returns received by recent college graduates have an important influence on student decisions. Dramatic changes in the average monetary return to a college education over the past few decades are at least partially if not largely responsible for the changes in college ______ rates. Unlike enrollment rates for men, those for women rose throughout three decades but they rose most when the college/ high school earnings differential rose most sharply. The expected returns to education actually rose because of increases in their intended labor force attachment and norms of work outside the home. (both of which increase the period over which the earnings differential will be received.)


Human capital investments entail _____. Individuals must assess their own probability of success in specific fields requiring a college degree. Recent studies have predicted the influence of friends and ethnic affiliations and neighborhoods in the human capital decisions of individuals even after controlling for the effects of parental income or education. The presence of role models helps to reduce the uncertainty that inevitably surrounds the estimates of future success in certain areas

the returns to college attendance are determine by the forces of both employer demand and employee supply. If more high school students decide to attend college when presented with high returns to such an investment, market forces are put into play that will tend to _____ those returns in the future. Increased numbers of college graduates put downward pressure on the wages observed in labor markets for those graduates. other things equal, while a fall in the number of HS graduations will tend to raise wages in markets for less educated workers thus,adding to uncertainties about expected payoffs to an investment in college is t he fact that current returns may be an unreliable estimate of future returns. A high return now might motivate an individual to opt for college but it will ale cause many others to do likewise. An influx of college graduates in four years could put downward pressure on returns, at that time, which reminds us that all investments , even human capital ones, involve outlays incurred and uncertain returns in the future.



the view that increased educational investments increase worker _____ is a natural outgrowth of the observation that such investments enhance the earnings of individuals who undertake them. If individual A’s productivity is increased because of more schooling, then society’s stock of human capital has increased as a result. Some argue, however, that the additional education received by individual A also created benefits for individual B, who must work with A. If more schooling causes A to communicate more clearly or solve problems more creatively than B’s productivity will also increase. Education may create positive externalities so then the social benefits are larger than the private benefits. Others argue that returns to society are _____ than the returns to individuals. They argue that the educational system is used by society as a screening device that sorts people by their pure determined ability. The educational system is a means of finding out who is productive, not of enhancing worker productivity.

productivity, signals

1, 2

an employer looking to hire a worker is never completely sure of the actual productivity of any applicant and may remain unsure long after an employee is hired. what an employee can observe are certain indicators that firms believe to be correlated with ______: age, experience, education and other personal characteristics. some indicators such as age are immutable. Others, such as formal education can be acquired by workers. Indicators that can be acquired by individuals are called _____. Suppose firms wanting to hire new employees for a particular job know that there are two groups of applicants that exist in roughly equal proportions. One group has a productivity of ____ and the other has a productivity of ___. Supposed that these productivity levels cannot be changed by education and that employees cannot readily tell which applicants are from which group. If they were unable to make such distinctions they would have to assume that all applicants are average and that each has a productivity of 1.5 (and would offer them wages of up to 1.5), while workers in this example would be receiving what they were worth on average, any firm that could devise a way to distinguish between the two groups (at little or no cost) could enhance its profits.

more, profits

when wages equal 1.5, workers with a productivity of 1 are making ____ than they are worth and if these applicants could be discard and either rejected or placed into lower paying jobs, the firm could increase profits using educational attainment as a hiring standard can increase ____ even if education does not enhance productivity


employers come to believe that applicants with at least e years of education beyond high school are the ones with productivity of 2 and that these with less than that level of education are in the lower productivity group. workers with less than e would find that competition among employers drives their wages up to 2. If additionally schooling does not enhance productivity, requiring the signal of e*can really distinguish between the two groups of applicants if the costs to the worker of acquiring the added schooling are ______ related to his or her on the job productivity. if workers with at least e years of education beyond high school can obtain a wage of 2 while those with less can earn a wage of only 1, all workers would want to acquire the signal of e if it were costless for them to do so. But schooling costs are both large and different for different individuals. The ____ cost of educations are inversely related to ability, those who learn easily can acquire the educational signal of e* more cheaply than others, if those who have lower costs of education are also more productive on the job, then requiring educational signals can be useful to employers

c, c/2

Assume that each year of equation costs ____ for those with less productivity and ____ for those with greater productivity Workers will choose the level of schooling at which the difference between their discounted lifetime earnings and their total educational cost is maximized. For those with yearly educational costs of c, the difference between the lifetime earnings and the total educational costs is maximized at ____ years, of education beyond high school. for those workers, the net benefit of an additional e years if less than the net benefit of zero additional years. For them, the benefits of acquiring the signal of e years is not worth the added costs For those with costs at c/2, it can be seen that the net benefits of investing in e exceed the net benefits of other schooling choices. Therefore, onl y those with costs of c/2 find it advantageous to acquire e years of schooling. Schooling attainment signals productivity


for education to have signaling value, on the job productivity and the costs of productivity must be _____ correlated, if the higher costs reflected along line C were associated with lower cognitive ability, or a distaste for learning, then it is conceivable that these costs are indicative of lower productivity. If, however, these costs along C have higher costs only because of lower family wealth and therefore smaller contributions form others to their schooling costs than they may be no less productive on the job then those along c/2. In the latter case, signaling would fail, because it would only indicate those with lower family wealth, not lower productivity even when educational signaling is a useful way to predict future productivity, there is an optimum signal beyond which society would not find it desirable to go. If employers requiring e* years for entry into jobs pay a wage of 2 were to raise their hiring standards to e’ years, those with educational costs along C would still find it in their best interests to remain at 0 years of schooling beyond high school and those with costs along c/2 would find it profitable to invest in the required signal of e’. Requiring more schooling of those who are selected for higher wages is more costly for workers and thus for society as a whole. While the new required signal would distinguish between the two groups of workers, it would do so at increased an unnecessary ___ to individuals, which cannot be socially optimal.


it clearly can be beneficial for individuals to invest in educational signals but school can only have signaling value, is it a worthy investment for society to make? If the only purpose of school is to provide signals, why encourage investments in the expansion or qualitative upgrading of school? these issues are even more important in less developed countries, where mistakes in allocating extremely scarce _____ could be disastrous.

human capital, smaller

advocates for the signaling view might point to higher rates of return for college graduates than for college dropouts as evidence that schooling as a signaling device. They argue that what is learned in school is proportional to the time spent there and that an added bonus (rate of return) for just a diploma is proof of the signaling hypothesis. advocates of the view that schooling enhances ____ _____ would counter that those who graduate after four years have learned more than four times what the freshman dropout has learned. they argue that dropouts are more likely to be poorer students, the ones who are overestimated their returns on schooling and quit when they discovered their mistake. Thus, their relatively lower rate of return is associated not with their dropping out but with their reason for dropping out. Proponents of the human capital view would argue that the earnings differential between college and high school graduates few with age support their view. if school were jut a signaling device, employers would rely on it initially but as they accumulated direct information from experience with their employees, schooling would play a much ____ role in determining earnings. Signaling advocates could counter that continued wealth in earning differentials only illustrates that educational attainment was a successful signaling device.


given difficulties reached for both employees and employers by pay for performance plans, including merit pay, employees are often driven to search for other monetary incentives that can be used to motivate their workers paying higher wages is thought to increase worker _____ for several reasons. one involved the type of worker a firm can attract, the others are related to the productivity that can be elicited from given workers.


higher wages can attract ____ employees by enlarging the firm’s applicant pool. a larger applicant pool means that the firm can be more selective, bringing in the creme of the crop to employe only the most experienced and dependable and highly motivated applicants. the reason higher wages are thought to generate higher productivity from given workers all relate to the commitment to the firm they build. the higher the wages are relative to what workers could receive elsewhere, the less likely it is that workers will ____, knowing these, employers will be more likely to offer training and more likely to demand loner hours and faster pace from their workers. employers, on their part, realize that even though supervision might not be detailed enough to detect shirking with certainty, if they are caught cheating on their promises to work hard and as fired as a result, the loss of a job paying above market wages is costly both now and over their remaining working life.


a related reason that higher wages might generate more productivity from given employees arises from their concern about being treated ____. Workers who believe they are being treated fairly are likely to put forth an effort while those who think their treatment is unfair may get even by with holding effort or engaging in sabotage. one comparison workers make in judging their treatment is the extent to which they see the employer as profiting from their services. it is often considered unfair if a highly profitable employer is not generous, even if the wages it pays are already relatively high. likewise, if workers who are asked to sacrifice leisure and put forth extraordinary effort on the job are likely to expect the firm to make an extraordinary financial sacrifice (that is, the offer of higher pay) to them in return. employees also judge the fairness of their pay by comparing it with that they could obtain elsewhere. raising compensation above the level that workers can receive elsewhere has both benefits and costs to the employer.

efficiency wages

while initial increases in pay may well secure an increase in productivity and then effect the profits of a profit, after a point, the costs to the employer of further increase will exceed the benefits. The above market pay level at which the marginal return to the employer from a future increase equal the marginal costs is the level that will maximize profits. this has become known as the _____ _____ the payment of efficiency wages has a wide set of implications that in recents have reason to be expected by economists. for example, the persistence of unemployment is thought by some to be the result from widespread payment of above market wages. furthermore, persistently different wage rates paid to qualitatively similar workers in different industries are the hypothesized result of efficiency wage considerations

efficiency wage theories

the most important implications of efficiency wages relate to their effects on productivity and the two types of empirical studies are of interest. one set of studies infers that the effects of efficiency wages on productivity from the types of firms that pay these wages. that is, the some firms raise wages above the market level for profit maximizing purposes, we ought to observe that those who do are the ones that a) stand to gain the most from inhaling worker reliability (perhaps because they have a lot invested in expensive equipment) or b) find it most difficult to properly motivate their workers the other kind of study directly relates to the effects of efficiency wages to measures of productivity rates of disciplinary standards or changes in the employers product market share. These studies so far are limited in number, but they are generally supportive of efficiency wage theory. The payment of wages above what workers could earn elsewhere makes sense only because workers expect to have long term employment relationships with firms, if workers switched jobs every period, they would face no incentive to reduce shirking when a firm paid above market wages, because firing someone who is going to quit anyway is not an effective penalty. as a result, firms would have no incentive to pursue an efficiency wage policy. thus, efficiency wages are likely to work only in situations where strengthened internal labor markets exist. the existence of internal labor markets, however, raises other possibilities for using pay to motivate workers and it is to these possibilities that we now turn.


employers with internal labor markets have options for motivating workers that grow out of their employees expected careers with the organization. applicants to and employees of employers with internal labor markets are derived with the present value of career compensation. this lifetime perspective increases employers options for developing _____ policies because both the pay levels of each step increases over and the swiftness of promotion to given steps can be valued by the firm while still living with the constraints of having to offer an attractive offer of career consumption. it may be beneficial to both employees and employees to arrange workers pay one time so that employs are underpaid early in their careers and over paid later on, this sequencing of pay will increase worker productivity and enable firms to pay higher present values of compensation the otherwise for reasons related to both worker sanity and to work incentives. an understanding of these reasons takes us back to the problem of avoiding cheating at an implicit contact in the premise of asymmetric information.


FLSA of 1938 was the first major piece of protective labor legislation adopted in the national level in the United States. Among its provisions were a minimum wage rate, below which hourly wages could not be reduced, an overtime pay premium for workers who worked long work weeks and restriction on the use of child labor. It covers nonsupervisory wage and salary workers, primarily, those employed in larger firms involved in interstate commerce (manufacturing, mining, construction). Both the basic minimum wage and coverage have expanded over time. Minimum wage is specified in _____ terms and not in relative terms to some other wage or price index. The nominal wage rate has been raise once every few years. In the last two decades, even the yearly legislated minimums have been below 40% of the average manufacturing wage.


since the minimum wage was first legislated, a concern has been that it will ____ employment, especially among the groups that it is intended to benefit. In the face of a downward sloping labor demand curve, a policy that compels firms to raise the wages paid to all low wage workers can be expected to reduce employment opportunities for the least skilled or the least experienced. Furthermore, if the percentage loss of employment among low wage workers is greater than the percentage increase in their wages, that is, if the demand curve for low wage workers is elastic, then the aggregate earnings of low wage workers could be made smaller.


minimum wage levels in the US have been set in _____ terms and have been adjusted by congress only sporadically. the result is that general price inflation gradually lowers the real minimum wage during the years between congressional action, so what appears to be a fixed minimum wage turns out to have constantly changing incentives for employment. also, the federal wage in the US is uniformly applied to a large country characterized by regional differences in prices. Recognizing that there are regional differences in the real minimum wage leads to the prediction that employment effects of a uniformly applied minimum wage law generally will be most adverse in regards with the lowest costs of living. Many states must also have their own minimum wage laws, many having minimums that exceed the federal minimum

non coverage

in a growing economy, the expected effect of a one time increase in the minimum wage is to reduce the rate of employment. controlling for all other things beside wages that affect labor demand turns out to be the major difficulty in measuring employment changes caused by the minimum wage the federal minimum wage law, like many government regulations, has an uncovered sector. coverage has increased over the years, but the law still does not apply to some non supervisory workers, mainly those in small firms in the retail trade and service industries. also, with millions of employers and limited resources of governmental enforcement, noncompliance with the law may be widespread, creating another kind of _______ the existence of non-covered sectors significantly affects how the overall employment of low wage workers will respond also to increased in the minimum wage. The market has two sectors. In one, employees must pay wages equal to at least the minimum wage of W1. Wages in the uncovered sector are free to vary with market conditions. whilee the total labor supply to both makers taken as a whole is fixed as Et (the total labor supply curve is vertical), workers can move from one sector to the other seeking better job offers.

affects of minimum wage on employment

free movement between sectors suggests that in the absence of minimum regulations, the wage in each sector will be the same. if the minimum wage is impressed on the covered sector, all unskilled workers will prefer to work there. however, the increase in wages in that sector reduces demand and covered sector employment will fall. some workers who previously had or would beforehand, hobs in the covered sector must now seek work in the uncovered sector. thus, the workers formally working in the uncovered sector are added to other workers seeking jobs there. all unskilled workers in the market not lucky enough to find covered jobs must not look for work in the uncovered sector. the increased supply of workers to that sector drags down the wage. the presence of an uncovered sector thus suggests the possibility of an uncovered sector among unskilled workers will be re-arranged. but not reduced by an increase in the minimum wage. rather than reducing overall employment of the unskilled, then, a partially covered minimum wage law might serve to shift employment out of the covered to the uncovered sector, with the further result that wages in the uncovered sector would be brought down.

the magnitude of any employment shift for the covered to the uncovered sector depends on the size of the latter. the smaller it is, the lower are the chances that job losses from the covered sector will find employment there. whether the size of the uncovered sector or its very presence means that the overall loss of employment is likely to be less than the loss of employment in the covered sector.


if a minimum wage of W1 is imposed on the covered sector, all unskilled workers will prefer to work there. however, the increase in wages in that sector reduces demand and covered sector employment will ____. Some workers who previously had or would have found jobs in the covered sector must now seek work in the uncovered sector. Thus, to the workers formerly working in the uncovered sector are added other workers seeking jobs there. hence, all unskilled workers in the market who are not lucky enough to find "covered jobs" must not look for work in the uncovered sector, and the vertical supply curve. the increased supply of workers to that sector drives the wage down. the presence of an uncovered sector thus suggests the possibility that employment among unskilled workers will be rearranged, but not _____ by an increase in the minimum wage. Rather than reducing overall employment of the unskilled, then, a partially covering minimum wage law might serve to shift employment out of the covered to the uncovered sector, with the further result that wages in the uncovered sector would be driven down.


the magnitude of any employment shift from the covered to the uncovered sector depends on the size of the uncovered sector, the _____ it is, the lower are the chances that job losers from the covered sector will find employment there. Whatever the size of the uncovered sector, its very presence means that the overall loss of employment is likely to be less than the loss of employment in the covered sector.


the employment effects of a wage change are the result of scale and substitution effects. substitution effects stem from changes in how firms choose to produce where scale effects are rooted in consumer adjustments to changes in product prices. faced with a given increase in the minimum wage, firms increased in costs will generally be greater when the share of low wage labor in total costs is greater. thus, the same increased in the minimum wage can lead to rather difference effects on product prices among different parts of the covered sector. furthermore, if these sub sectors compete with each other for customers, it is possible that scale effects of the increased wage will serve to _____ employment among some firms in the covered sector



the demographic group for which effects of minimum wages are expected to be most visible is composed of _____- a notoriously low paid group, mandated wage increased have effected their employment. updated prior estimated of how overall teenage employment has responded to increased in the minimum wage, however, found ____ effects on employment. once account is taken of the extent to which minimum wage increased raise the average wage of teenagers, the implications of this latter study are that the elasticity of demand for teenagers is in the range of -.4 through -1.9 recent estimates of how increases in the minimum wage affects employment for all low wage workers, not just teenagers, suggests its own wage labor demand elasticity that is considerably lower. this study looked at the employment status of those who were at or near the minimum wage and then look at their employment status a year later. the estimated decline in the probability of employed implied that the labor demand curve facing these workers has an elasticity of roughly .15 therefore, it is uncertain what effects are on low wage workers to increases in minimum wages.

are not

many who live in poverty (are not/are) affected by the minimum wage, either because they are not employed or because their wages, while low, are already above the minimum. many of those most affected by the minimum wage are teenagers who may not reside in poor families.

living wage

_____ ____ ordinances apply to a subset of employers with their jurisdictions and imp rose wave floors that are higher than either federal or state minimum wages on these employers, the affected employees are generally those enforcing contracts with the local government but can also apply to employers receiving business assistance from the city or county benefits are limited to the narrow group of employees to which these laws apply. benefits are also reduced if these laws cause the affected employers to either reduce their employment levels or move their operations to cities that do not have living wage ordinances. cities with rapidly expanding employment opportunities mat decide differently about adopting a living wage lower than cities with stagnant or decking opportunities.


economists describe the presence of upward sloping labor supply curves to individual employers as creating ______ conditions in the labor market. a labor market ______ is a firm that is the only buyer of labor in its labor market. the employer faces (as the only employer in the market) the market supply of labor curve which is upward sloping you cannot get workers from competing firms because there are none. instead, you need to increase wages to attract workers who must move in from out of town, attract workers from other occupations whose preferences were such that at the old lower wage, they preferred to work at a job that was less dangerous or induce people currently out of he labor force to seek paid employment


when the labor market is not completely competitive, when mobility costs impede workers entry to and exit from various places of employment, we call such labor markets ______ when we describe a labor market as monopsonistic, we are not thinking exclusively of the rather rare cases of pure monopsony (single employers in isolated places), our analysis of monopsonistic labor markets rests only on the assumption that the labor supply curve facing individual employees slopes upward and are not horizontal. it does not matter why these curves slope upward, being the only employer in town is one cause. these curves slope upward because employers find it costly to change jobs even when there are several potential employers for them in their labor market


profit maximizing firms will hire labor as long as an added worker’s marginal revenue product is ______ than his or her marginal expense. hiring will stop when the marginal revenue product equals the marginal expense. when it is assumed that extra workers can be attracted to the firm at the going wage rate/ when labor supply surges to the firm are horizontal, then the marginal expense is simply equal to the ___. when firms face upward sloping labor supply curves, the marginal expense of buying labor exceeds the wage.


upward sloping labor supply curve causes the marginal expense of labor to exceed the _____. the marginal expense includes the wages paid to the extra workers plus additional cost of raising the wage for all other workers. the supply curve represents for the firm in question, the wage it needs to pat to get each of the employment levels it is considering. the marginal expense is the added cost of increasing the employment level by one worker. the marginal curve lies both above the supply curve and is steeper in slope (goes up at a faster rate.)


to maximize profits, we know that any firm, including these in monopsonistic markets should hire labor until the point at which the marginal revenue product _____ the marginal expense MRPL= MEL any firm in a monopsonistic labor market must make two decisions about hiring, first, like firms in competitive labor markets, it must decide how much labor to hire, this decision, consistent with the profit maximizing criterion in the equation, is made by finding the employment level at which MRPL= MEL second, the firm must find the wage rate necessary to get to E* employees. The firm’s labor supply curve represents the relationship between its potential wage rates and the number of workers interested in working there.

competitive, monopsonistic

with a _____ labor market, where individual firms are wage takers and can hire all the labor they want at the going wage, employers decide only on the number of workers they want to hire, the wage they pay is given to them by the market. _____ firms must decide on the wage to pay as well. further, while firms in competitive labor markets hire until the MRPL equals the given wage, firms in monopsonistic markets pay workers on wages less than the marginal revenue product of labor. they do not set wages without constraints. they are determined by both the MRPL and the labor supply curve they face, both curves are given to the firm and are thus out of their control. firms must make labor market decisions that allow them to remain competitive in their product markets. they face constraints, posed by both labor and product markets. within the product and labor markets constraints facing them, different firms in monopsonistic labor markets may well offer different wages to equivalent workers. it is unlikely that the labor supply and the MRPL curves are exactly the same for different firms in the labor market. thus, we should not be surprised if exactly competitive workers were to have different marginal productivities and receive different wages at different firms. thus, a firm employing older equipment and having a lower MRPL could co-exist with one having new equipment and a higher MRPL by having a lower wage to the same kind of worker.


in a monopsonistic labor market, the firm does not really have a labor demand curve, the firm is not a wage taker, so asking hypothetical questions about the level of wages facing the firm is meaningless. given the firm’s labor supply curve and its schedule of marginal revenue product, there is only one profit maximizing level of employment and only one associated wage rate, both of which are chosen by the _____.



with the ______ model of labor demand, a leftward shift of a market supply curve would cause the market wage to increase and the level of employment to fall as employees moved to the left along their labor demand curves. in the short run, the MRPL curve is fixed. shift of he labor supply curve is represented by a movement to curve S’ from the original curve S. with a supply curve of S, the firm’s marginal expense of labor curve was MEL and it chose to hire E workers and pay them a wage of x- when the supply curve shifts to S’, the firm’s original labor expenses shift to a higher wage curve ME’L. Therefore, its new profit maximizing level of employment falls to E’ and its new wage increases to W’. thus, with a monopsonistic model, just as with the competitive model, a leftward shift in labor supply _____ MEL


when the supply curve shifts to S’, the firm’s marginal labor expenses shift to a higher curve ME’L. Therefore, its new profit maximizing level of employment falls to E’ and its wage rate increases to W’. with a monopsonistic model, just as with a competitive model, a leftward shift in labor supply increases the marginal expense of labor, ____ wages, and then reduces the firm’s desired levels of employment in the short run. in the long run, labor’s increased marginal expense will induce the substitution of capital for labor as firms seek to find the cost minimizing mix of capital and labor. the cost minimizing conditions for capital and labor under competitive conditions were given, in which the wage rate was treated as the marginal expense of labor. in a monopsonistic labor market, MEL exceeds W, so the left hand side of the equation must be written in the general form: MEL/MPL= C/MPK clearly, if a monopsonist is minimizing its costs of production and its marginal expense of labor is increased, it will want to restore equality by substituting capital for labor. thus, employment decreases even more in the long run than in the short run

increase, reduced, fall

for a monopsonistic firm, a mandated wage can simultaneously _____ the average cost of labor (that is, the wages paid to workers) and reduce the MEL. it is the decrease in marginal expenses that induces the firm to expand output and employment in the short run. thus, because an upward sloping supply curve is converted to one that is horizontal, at least for employment near the current level, it is possible that both wages and employment can increase with the imposition of a mandated wage on a monopsonistic firm. in the long run, two opposing effects on employment are possible with a mandated wage that is not too high, a monopsonisitic firm’s MEL is _____, causing a substituting of labor for capital in the long run. while the monopsonistic firm’s marginal expense of labor may have fallen, however, labor’s average cost (the wage) has increased. it is not more expensive to produce the same level of output than before. thus, profits will decline. if it is in a competitive product market, a firm’s initial profit level will be normal for that market, so the decline will push its profits below normal. some workers will get out of the market, putting downward pressure on employment, if this latter scale effect is large enough, employment in monopsonistic firms could _____ in the long term if a mandated wage were imposed.


in summary, the presence of monopsonistic conditions in the labor market introduces uncertainty into how employment will respond to the imposition of a mandated wage as the new wage ___ the firm’s marginal expense of labor. any shift in the supply of labor curve that increases the marginal expense of labor will unambiguously reduce employment.

human capital

this is the knowledge, skills, competencies, and experiences embodied in an individual unlike physical capital, this cannot be sold and it can only be rented. it is increased through investments. Investments in human capital take place in many forms such as education and training. Human capital investment must be viewed in a life cycle setting, investment early on following by future benefits. when assessing the attractiveness of a human capital investment it is necessary to account for the timing of costs and benefits through present value calculations

human capital


____ _____ investment and accumulation takes many forms: education, classroom training, OJT training, learning by doing human capital theory is a tool to help us understand investments in education, training and learning by doing the ____ of human capital investment: forgone earning (an opportunity cost, absent for on the job training), tuition costs, possible utility or disutility of study


a dollar tomorrow is worth ____ than a dollar today. income occurring in the future is worth less than the same dollar amount received today

subjective time preference

monetary inflation


why is a dollar tomorrow worth less than a dollar today? _____ _____ _____- impatience, individuals prefer present consumption to future consumption _____ ____ erodes the value of currency over time ____ of future income reduces its value to the individual

interest rate

when computing to present value of a future income stream we use an ______ rate. this summarizes the effect of the subjective time preference, the monetary inflation and the risk it is a single number that tells us how much we should down weight income occurring in the future

present value of future benefits

the value to an individual of future benefits expressed in today’s money

present value of the income stream

the amount of money that the individual needs today to guarantee this income stream in the future, given the interest rate, and assuming that it is possible to save and borrow at this interest rate

interest rate

the present value of income y that will be received in one year’s time is PV= Y/1+R where r is the ___ ___ expressed as a decimal

greater than

the individual should make the investment in training if the PV of the benefits is _____ than the PV of the costs.


if the PV of the benefits _____ the PV of the costs, then you should invest. If it is not then you should not invest.

increase, increase, increase

if benefits _____, the investment becomes more attractive. If the interest rate _____, the investment becomes less attractive. If the costs ______, the investment becomes less attractive.

costs, benefits

deciding whether to invest in a college education requires comparing the present value of the _____ with the present value of the ____


______- oriented people will be less likely to go to college and you can think of this as a high interest rate. college students will be ____ because they have a longer time over which to enjoy benefits college attendance will increase as the gap between the earnings of high school graduates and college graduates widens college attendance will ____ with an increase in the tuition cost



the ____ the period over which the benefits are received, the more attractive the investment, therefore, an increase in life expectancy will increase an investment in human capital ____ progress often works to increase the wage gap between the low and the high educated. it is often skill biased change and this type of technological change will increase benefits from education and increase the investment in education

learning by doing

there is a concavity of the wage profile over time this may reflect diminishing returns to ____ by ____, as an individual works, he or she accumulates experience, this is highly valuable at first and then becomes less and less important as well as learning by doing, individuals make investments in training over the life cycle. these investments are concentrated at young ages. so we see some wage gains from training at young ages and then lower gains later on.


comparing men and women, the wage age profiles are more concave for ___ than men. less experience based human capital due to lower labor force participation and lower hours lower investment in training as expected future benefits are lower, due, again, to lower labor force participation and lower hours.


the life cycle profile of earnings has become less concave for women. this reflects the increased rate of labor force participation for women, which increases learning by doing and ____ incentives to investment in training


according to the ____ model, education has no productive value but it increases wages as it acts as a signal to high ability employers are unsure of a worker’s actual ability. employers may judge worker’s productivity based on observable characteristics such as age, experience, or education education is a choice for the individual. through choice of education, the worker may be able to manipulate the employer’s beliefs about his or her true ability. model of signaling- there are two types of workers, high ability and low ability. workers produce output with value equal to worker productivity. therefore, the employer is willing to pay the worker a wage up to his or her true ability. the ability is known to the worker but the employer cannot see his or her ability.

2, 1

high ability workers have a productivity of ___ and low ability workers have a productivity of ___. assume equal numbers of high and low ability workers in the labor force. if the employer has no information about productivity, then they will be willing to pay a wage up to 1.5 as this is the average productivity of workers. but employers may not be able to offer wage education contracts that separate low and high ability workers. formally, there may exist a separating equilibrium. the employers believe that workers with an education greater than e are high ability and this pays a wage of 2 if education is greater than e. the employer believes that workers with an education lower than e* are low ability and pays a wage of 1.

separating equilibrium

single crossing

workers choose education understanding that the firm will pay a wage based on education, if education is costless than all workers will get education e* or more and collect the high wage, but this cannot be an equilibrium as the firm’s beliefs are incorrect, so with a costless education we cannot have a ______ ______ if education is costly and the cost of education is higher for low ability workers than for high ability workers, then there may be a separating equilibrium where workers educational choices are consistent with the firm’s beliefs. the cost per year of education is C for low ability workers and c/2 for high ability workers. the difference in costs by education is called the ____ ____ property each type of worker will choose the level of education that maximizes the difference between the wage and the cost of education. low ability workers choose an education of 0 and high ability workers choose an education of e*. neither type has an incentive to deviate. the single crossing property is really important here. this means that the low types do not want to deviate to e* and the employers beliefs are correct.



in this model, _____ is a social wasteful signal. it has zero productive value and it redistributes wage income from low ability workers to high ability workers. depending on the firm’s beliefs, the extent of the social waste can vary (.ie different levels of e*) there is empirical evidence in favor of signaling. wages do not increase smoothly in years of education. those who drop out of college in the years before graduation earn a lot less than those who graduate. those who drop out just before graduation have almost the same human capital as those who graduate. signaling can explain the large wage premium from graduating from college. but the counterargument is that those who drop out of college do so for a reason- low motivation or poor health. there is also empirical evidence against signaling. the wage gains to education _____ over the life cycle. if employers learn about ability over time or if ability changes over time then the signaling value of education should decrease with time in employment. thus, if signaling is at work we should expect a large wage gain to education at the point of entry to the labor force, followed by a stable or decreasing wage premium. empirical estimates of the returns to education generally lie in the 5-12% range.

ability bias

high ability workers tend to get more education than low ability workers. high ability individuals tend to get paid more in employment that low ability individuals in the same job with the same education. this type of bias creates an upward pressure in the estimated returns one education one solution to this bias problem is "twin studies", used a sample of identical twins to obtain an estimate of returns to education, identical twins have identical innate ability, looking at differences in wages according to the differences in education isolates the causal effect of education.

selection bias

wages are only observed and sampled for working individuals. we do not know what a non-working individual would be paid if he or she were in employment. but, the individual’s decision to work is based on the wage. individuals who can earn a high wage, because they have a high motivation are more likely to enter employment that those with a low wage. it is likely that high education workers are in employment irrespective of motivation, therefore there is not much selection. there is more selection for the low motivated, they will only work if the wage is high. there is a downward bias in returns to education.

human capital



what causal effect is being estimated? 1. ____ ____- if education is productive then an increase in wages with education reflects a productivity increasing effect of education 2. ______- in a pure model of this, education has no productive value and the estimated return to education reflects the redistribution of wages between high and low ability workers. private v. social returns to education ____ equation estimates are estimates of the private return to education rather than the social return. social returns may arise from positive spillovers, education benefits even those who do not receive an education. through motivation or productivity or intergenerational transfers

social security

____ ____ benefits are based on the average indexed monthly earnings from the 35 highest earning years in an individual’s career for an individual with average earnings and 35 years of work experience, social security retirement benefits will replace approximately 40% of pre-retirement earnings for 19% of recipients, social security is their sole source of income. for 30% of recipients, social security accounts for 90% of their retirement income

future earnings

retirement incentives depend on 1. the present value of ____ ____ (social security) if he retires today at the age of 62. 2. the present value of ___ if he postpones retirement. 3. the value of ____ that you will be able to enjoy if you retire.


the present value of future earnings is ____ the longer the individual waits before retirement and starts to claim benefits. therefore, the individual should retire based on the value the individual places on the extra ___ available when you are retired. if you have a high value of leisure than you should retire early and if you have a low value of leisure than you should postpone retirement. the individual should retire at the age that gives him the highest present value of combined earnings, social security benefits and leisure time.

efficiency wages

when firms pay high wages to increase productivity this is called….


between 1908 and 1914 the ____ motor company introduced automated processes into its model t ford car. work was boring and repetitive, most of the workers on the production line were unskilled. worker turnover was really high (in 1913, 370 workers had to be hired over the course of the year to keep 100 workers employed. the morale was low and the absenteeism was really high. however, the company had no problem hiring workers, there was a large supply of unskilled workers.


in 1914, the ford motor company made the dramatic step of increasing the wage to $5 a day. this was a huge increase as the previous wage was about $2.50 a day. the motivation for the large pay increase was not to attract workers. there was no shortage of qualified workers waiting outside the factory gates to be hired. rather, the large pay increase was intended to change the behavior of ____ employees. specially, it was intended to reduce worker turnover, reduce absenteeism rates, and increase worker productivity. this worked, absenteeism fell by 75%, morale and productivity increased, although it was probably too large of a pay increase to be profit maximizing.


the ford motor company case study highlights that the optimal quantity of labor is not a simple quantity. once a worker is hired, he or she has many choices…. 1. how hard to work 2. when to quit her job 3. whether or not she wants to be a team player 4. how often to call in sick 5. etc. in response to those effects, employers may design _____ schemes in order to motivate their workers. also, compensation schemes may be designed to attract workers who will be self motivated once they join the firm.

equity, increase

higher wages may attract higher ____ workers. with higher wages, the pool of people who will be willing to work at the firm are larger. the firm will have a larger pool of employees from which to select its employees/workers. the firm can be highly selective in which workers it wants to hire, and can therefore select workers who are going to be the most productive once employed. you can also build employee ______. if the wage is high relative to the worker’s outside option then it will be unattractive for the workers to quit. employee turnover will then decrease and therefore the firm benefits from more job specific human capital accumulated via learning by doing. also, with a high wage, relative to the outside option, the employee will be highly adverse to being fired. employee shirking will be reduced. you can also build a positive perception of _____ for most people, it is not just the absolute wage which enters into the utility function. an individual’s wage relative to that of her co-workers can also be an important motivating factor. decreasing the variability of wages between workers in the same firm can work to increase worker moral and to increase productivity. so therefore, increase the wages on manual workers, relative to more highly skilled workers, may ____ productivity.

average productivity of labor

goods produced/ number of workers employed y/l

marginal productivity of labor

the extra goods produced by hiring an additional worker in this short run, this is typically diminishing, the more people working the in firm, the less an additional worker will add because all workers share the same capital. as the employment level increases, capital resources become more and more congested. change in y/ change in l

efficiency wage

the profit maximizing wage, recognizing that higher wages may increase productivity


revenue-costs priceoutput -wagelabor output f(L) is the number of goods produced with L units of labor. as we increase the wage, the cost of labor increases. but, all else equal, a wage does not affect revenue.


the rule of profit maximization: the firm employs labor up to the point where the extra revenue from employing an extra unit of labor ____ the extra cost MRPL=MEL

marginal revenue product of labor

extra revenue from employment of an extra unit of labor =p*MPL, where the marginal product of labor is the extra output from an additional worker. the extra cost from employing an extra unit of labor is this… and it is equal to the wage

low wage

starting at a _____ wage, a small increase in the wage is likely to increase productivity and profits. gains for reduced turnover and high productivity will be high. further increase will be similarly costly. however, workers are likely to exhibit diminishing sensitivity to wage increases. at some point, wages cease to have an effect on productivity or turnover.


there is a minimum _____- an hourly, weekly or monthly threshold that compensation must legally meet or exceed arguments in favor: increase living standards, reduce poverty, reduce inequality, increase efficiency arguments against: increase unemployment and have adverse effects on profitability.

states x 2

beyond the federal minimum wage, some ____ have their own minimum wages. ____-level minimum wages are in part justified by regional differences in costs of living. state level changes in minimum wages provide opportunities to investigate empirically effects of minimum wages on employment by using differences in differences methods.


the theoretical effects of minimum wages depend on the ___ of the labor market there are effects in the competitive markets with 100% coverage, there are effects with covered and uncovered sectors and there are effects in monopsonistic markets (employers with market power)

demand, supply, upward

in this type of labor market, the firm is small relative to the size of the labor market. therefore, the firm cannot influence the wage rate, and the wage rate does not depend on the firm’s employment level. the condition for profit maximization is that the firm hires workers up to the point where the marginal revenue product of labor equals the marginal expense of labor. p*MPL= W the MRPL curve is the individual firm’s _____ curve for labor and the MC curve is the ____ curve for labor facing the firm. the market supply is ___ sloping. when there is an introduction of a minimum wage, the lowest wage payable is now restricted by the law.

non binding

if the minimum wage is lower than the equilibrium wage in the market, the marginal cost curve facing the firm does not change and this minimum wage is ____-_____.


if the minimum wage is greater than the equilibrium wage in the market, this high minimum wage makes illegal the previous market clearing wage. the MC of labor curve facing the firm shifts _____ to the level of a new minimum wage and the profit maximizing level of employment will fall. at he market level, the aggregate employment falls but he wage paid increases.


a binding minimum wage causes ______. when the wage equals the minimum wage, the supply of labor exceeds the demand for labor. and there are even workers who would be willing to work for less than the minimum. it would be profitable for firms to employ these workers but they cannot because it would be illegal to do so.



a ____ minimum wage- workers are paid a wage above the minimum wage. the minimum wage has no effect on employment or wages. a ____ minimum wage- workers are paid the minimum wage, the minimum wage reduces employment but increases the wage of those who are employed.


the coverage of the minimum wage is not ___%, there are some small local firms that are exempt and enforcement of the law is not perfect. the labor market contains covered and uncovered sectors. the movement of workers between these sectors is important for determining the effect of the minimum wage on wages and employment.

fall, down

simple model of ____ supply, there is a fixed total supply of workers to the market. they are willing to work at any wage. suppose there is an existence of a covered and an uncovered sector of workers. workers distribute themselves between these two sectors. the free movement of the workers between the sectors means with no minimum wage in the covered sector, the wage is equal across the sectors. if the minimum wage increases in covered sector, the employment in the covered sector will ___. some workers in the covered sector will lose their jobs and move to the uncovered sector. this will drive the wages in the uncovered sector ____. but everyone is once again employed. the welfare effect is again ambiguous, there are wage increases for some and wage decreases for others.

market power

in some labor markets, employers may have ___ ____ in the labor market and therefore, they may be able to set the market wage. this is most likely in specialized labor markets and geographically isolated markets. the extreme case of a single buyer of labor gives a _____ labor market. but you can also apply this model to a small number of buyers in the labor market.


in the monopsonistic labor market, the firm faces an ____ sloping supply curve, to increase the supply of workers, the employer must increase the wages, as the firm cannot discriminate between employees when it increases the wage to attract more workers, all of the workers benefit from the wage increase.


profit maximization with monopsony- firms employ labor up to the point where the extra revenue for employing an extra unit of labor (p*MPL) equals the extra cost (MC= marginal expense of labor, MEL) this equation determines the firm’s profit maximizing employment level. once you have found the profit maximizing employment level, E, we must find the profit maximizing wage. Given employment E, the firm maximizes profit by paying the lowest wage that gives the employment level of E*. you need to look at the supply curve to find this.

increases, increases

when there is a minimum wage in monopsonies, it _____ employment and ___ wages, the minimum wage is reducing the employer’s power in a way that benefits employees


one limitation of our model is its static nature. in the long run, there is a ____ effect, there is a move to more capital intensive technology. there is also a ____ effect- the firm may shrink or exit the industry. the long run effects of a minimum wage may be less desirable than the short run effects.

competitive labor market

monopsony model

segmented labor market with covered and uncovered sectors

in this type of labor market, a binding minimum wage increases the wage but decreases employment and increases unemployment in this type of labor market, a not-too-high minimum wage increases the wage and increases employment. in this type of market- the minimum wage increases the wage and decreases employment in the covered sector, the minimum wage leaves people to exit the covered sector and move to the uncovered sector. the wage in the uncovered sector decreases and everyone remains employed.


_____ approaches rely on some kind of random assignment of the causing variable (income) to establish causation pure randomization- randomized social experiments and laboratory experiments are rare in labor economics quasi randomization- this is when you exploit naturally occurring randomization that is as good as random ex. change in policy or discontinuities in who is affected by a policy

differences in differences method


for this method, you need at least two groups. you need a treatment group that is subject to the policy or the invention and you also need a control group. you need to observe each group in at least one pre-reform and pre-intervention period. you also need to observe each group in at least one post reform/ post invention period the basic idea of this method is that the ____ groups tells us what would have happened to the treatment group had they not received the treatment

pre reform

you want to estimate the effects of the treatment. the total post reform difference between the treated and the control group include the treatment effect and the systematic treatment control difference. the ____-____ difference is the systematic difference between the treated and the control group the difference in these differences gives the treatment effect

the key assumption in DiD is that the ____ trend for the treated and the control groups is the same. this allows us to work out what would have happened to the treated if they had not been treated.

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