ECON 327 – Labor Economics
Spring 2014
Problem Set #6
Name_______________________________________
Due Monday, March 10 (30 points) – Turn in as hardcopy or electronically as PDF or Word Document.
1.
Discuss the expected theoretical relationship between contracted fringe benefits and wage rates.
Explain the popularity of contracted fringe benefits. What problem can lead to statistical evidence that
the theoretical relationship does not hold? Discuss the problem and the evidence from studies that use
methods to counteract the problem.
2.
There are two distinct sectors: taxicab drivers (X) and teachers (T). Suppose that there is complete labor
mobility between the two sectors, and complete immobility from either of these two sectors to all other
labor markets. There are 100 equally talented workers who supply their labor perfectly inelastically. The
demand for taxicab drivers is given by LX = D(WX) = 115 − 15∙WX and the demand for teachers by LT =
D(WT) = 85 − 5∙WT.
(a) What is the competitive equilibrium outcome (wages and employment in each sector) in this
situation?
(b) What is the equilibrium outcome (wages and employment in each sector) if the government imposes
a minimum wage of $7 that covers both labor market sectors?
(c) Instead of (b), what would happen to the equilibrium outcome (wages and employment in each
sector) if the government imposed a minimum wage of $7 that covered only the taxicab sector?
(d) What are the different impacts on unemployment in (b) and (c)?
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3.
Consider a monopsonist that confronts a wage schedule W = S(L) = L and whose marginal revenue
product curve is L = 115 – 15W (or MRP = 7.67 - .06L). [Note: The MFC of labor is MFCL = 2L.]
(a) what is the monopsony outcome for employment and the wage rate?
(b) what happens to employment and wages if government sets a minimum wage equal to $7? What if
government sets a minimum wage equal to $5?
(c) Note that the demand curve in this question is the same as the demand curve for taxicab drivers in
question 2. Compare your answers in (2) and (3) concerning a minimum wage law.
4.
Discuss the evidence concerning the employment impacts of minimum wage laws.
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5.
Discuss the theoretical impact of minimum wage laws upon income inequality. Discuss the evidence.
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