Labour Economics ECON30006
Problem Set Two
DUE BY: 4pm, Sunday, 7 May, 2023.
Problem set answers are to be submitted via the LMS “Assignments” menu item by the due
date and time.
This assessment is worth 5% of the overall grade for the subject.
This Problem Set Two can be completed by students in groups of a maximum three stu-
dents. Students will form their own groups. All group members will receive the same mark
for the assessment. Students may work alone if they wish and submit their own answers,
but I encourage you to work in groups.
Your answers must be no more than five pages in total, including graphs, tables, and
written answers. The written answers must also not exceed 1,000 words in total, so be
succinct in your written answers. Submissions that exceed page and word limits will attract
marking penalties (0.5 marks out of 5 for each 10% of length beyond these limits).
Answers not received by the due date and time – and if no formal assignment extension has
been granted by the Faculty (see the Subject Guide for information regarding applying for
assessment extensions) – will have half a point (out of 5) taken off for every weekday the
assessment is late. Assessment answers will not be accepted after 4pm on Sunday 14 May
(students will receive zero for the assessment if not received by this date and time).
OBJECTIVE
The purpose of this assignment is for you to apply the material covered in topics 5, 6
and 7 of the subject by answering the three questions below. This subject material covers
compensating wage differentials, education and training and theories of wage determination.
START OF QUESTIONS
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Labour Economics ECON30006
Question One (3 marks)
Virat currently works for a large Australian bank as a loans officer, earning $55,000 per year
after taxes. He is considering quitting work for one and a half years to earn a Master of
Applied Econometrics (an MAppEcon). He believes that he could earn $70,000 per year
after taxes if he had an MAppEcon now, working for the Victorian State Government.
MAppEcon tuition fees are $54,000 in total, spread evenly over the 1.5 years (3 semesters).
Other direct costs of studying are $1,500 per semester. The rental cost of an apartment near
campus is $25,000 per year, compared to the $28,000 Virat is currently paying. Virat’s real
discount rate is 10% per year. He just turned 37 and plans to retire the day he turns 67,
whether or not he undertakes further study to change jobs. Virat believes that real wages
will grow at 1% per year.
(a) Based on this information alone, should Virat quit work to earn an MAppEcon?
Treat all income and costs as occurring at the beginning of each year.
Provide details to support your answer.
(b) Now, suppose that Virat was warned that real wages may grow more slowly if he had
an MAppEcon and worked for the Government rather than the 1% he believes his real
wages will grow in his current job for the large bank.
What is the minimum annual real wage growth for the Government job that would
leave Virat indifferent between studying and changing jobs versus not studying and
continuing to work for the bank?
Briefly explain how you determined your answer.
(c) Provide at least two potential reasons for why real wage growth may be lower working
for the State Government than working for a large bank.
Explain your answer.
(d) Apart from the information provided in the question, provide two financial reasons
why Virat may still choose to study for the MAppEcon and go work for the State
Government even if real wage growth in the Government job was only 0.5% per year.
Explain your answer.
(e) Finally, provide two non-financial reasons why Virat may still choose to study and
change jobs if real wage growth in the Government job was only 0.5% per year.
Explain your answer.
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Labour Economics ECON30006
Question Two (1 mark)
In Topic 6, a number of potential pieces of evidence supporting either the screening or human
capital theories of education were provided on slides 38 to 40.
Apart from these potential pieces of “evidence”, can you provide another method for at-
tempting to differentiate the two theories?
Explain clearly how the method you provide could successfully differentiate the two theories.
Question Three (1 mark)
Provide two job characteristics that could potentially provide positive utility to some workers
and negative utility to others. Briefly explain why you believe this may be the case.
Describe how any wage difference (if any) between jobs that did or did not involve such a
job characteristic may be determined in a competitive labour market.
You may use one of the two job characteristics you provided above to help explain your
answer.
END OF QUESTIONS
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