Ch.14 – Attracting and Retaining Qualified – Full Test Bank

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1) What roles do human capital and compensating differentials play in shaping the wage that a firm will pay a new employee?

2) Explain the effect of self-selection on compensating wage differential.

3) What are internal labor markets and what is an important characteristic of these markets?

4) Fred Powell of TruLite makes a verbal pledge to every new employee that he will not lay off employees after they have worked for TruLite for two years and that TruLite will make all promotions internally. Why would Powell make such a pledge? Why is the pledge unwritten?

5) What are efficiency wages and why are they important in internal labor markets?

6) Always Round Tire tries to base its promotions on seniority (where education and training requirements are not necessary). The company finds that this system seems to work most of the time with shop-floor supervisors and team managers. However, the system breaks down for higher-level positions. Why?

7) Employees at Plain Truth Advertising have maintained a semi-secret website where wages of employees are published and comparative salaries of friends at other advertising agencies are also published. Employees at Plain Truth Advertising have noticed that wage dispersion of similarly ranked employees has shrunk dramatically in the past five years. What happened?

8) How can firms survive in the long run if mandatory retirement is illegal and if firms are stuck with older workers whose productivity might technically have fallen over time?

9) The owners of Market Analysts, a business and economics consulting firm, are big believers in paying benchmark competitive wages. They pay all (non-legally specified) compensation in wages. If an employee wants a benefit, the company has an insurance program, but it comes out of the employee’s paycheck. Market Analysts tends to hire very young workers just out of college. They are energetic and work hard, but after two years they tend to leave for other firms, taking valuable training with them. If Market Analysts wants to keep its employees, what changes should it make to the terms of employment offered to new employees?

10) Draw a graph showing the trade-off between salary and benefits. Show an employee's indifference and a firm's isocost curve. Label the equilibrium salary/benefits combination. Discuss what would happen as individual taxes fall or as firm payroll taxes rise.

11) If a prospective employee is not offered his/her reservation utility or reservation wage, then he/she will

A) tend to look for another job or withdraw from the labor force.
B) seek a larger fringe benefit package.
C) use the job as the basis for a career, assuming that wages will increase beyond the marginal revenue product over time.
D) accept the job because a wage below the reservation utility is very attractive.

12) There are several assumptions that are the basis of the operation of the benchmark competitive labor market. Which of the following is not one of these assumptions?

A) Wage rates are costlessly observable.
B) All jobs are identical.
C) There are no long-term contracts.
D) Compensation is made up of wages and benefits.

13) In the basic competitive model of labor markets, we see that

A) individual firms and workers can exert a lot of influence over the wage rate.
B) there are only long-term contracts.
C) jobs are not identical to each other.
D) individual firms and workers have no control over the wage rate paid and received.

14) In the basic competitive model of labor markets, it is assumed that

A) individuals are not identical in training and skills, and jobs are not identical.
B) not all individuals are identical in training and skills, but all jobs are identical.
C) individuals are identical in training and skills, but not all jobs are identical.
D) individuals are identical in training and skills, and all jobs are identical.

15) In the basic competitive model of labor markets we assume that

A) firms have discretion over the wages they pay to their employees.
B) market wage rates are not costlessly observable.
C) all compensation is monetary and there are some fringe benefits included.
D) all compensation is monetary and there are no fringe benefits.

16) In the benchmark competitive case, the firm will expand the hiring of employees until the marginal revenue product is

A) less than the market wage rate.
B) equal to the market wage rate.
C) greater than the market wage rate.
D) the square of the market wage rate.

17) If a firm in a competitive labor market offers less than the market wage rate, it will

A) be able to attract a large number of employees because the marginal revenue product is low.
B) find that it has broken a federal wage law.
C) attract too few employees.
D) find that the supply is greater than the demand.

18) Human capital is a term that characterizes

A) the number of workers in a company who are productive.
B) firms that sell their products to customers directly.
C) individuals who buy skills from the companies they work for.
D) individuals with a set of skills that they rent to employers.

19) The value of human capital is determined by

A) a special team of experts in each college and university.
B) a ranking system of the relative value of different types of education to society.
C) the forces of supply and demand for human capital in the market.
D) an investment board at the New York Stock Exchange.

20) Which of the following is a distinction between general and specific human capital?

A) General human capital consists of training and education that is valued by different firms, whereas specific human capital is more valuable to the current employer.
B) General human capital enables workers to earn compensating wage differentials, whereas workers with specific human capital earn the competitive wage rate.
C) General human capital leads to higher labor costs, whereas specific human capital leads to higher turnover costs.
D) General human capital leads to self-selection on the basis of risk preference, whereas specific human capital leads to the adverse selection problem.

21) The gains from specific training in human capital tend to go to the

A) employing firm and not the individual.
B) federal government in the form of higher taxes.
C) individual and not the employing firm.
D) parents since they paid for the education in the first place.

22) The gains from general training in human capital tend to go to the

A) employing firm and not to the individual.
B) federal government in the form of higher taxes.
C) individual and not to the employing firm.
D) parents since they paid for the education in the first place.

23) The extra wage that is paid to an individual to attract him/her to a less desirable job is called

A) the benchmark competitive wage.
B) the general training human capital difference.
C) the specific training human capital difference.
D) a compensating wage differential.

24) A waiter in an all-night restaurant at a dangerous location is likely to receive

A) a competitive market wage.
B) a wage that equals returns to general training.
C) a wage that equals returns to specific human capital.
D) a wage with a compensating wage differential.

25) In Mexico, many garment or tailoring shops found they could entice many young people to work for them if they offered clean, air-conditioned work areas with high-quality locker rooms to clean up in after the work day. Typically, traditional garment shops had to offer ________ to get workers to apply for the hard, repetitive, and somewhat dangerous work.

A) benchmark competitive wages
B) compensating differentials
C) monopoly wages
D) wages based on human capital development of each employee

26) The Industrial Internet of Things (IIoT) is improving worker safety and increasing productivity. Though workers are supposed to earn a premium wage for working in more risky environment, the IIoT inspections may be a good idea because

A) employees might not have good information about the level of danger.
B) employees may already understand the risks that they are exposed to on the job.
C) inspections and fines may raise the cost of production significantly.
D) there are never any societal costs or externalities to dangerous working conditions.

27) Self-selection

A) increases the number of qualified applicants for a job.
B) increases the turnover costs of a firm.
C) increases the compensating wage differential.
D) reduces the compensating wage differential.

28) If a firm is inundated by qualified applicants when it advertises a job opening and the firm's quit rate is unusually low, then the firm is probably paying

A) below the market wage.
B) the market wage.
C) above the market wage.
D) each worker its marginal revenue product.

29) We know that a firm is paying way below the market wage rate if

A) the number of applications for a job posting is high and the quit rate is low.
B) the number of applications for a job posting and the quit rate are high.
C) the number of applications for a job posting and the quit rate are low.
D) the number of applications for a job posting is low and the quit rate is high.

30) The costs of recruiting new employees, training the new employees, and suffering the initial low productivity of new employees when old employees leave are called

A) efficiency wages.
B) benchmark wages.
C) turnover costs.
D) marginal costs of long-term training.

31) The typical employee

A) works for the same employer for about 5 years.
B) works for the same employer for about 10 years.
C) works for the same employer for about 15 years.
D) works for the same employer for about 20 years.

32) When a firm focuses on hiring only for entry-level jobs and tends to promote from within the firm, then the firm is said to

A) use the benchmark competitive labor market.
B) have an internal labor market.
C) hire based on human capital.
D) use compensating differentials.

33) When rates of pay and job assignments are determined by administrative rules and implicit promises of management, then a firm is operating in a(n)

A) internal labor market.
B) competitive labor market.
C) human capital market.
D) risk-sharing market.

34) When a firm makes verbal promises about future working conditions, benefits and raises, and promotions, it is offering a(n)

A) implicit labor contract.
B) explicit labor contract.
C) human capital contract.
D) compensating wage differential.

35) A primary reason for the use of implicit contracts in internal labor markets is to

A) establish long-term employment relationships.
B) encourage employees to participate in decision making.
C) reduce the costs associated with formalizing contracts.
D) reduce the training and recruitment expenses.

36) When a company is very dependent on firm-specific human capital, it makes sense for the company to

A) use only benchmark competitive wage rates.
B) offer compensating differentials for unpleasant jobs.
C) develop programs for sending employees to the local university.
D) create an extensive internal labor system for career advancement.

37) Which of the following is not a lower-cost benefit of an internal labor market?

A) promoting only insiders to higher-level jobs
B) the development of firm-specific human capital
C) the cultivation of long-term employee motivation
D) management's ability to learn about employees’ best attributes

38) Firms with internal labor markets have more flexibility in deciding the level and time profile of wages because

A) individuals tend to base their employment decisions on their entire career earnings.
B) they have to pay the wage rate that equals the marginal revenue product of labor.
C) compensating wage differentials do not have to be paid in internal job markets.
D) firm-specific human capital is less costly than general human capital.

39) To help with motivation, long-term productivity, and retention, firms with internal labor markets tend to offer all of the following except

A) efficiency wages.
B) benchmark competitive wages.
C) pay based on job seniority.
D) internally based promotion systems.

40) Efficiency wages can be used to

A) prevent self-selection of employees.
B) retain firm-specific human capital.
C) compare the relative performance of employees.
D) reduce influencing activities.

41) According to Peter principle, employees

A) keep getting promoted until they reach the level that they cannot handle.
B) should be promoted till they reach the top management level.
C) do not always value promotions.
D) resort to influencing activities to ensure their promotions.

42) In an internal labor market, employees often spend too much time lobbying for promotions or preferred job assignments. These are referred to as

A) administrative costs.
B) market costs.
C) influence costs.
D) human capital costs.

43) One of the benefits of the Hay System is that it can be used to

A) determine the optimal mix of salary and fringe benefits.
B) determine the level of compensating wage differentials in risky jobs.
C) assign a position to each job within a firm’s hierarchy.
D) assign a task to each employee on the basis of seniority.

44) The typical salary–fringe benefit mix for full-time workers in the U.S. businesses is

A) 90 percent salary and 10 percent benefits.
B) 75 percent salary and 25 percent benefits.
C) 55 percent salary and 45percent benefits.
D) 100 percent salary and benefits are illegal.

45) Large company-paid employee benefits packages can alter behavior and result in

A) output enhancement.
B) shirking.
C) seniority-based promotion.
D) compensating differentials.

46) For a given compensation potential (isocost curve), an employee with a large family is more likely to pick a wage-benefit mix that emphasizes

A) wages.
B) incentive piece rates.
C) risk-averse commission plans.
D) fringe benefits.

47) The two defects of cafeteria benefit plans are

A) the high cost of administration and wrong employee decisions.
B) the high cost of administration and adverse selection.
C) employee decision making and adverse selection.
D) employee decision making and free riding.