Labour Market and Marginal Products Questions


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Q1 You are the human resource manager at a large organization. Each worker in your organization produces output valued at $10 per hour (i.e., VMP = $10). You want to deter shirking and turnover by paying a deferred wage profile where the hourly wage is W = 2/3T, where T is the tenure, or length of time that the worker remains with the firm (i.e., after 10 years the worker would earn W = 2/3(10) or $6.67 per hour).

  1. a) Draw the diagram of the deferred wage profile. [2 marks]
  2. b) Could this profile persist? [2 marks]
  3. c) Solve for the breakeven point, or length of time the person would have to staywith the firm so that her wage would just equal their productivity. [2 marks]
  4. d) If the vast majority of the workers start working with the firm at age 35, whatmandatory retirement age would you pick to provide a termination date to thatcontractual arrangement? [2 marks]
  5. e) If a positive discount rate were assumed, what would that do to the mandatoryretirement age? [2 marks]

Q2: Mandatory retirement may exist in part to facilitate the payment of deferred wages. If this is the case, discuss the impact that a legislative ban on mandatory retirement would have on the following aspects of the personnel function:

a) Compensation b) Monitoring and evaluation c) Training

Q3 The average wage depends on ability and years of education (S) as follows: W = $50,000 + $5,000S for more able individuals

W = $30,000 + $5,000S for less able individuals
In addition, S=10 for more able individuals and S=5 for less able individuals.

  1. a) Do employers discriminate based on the years of education? [3 marks]
  2. b) Based on the observed difference in the average wage between more and less able individuals, what is the implied return per year of education? How is thisdifferent from the actual return per year of education? [4 marks]
  3. c) What is an instrumental variable? Explain how using an instrumental variablecan help you identify the actual return per year of education even if you can’t observe the ability of individuals. [3 marks]

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