Economics 415: Economics of the Employment Relationship
Topics to Review for the First Midterm Exam
The first midterm examination will count for about 1/4 of your final grade in the course. The exam may
cover any topics covered in course lectures, as well as any material from the following chapters in your
textbook (Contemporary Labor Economics, by McConnell, Brue, and Macpherson): Chapters 1—4, 6 (first
part), and 9. A list of broad topics appears below and continues on the other side.
The format of the exam will be much like that of the homework assignments you have done—that is, a
series of questions requiring a short answer. In most cases, it will be more important to explain the answer than
simply to give the answer. Guessing may not be very helpful; even if you somehow guess the right answer, you
will likely not get much credit if there is no indication of how you arrived at that answer. On the other hand,
you may receive substantial credit for an incorrect answer if there is solid reasoning behind it. If you would like
an example of the exam format, some past midterm exams are available on the course page on D2L. Answers
will not be provided, however.
Several different styles of questions may appear on the exam. Some questions may require little more
than an understanding of key definitions or empirical results, others may involve computations, and still others
may ask you to apply what you have learned in this class to a particular problem or observation. All of these
are skills that this class is intended to help you acquire and develop. Remember as well that this course is
designed to present the “economic perspective” on labor markets, so your answers should be written from that
perspective. Refer to the handout “The Economic Perspective” for a description of this point of view.
Be aware that you will have a limited time to work on the exam. Another course uses the classroom after
we do, so it is important that we vacate the room promptly. Accordingly, you will have 75 minutes to work, and
you must complete your exam within those constraints. The exam will be short enough that you should be able
to finish in about an hour if you know the material well and work efficiently.
You will not be allowed to use your textbook during the exam. However, you may bring one page of
notes with you to the test. Other than that, all you will need are a calculator (optional) and a pen or pencil. You
will be able to write your answers on the exam itself, so you need not bring anything else to the exam.
Finally, I want to encourage you to see me to resolve any questions you may have about the material,
either during my office hours or by making an appointment (e-mail: sdrewian@uwm.edu)
Topics to study:
I.
Supply and Demand in Labor Markets (some material appears in the first part of Chapter 6)
A. Definitions of Supply and Demand Curves and Their Interpretation
B. Market Equilibrium
a. Finding Equilibrium through Graphs or Equations
b. How Equilibrium Changes when Supply or Demand Relationships Change
c. Welfare Analysis—Graphing and/or Computing Payments to Workers,
Deadweight Losses, etc.
C. Elasticities of Supply and Demand
1. Definitions and Calculations
2. Interpretation
a. Responsiveness of Quantities Supplied/Demanded to Changes in Wage Rates
b. The Availability of Alternatives/Substitutes and the Magnitude of Elasticities
D. Examples: Analysis of Taxes and Minimum Wages with Supply and Demand
II.
Aggregate Labor Supply (Chapter 3; latter part of Chapter 9)
A. Definitions of Measures Relevant to Labor Supply
1. Noninstitutional Civilian Population
2. Civilian Labor Force
3. Employed versus Unemployed versus Out of Labor Force
4. Labor Force Participation Rate, Unemployment Rate, and Employment-Population
Ratio
5. Seasonal Adjustment
B. Population
1. Fertility
2. Mortality
3. Migration (latter part of Chapter 9)
a. Migration between Countries
b. Movement of Domestic Workers across Occupations, Industries, and Locations
(States/Counties/Metro Areas).
C. Labor Force Participation Rate
1. Declining LFP for Older Workers
2. Rising LFP for Women
D. Hours of labor supplied per worker
1. Trend over time (sharp decrease between 1900 and 1940, almost perfectly constant
since)
2. Variation across countries
III.
Individual Labor Supply (Chapter 2)
A. Key Tradeoff: “Leisure” Time versus Earned Income
B. Income and Substitution Effects
1. Concepts
2. The Net Effect and Implications for Individual Labor Supply
3. Application: Labor Supply of Men versus Women
IV.
Human Capital and the Quality of the Labor Supply (Chapter 4, first part of Chapter 9)
A. On the Job Training: General versus Specific Human Capital
1. Who pays for it? Who benefits?
2. Implications for the durability of the employment relationship
B. Selection Bias: Cautions about Comparing Cross-Sectional Means When Individuals Self-Select
Into Groups
C. Age-Earnings Profiles
D. Present Value calculations
E. Factors that affect the optimal amount of human capital investments
1. Out of pocket costs
2. How long the investment will be used (e.g., number of years person will work in the
formal labor market in the future)
3. Interest Rate
4. Foregone earnings
5. “Rate of return” to education (amount that it increases wages)
6. Uncertainty
7. Credit Constraints (difficulties in borrowing to finance education)
F. Value of education
1. Raw college wage premium (currently about 80%)
2. True “rate of return” to education (For people who choose to go to school, each year of
schooling increases their wages by about 10% over what they would have been.)
G. Alternate Hypothesis: Education as a Screening Device
H. (Related application) Migration As a Human Capital Investment (first part of Chapter 9)