ARHOLIADAU EXAMINATIONS
Mai / Mehefin 2011 May / June 2011
EC31320 ECONOMICS OF LABOUR AND INDUSTRIAL
RELATIONS
Time allowed: THREE Hours
Answer THREE Questions
1. Assuming a firm has a highly stylised long-run production function of the form Q = f (L,
K), where output (Q) is a function of labour (L) and capital (K). Explain
diagrammatically with the aid of isoquant and isoexpenditure schedules how an increase
in the price of labour may induce both a substitution and a scale effect.
2. Outline the reasons why people migrate. What are the cost and benefits of a policy to
restrict immigration, with particular focus on the issue of illegal immigration?
3. Using Indifference curve analysis, isolate the income and the substitution effects of an
observed change in labour participation from an increase in wages. Show a case where
the substitution effect dominates the income effect.
4. Assume workers are grouped into more able and less able, and there are two possible
levels of education, e* and zero. Furthermore, ability and education are positively
correlated. Using the screening model clearly show under what circumstances:
a) All workers choose a zero level of education
b) All workers choose e* level and
c) The more able workers choose e* and the less able zero level. What happens if
employers raise e* to e**?
5. Explain what is meant by employer discrimination. What factors may affect the extent of
a pay gap between groups of workers under employer discrimination?
6. Illustrate how employees are matched with employers using hedonic wage theory.
7. Use a bargaining framework to explain how firms and unions bargain over wages.
Explain why it is normally more efficient for firms and unions to bargain jointly over
wages and employment.
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