THE UNIVERSITY OF ZAMBIA

SCHOOL OF HUMANITIES AND SOCIAL SCIENCES

2007 ACADEMIC YEAR FIRST SEMESTER

FINAL EXAMINATIONS

EC 431: LABOR ECONOMICS

TIME: TWO (2) HOURS

INSTRUCTIONS: ANSWER ALL (4) QUESTIONS

Question 1

a) A firm is considering adopting a plan in which the company pays employees

less than their MRPL early in their careers and more than their MRPL late in
their careers. For a typical worker at the firm, MRPL = 10 + 0.1T, where T =
number of years that the worker has been employed at the firm and MRPL is
measured in dollars per hour. The workers wage per hour is W = 8 + 0.2T.
Assume that this wage is high enough to attract workers from alternative jobs,
that the discount rate for a firm is zero, and that the expected tenure of a
typical worker is 35 years. If workers retire after 35 years, will this plan be
profitable for a firm? Explain. For how many years will the firm underpay its
workers?

b) “Wages in Indian firms were so low that they have no relationship with
worker productivity.” Comment on this statement using the principles of
profit maximization.

c) “Working in an explosive manufacturing company is dangerous to workers’

health and safety. You heard how some graduates died in a blast some few
years ago. Therefore, the government should establish and enforce a policy of
rigid safety and health standards.” (True/False/Uncertain). Briefly explain
your answer.

Question 2

Suppose the demand for pizza at fast food restraunts in a small city is
LD = 300-20W

where L = number of pizzas and W = the wage in dollars per hour. The equilibrium wage
is $4 per hour, but government puts in place a minimum wage of $5 per hour.

a) How does the minimum wage affect employment in these restaurants?

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 b) Suppose that in the city above, there is an uncovered sector where
LS = -100 + 80W
LD = 300 – 20W

where the supply is LS and demand is LD before the minimum

wage is put in place. Suppose that all workers who lose their jobs
as Pizza makers due to the introduction of the minimum wage seek
work in the uncovered sector. What happens to wages and
employment in that sector?

c) Women receive lower wages, on average than men of equal age. What
concepts of human capital help to explain this phenomenon? Why does
this discrepancy between earnings for men and women grow with age?

Question 3

When the Zambian labour Act began to mandate paying 50 percent more for overtime
work, many employers tried to avoid it by cutting hourly pay, so that total pay and hours
remained the same.

a) Assuming that this 50 percent overtime pay premium is newly required for
all work beyond eight hours per day, draw a budget constraint that pictures
a strategy of cutting hourly pay so that, at the original hours of work, total
earnings remain the same.

b) Suppose that an employer initially paid $11 per hour and had a 10-hour
workday. What hourly wage will the employer offer so that the total pay
for a 10-hour workday will stay the same?

c) Will employees who used to work 10 hours per day want to work more or
fewer than 10 hours in the new environment (which includes new wage
rate and the mandated premium).

Question 4

a) Suppose that the employer concession schedule is W = 1+ 0.02S and the

union resistance curve is W = 5 + 0.02S – 0.01S2, where W = percentage
wage increase and S = expected strike length in days. Using Hicks simple
model, dertermine the length of the strike and the percentage wage
increase.

b) Suppose the unionized workers in the mines earn $10 per hour and non-

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 Unionized workers in the industry earn $8 per hour. What can be said
about the relative wage advantage of unionized workers and the absolute
effect of the union on its members’ real wage?

c) Briefly discuss the constraints that unions face in achieving their

objectives.

END OF FINAL EXAMINATION

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