I need help in Labor Economics

Assignment 2 Due December 2nd, 2015, in class Must be submitted as a hard copy

Question 1

Consider the following information:

White Males Non-White Males Variable Mean Std. Dev. Min Max Mean Std. Dev. Min Max

Income (year) 46,450 8,500 0 500,000 36,850 7,750 0 425,000 Schooling (years) 14.50 3.50 0 20 13.25 3.75 0 20 Experience (years) 22.25 11.00 0 50 18.25 10.85 0 45 Has tenure 0.25 0.11 0 1 0.15 0.07 0 1 Is Married 0.80 0.45 0 1 0.70 0.55 0 1 Is Unionized 0.25 0.22 0 1 0.20 0.18 0 1 Works part-time 0.05 0.22 0 1 0.15 0.48 0 1 Works for a large firm 0.55 0.45 0 1 0.35 0.60 0 1 Lives in the maritimes 0.10 0.65 0 1 0.10 0.65 0 1

Variable β̂white β̂non−white Intercept 12,000 11,500 Schooling (years) 1,100 1,000 Experience (years) 500 450 Has tenure 10,000 9,500 Is married 4,000 3,750 Is unionized 3,000 3,000 Works part-time -10,000 -9,000 Works for a large firm 3,500 3,250 Lives in the maritimes -5,000 -5,500

QUESTIONS: Using the means of each variable, what is the predicted wage gap between white and non-white men? Next, using a “Blinder-Oaxaca” decomposition, break-up this total wage gap into “explained” and “unexplained” portions, using the white male coefficients as the “privileged” betas. How much of the total wage gap is explained? How much of the wage gap is unexplained? Perform this analysis with both methods of decomposition.

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Question 2

A firm manufacturing smart phones is interested in attaining only the highest quality workers. To screen out the lower quality workers, the firm puts into place a one-year probationary period whereby the employee will earn a reduced salary. At the end of the one-year period the firm will decide whether or not to keep an employee. Should this employee be kept on, they will earn a higher salary for their remaining years at the firm. The firm typically finds that employees stay with the firm for 15 years in total (probation + non-probation years), and assumes that new recruits will do the same. Skilled labour can earn $25/hour at other manufacturing operations in the area while unskilled labour can earn $18/hour working at call-centres. Assume the employee is compensated for 2,000 hours per year regardless of where they work. Lastly, the firm inspects 99 percent of its smart phones to ensure they meet pre-specified standards, tracing all defects back to the employee who manufactured the phone. Note the firm makes their decision as to whether or not to keep the worker based on the occurrence of a defect during their pre-probationary tenure. Should a defect be found, their contract will not be renewed after the pre-probationary period.

QUESTIONS: What should the probationary period wage and the post-probationary wage be in light of the monitoring and outside opportunities? These wages must be able to effectively keep out unskilled labour while enticing skilled labour to apply. Ignore present value calculations and assume that the post-probationary wage and outside opportunity wages will not change for the duration of employment.

Do not simply use the formulas provided in class without showing where they came from. Prove why these wages you found will only entice skilled workers to apply for the job.

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