1. Suppose that we observe most janitors with red hair earn $8 per hour and most janitors with brown hair earn $6 per hour. The National Organization for Equality (NOE) also notices and holds a press conference decrying the lack of wage equality in the janitorial profession. Suppose that you take a closer look at the data and discover that most of the red hair workers are in hot, noisy factories, while most of the brown hair workers are in quiet, air-conditioned office buildings.

a)Making use of a diagram that properly illustrates the compensating differential model of job attributes, explain to NOE how the concept of compensating differentials may completely explain the wage differential. Be sure to clearly label your diagram.

2. Debbie is about to decide which career path to pursue. She has narrowed her options to two alternatives. She can become either a marine biologist or a concert pianist. Debbie lives for two periods. In the first, she gets an education. In the second, she works in the labor market. If Debbie becomes a marine biologist, she will spend $15,000 on education in the first period and earn $472,000 in the second period. If she becomes a concert pianist, she will spend $40,000 on education in the first period and then earn $500,000 in the second period.

a.Suppose Debbie can lend and borrow money at a 5 percent annual rate. Which career will she pursue? What if she can lend and borrow money at a 15 percent rate of interest? Will she choose a different option? Why?

b.Suppose musical conservatories raise their tuition so that it now costs Debbie $60,000 to become a concert pianist. What career will Debbie pursue if the discount rate is 5 percent?

b)Suppose that despite your insightful analysis, NOE successfully lobbies for a law requiring brown-hair janitors to earn $8 per hour as well. Use the model to further illustrate what effect this mandate will have on the utility of brown hair janitors. You should assume that rather than making less than zero profits a firm will shut down, but that there are plenty of jobs available at operating firms. Also assume that there are no market imperfections.

Now suppose that there are hidden dangers to working in air-conditioned office buildings. For example, workers may suffer from "sick building syndrome" where the lack of outside ventilation causes health problems. Using a diagram, illustrate what effect the NOE mandate may have on the utility of brown-hair janitors if when making their current job choices they are unaware of their risk of developing "sick building syndrome."

3. Suppose there are two types of persons: high-ability and low-ability. A particular diploma costs a high-ability person $80,000 and costs a low-ability person $200,000. Firms wish to use education as a screening device where they intend to pay $250,000 to workers without a diploma and $K to those with a diploma.

a)In what range must K be to make this an effective screening device?

b)Suppose the government subsidizes low-ability persons by $120,000 for the diploma.

What happens to the signaling value of the diploma?

4. Suppose years of schooling, s, is the only variable that affects earnings. The equations for the weekly salaries of male and female workers are given by:

w_m = 500 + 100s

and

w_f = 300 + 75s.

On average, men have 14 years of schooling and women have 12 years of schooling.

(a)What is the male-female wage differential in the labor market?

(b)Using the Oaxaca decomposition, calculate how much of this wage differential is due to discrimination?

5. After controlling for age and education, it is found that the average woman earns $0.80 for every $1.00 earned by the average man. After controlling for occupation to control for compensating differentials (i.e., maybe men accept riskier or more stressful jobs than women, and therefore are paid more), the average woman earns $0.92 for every $1.00 earned by the average man. The conclusion is made that occupational choice reduces the wage gap 12 cents and discrimination is left to explain the remaining 8 cents.

a)Explain why discrimination may explain more than 8 cents of the 20 cent differential (and occupational choice may explain less than 12 cents of the differential).

b)Explain why discrimination may explain less than 8 cents of the 20 cent differential.

6. Draw the union indifference curves (iso-utility curves) for the following situations:

a)Wages and employment are perfect substitutes.

b)There is a minimum wage below which union members will not reduce their wages in order to increase employment.

c)At the current level of employment within the union, unions attach more disutility to a given employment reduction than the utility they attach to a corresponding employment increase.

d)As their wealth increases, union members attach more weight to job security than to real income gains.

e)The union objective is to maximize the wage bill.

f)The union objective is to maximize total economic rent.