Deck 8: Compensating Wage Differentials

Question 1

What does the empirical evidence regarding compensating differentials tend to reveal?

A) They do exist in situations of job safety and work hazards.
B) There is evidence of the existence of both positive and negative differentials for a wide range of job amenities and disamenities.
C) It is hard to find the evidence to support the theory of compensating differentials.
D) They do not exist.
E) There is evidence that they exist, but the methodology is so fraught with pitfalls that the evidence is not deemed to be credible.

Answer 1

A

Question 2

The isoprofit schedule exhibits a(n) between wages and job safety levels.

A) increasing marginal rate of substitution
B) constant tradeoff
C) diminishing marginal rate of substitution
D) diminishing marginal rate of transformation
E) increasing marginal rate of transformation

Answer 2

D

Question 3

In the context of empirical research on compensating differentials, omitted variable bias may exist when:

A) Important variables are not controlled for in the measurement of the wage-risk tradeoff.
B) Irrelevant variables are included in the equation.
C) Employers attempt to hide crucial safety information from their employees.
D) The information about factors that are correlated with job risk is imperfect.
E) Samples have selection issues.

Answer 3

A

Question 4

How do economists go about estimating the value of life in the context of job safety regulation?

A) They add up the cost of implementing all of the job safety features in firms that have excellent job safety records.
B) They estimate the compensating wage differential that workers in a dangerous occupation receive for the level of risk that they assume, and then extrapolate that figure for a scenario in which the risk is reduced to zero.
C) They take the amounts that are rewarded to victims' families in wrongful death law suits.
D) They estimate the difference between profits that are earned by firms with dangerous working conditions versus those with safer working conditions.
E) They never engage in such an exercise, as life is infinitely precious and thus no value can be placed upon it.

Question 5

Which of the following statements does not pertain to wage structures?

A) The wage premiums that compensate workers for working jobs with undesirable characteristics
B) The lowest wage levels at which workers will accept jobs having certain attributes
C) The relative prices of labour that are utilized in order to allocate labour to its most efficient use
D) The relative prices of labour that are used to remunerate human capital
E) None of the answer choices are correct.

Question 6

Which of the following is correct?

A) In a competitive market, the firm will bear the costs of a legislated increase in safety regulations.
B) In a competitive market, imposing safety regulation is easy since all firms will adopt it right away due to the market competition.
C) In a competitive market, a legislated increase in safety will drive some firms out of the business.
D) In a competitive market, the application of uniform safety standard will not help weed out the firms that have low safety technologies.
E) In a competitive market, a legislated increase in safety will make people better off.

Question 7

Compensating premiums for job-related risks are normally paid (ceteris paribus) in the form of:

A) longer coffee breaks at Tim Hortons.
B) higher degrees of job security.
C) higher wages.
D) time off the job with pay.
E) certificates of appreciation for working at a tough job.

Question 8

Consider the diagram for a labour market in which the relevant job attribute is the instability of the hours. In other words, less stable jobs are characterized by irregular hours, with no guarantee of a full time job, but with the possibility of overtime hours some weeks. What would the curves look like?

A) The model cannot be used for this situation
B) Positively sloped isoprofit curves and negatively sloped isoutility curves
C) Negatively sloped isoprofit curves and positively sloped isoutility curves
D) Negatively sloped isoprofit and isoutility curves
E) Positively sloped isoprofit and isoutility curves

Question 9

Which of the following regarding attracting doctors to rural community is NOT correct?

A) Rural community does not usually have fully staffed and equipped hospitals.
B) Given the tight budget constraints, government cannot afford to pay the doctors a premium to attract them in the rural community.
C) Most of the doctors prefer to work and live in the urban area.
D) If moves to rural community, doctors have to pay higher taxes on the salary premia paid by the government.
E) The theory of compensating wages explains that the doctors will move to rural community as long as a premium is paid.

Question 10

Higher isoprofit schedules would imply profits that are the normal, competitive level.

A) higher than
B) below
C) greater than or equal to
D) equal to
E) None of the answer choices are correct.

Question 11

An isoprofit schedule is defined as:

A) The various combinations of wages and safety that the firm can provide and maintain the same level of utility for the labour force.
B) The various combinations of wages and safety that the firm can provide and maintain the same level of profits.
C) The various combinations of safety initiatives and wages that the firm can provide and still earn profit.
D) The various combinations of wages and safety that the firm can provide and maintain the same level of costs.
E) The variation between profit and loss margins that a firm earns as a function of changing wage and job safety levels.

Question 12

The employers' offer curve shows which of the following?

A) the wage levels offered by employers that are dependent on the required levels of safety and health
B) the maximum compensating wages that will be offered in the labour market for various levels of safety
C) the employers' profit-maximizating wages that combines wage and safety levels
D) the minimum compensating wages that will be offered in the labour market for various levels of safety
E) the employers' preferred combination of wage and safety levels

Question 13

The slope of the wage-safety locus gives:

A) The change in the wage premium that the labour market yields for differences in the degree of risk of the job.
B) The change in profitability that is associated with different combinations of wages and job safety.
C) The change in the wage premium that the labour market yields for differences in the preference of the workers.
D) The change in the wage premium that the labour market yields for differences in the salary of each worker.
E) The change in the wage premium that the market yields for differences in the safety standards of firms.

Question 14

Consider the diagram for a labour market in which the relevant job attribute is job safety. Why are the isoprofit curves concave, i.e., bowed in towards the origin?

A) Because paying higher wages and providing a safer environment for the workers are both costly for the employer
B) Because the marginal rate of transformation between wages and safety is increasing as a firm introduces more sophisticated safety procedure.
C) Because a firm's profit decreases if it provides a safer environment for the workers.
D) Because there is a negative trade-off between job safety and wages
E) Because the marginal rate of transformation between wages and safety is decreasing as a firm introduces more sophisticated safety procedure.

Question 15

The more ________ the individual, the more he/she requires a compensating wage differential in return for accepting a riskier work environment.

A) risk-averse; larger
B) risk-neutral; smaller
C) risk-averse; smaller
D) risk-loving; larger
E) risk-neutral; larger

Question 16

Which of the following regarding family-friendly workplace practice is correct?

A) Practices as the availability of parental leave, flexible working hours, job sharing, and taking time off work and making it up later are all part of the family-friendly workplace programs advocated by the government.
B) One cannot use the theory of compensating wage differentials to explain family-friendly workplace practice since it is not a job characteristic.
C) Empirical research finds little evidences to support the use of the theory of compensating wage differentials to explain family-friendly workplace practice.
D) One cannot use the theory of compensating wage differentials to explain family-friendly workplace practice since people are not willing to accept lower wages in return to family-friendly work environment.
E) None of the answer choices are correct.

Question 17

In wage-job safety space, workers' indifference (or isoutility) curves slope downwards because:

A) Workers require a higher compensating wage in order to avoid risky jobs.
B) Workers require a higher compensating wage in order to remain indifferent to the additional risk.
C) Lower wages are required in order to keep profits constant if a higher degree of job safety is required.
D) Employers will compensate them for their aversion to risk.
E) More hours of labour are supplied when wages are increased.

Question 18

Which of the following is not a way in which high wages may induce higher productivity?

A) Through reductions in absenteeism
B) Through improved morale
C) Through higher levels of job safety and improved working conditions
D) Through lower levels of turn over
E) Through greater intensity of work effort

Question 19

With reference to behavioural economics, in the context of compensating differentials, all of the following statements apply except that:

A) It is based on laboratory experiments in which the choices of workers are observed.
B) The labour market will generate compensating differentials in order to deal with job-related amenities and disamenities.
C) It gives reasons for why people ignore major infrequent risks or possible disamenties of the job.
D) It investigates how individuals make job-related choices (such as working conditions) based on imperfect information.
E) It makes a case for government intervention and regulation in the workplace.

Question 20

Which of the classical economists was the first to analyze the topic of compensating wage differentials?

A) John Stuart Mill
B) John Maynard Keynes
C) Adam Smith
D) David Ricardo
E) Alfred Marshall

Question 21

In the context of job related risk, the term "value of life" refers to:

A) people's willingness to pay in order to reduce the risk of death from a job-related accident to zero.
B) the value that is placed on the possibility of death in a working environment.
C) the average amount of awards in law suits involving wrongful death.
D) people's willingness to pay to save a person's life.
E) more leisure time.

Question 22

Regarding empirical research on compensating wage differential, which of the following is NOT correct?

A) Compensating wage premiums are larger in nonunion than in union environments.
B) Empirical evidences support that individuals would have to be compensated for bearing the risk of unemployment.
C) Empirical evidence shows that overall compensation inequality increased even more than wage inequality.
D) Compensating wage premiums are paid for work hazards and they increase with the seriousness of the risk.
E) People in poorer countries are willing (more realistically, constrained) to take on more risk in return for smaller wage increases than are people in richer countries.

Question 23

• Explain in general, intuitive terms the theory of compensating differentials. There is no need to provide a graphical analysis or to furnish technical details. Your response should address the followi issues:
(1) Explain how it fits onto the primary, neo-classical approach to labour economics.
(2) What are the primary elements (what are the curves in this model actually reflecting)?
(3) What are the two primary implications?
• Illustrate this theory by describing the following phenomena:
• very low wages in the child care sector
• very high wages in the mining sector
• high wages in construction
• Explain why an economist like Adam Smith who subscribes to free-market ideology would find this model so appealing.

Question 24

In searching for empirical evidence of the existence of compensating differentials, all of the following problems are potentially an issue except:

A) the wage-safety locus problem
B) omitted variable bias in the wage equation
C) error-in-variables problems for the risk variable
D) simultaneous equation bias problem
E) sample selection bias for the wage equation

Question 25

The curvature of the isoutility curve illustrates:

A) a diminishing marginal rate of substitution between wages and job safety.
B) the law of diminishing marginal returns applied to wages.
C) the diminishing marginal rate of technical substitution between wages and job safety.
D) a diminishing marginal rate of transformation between wages and job safety.
E) the amount of safety that can be exchanged for wages on the labour market.

Question 26

Which of the following is NOT a problem related to the empirical studies of compensating wage differentials?

A) Simultaneous equation bias
B) Sample selection bias
C) Omitted variables bias
D) Specification bias
E) Errors-in-variables problems