Question 1: (a) The variance of log labour earnings is given by Var[log(wl) = Var[log w] + Var[logl) + 2Cov[log w, log l], Where w denotes the wage rate and l is hours worked

Question 1:

(a) The variance of log labour earnings is given by

Var[log(wl) = Var[log w] + Var[logl) + 2Cov[log w, log l],

Where w denotes the wage rate and l is hours worked.

How does the covariance between hours of work and wages affect income inequality? Is the observed relationship between hours and wages different for men and women and why? (10 Marks)

(b) It has been argued that Royal Holloway cannot attract or retain good faculty by offering higher salaries, because anyone who is attracted by high salaries will go to work in the finance industry. Suppose that it is true that many faculty members could get jobs in industry paying at least 50% more than RHUL pays. Is this argument valid? Explain carefully. (10 Marks)

(c) Explain the concept of statistical discrimination. Is there empirical evidence for statistical discrimination? (10 Marks)

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