1 Labor Markets l Principles of Microeconomic Theory, ECO 284 l John Eastwood l CBA 247 l 523-7353 l...

1

Labor MarketsPrinciples of

Microeconomic Theory, ECO 284

John EastwoodCBA 247523-7353 e-mail address:

[email protected]

2

Learning Objectives

• Explain why college graduates earn more, on the average, than high school graduates

• Explain why union workers earn higher wages than nonunion workers

• Explain why, on the average, men earn more than women and whites earn more than minorities

3

Learning Objectives (cont.)

• Predict the effects of a comparable-worth program

• Explain the effects of immigration on the wages of immigrants and native Americans

5

Skill Differentials

• The Demand for High-Skilled and Low-Skilled Labor

• High skilled workers can perform more tasks than low skilled workers

• Different MRP's

6Labor (thousands of hours per day)

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Skill Differentials

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MRPof skill

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Skill Differentials

• The Supply of High-Skilled and Low-Skilled Labor

• The acquisition of a skill is an investment in human capital

• It is costly.

• The cost is paid prior to receiving a higher wage.

• Human capital is the accumulated skill and knowledge of human beings.

9

Skill Differentials

• Supply Curves of High-Skilled and Low-Skilled Labor

• Wages compensate labor for time spent on the job.

• High-skilled labor must be compensated for time and cost of acquiring the skill.


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Compensationfor cost ofacquiring skill

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Skill Differentials

• Supply Curves of High-Skilled and Low-Skilled Labor

• The Equilibrium Wage

• The equilibrium wage rate is higher for high-skilled labor than for low-skilled labor

• MRP

• Quantity supplied of labor


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Do Education and Training Pay?

• Amount of education is related to income.

• Age is correlated to income.

• Age is related to experience and training.

• 5%–10% return/year on high school and college education

16

Education and Earnings

17

Learning Objectives




18

Union-NonunionWage Differentials

• Monopoly Power in the Labor Market

• Labor unions are the main source of monopoly power in the labor market.

• A labor union is an organized group of workers whose purpose it is to increase wages and influence other job conditions for its members.

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• Two Types of Union• Craft unions

• Industrial unions

• Most unions are members of the AFL-CIO

• Union membership has declined from 35% in 1950 to 12% today

• Unions vary tremendously in size.

20

Unions with the Largest Membership

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• A local is a subunit of a union that organizes the individual workers.

• Three Possible Forms of Organization for a Local:• Open shop

• Closed shop

• Union shop

• Right-to-work

22


• Collective bargaining is the process of negotiation between employers and union representatives.

• A strike is a group decision to refuse to work under prevailing conditions.

• A lockout is a firm’s refusal to operate its plant and employ its workers.

23


• Binding arbitration is a process in which a third party — an arbitrator — determines wages and other employment conditions on behalf of the negotiating parties.

• A professional association is an organized group of professional workers such as lawyers, dentists, or physicians.• These act similar to unions.

24

Union’s Objectives and Constraints

• Three Broad Objectives of Unions

• To increase compensation

• To improve working conditions

• To expand job opportunities

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Union’s Objectives and Constraints

• Two Constraints on Unions

• Limited by how well it can restrict nonunion workers from offering their labor in the same market.

• Higher wages result in a decrease in the quantity demanded of labor.

26

Unions in a CompetitiveLabor Market

• Unions seek to increase compensation and to limit employee reductions by increasing the demand for the labor of its members.

27Labor (hours per day

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A Union in a CompetitiveLabor Market

0 90 100


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How Unions Try to Change the Demand for Labor

• How Unions Attempt to Increase Demand

• It tries to make the demand for union labor less elastic.

• It tries to increase the demand for union labor

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How Unions Try to Change the Demand for Labor

• Methods used by unions to increase the demand for labor include:• Increase the marginal product of union

members

• Encourage import restrictions

• Support minimum wage laws

• Support immigration restrictions

• Increase demand for the good produced

33

Featherbedding

• n., coercion, as by a union, for the hiring and retaining of unnecessary workers

American Century Dictionary

34

The Scale of Union-NonunionWage Differentials

• On the average, union wage rates are 30% higher than nonunion wage rates.

• In services, manufacturing, and transportation the difference is between 11% and 19%.

• In wholesale, and retail trade the difference is 28%.

35

The Scale of Union-NonunionWage Differentials

• In construction the difference is 65%.

• Allowing for skill differences, the wage differential lies between 10% and 25%.

36

Monopsony

• A monopsony is a market in which there is a single buyer.

• Some areas have a major employer.

• The employer will pay the last worker hired an amount equal to the extra total revenue brought in.


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A Monopsony Labor Market

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A Monopsony Labor Market

Labor (hours per day

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Monopsonyequilibrium

Competitiveequilibrium

MRCL

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Monopsony

• Monopsony decreases the level of employment and the wage rate.

• How much they are able to do so depends upon the elasticity of labor supply.

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Monopsony Tendencies

• Monopsony is rare

• Worker can commute long distances

• There is usually a union

41

Monopsony and Unions

• Recall

• Unions attempt to monopolize the labor market

• Monopsony is the only buyer

• A bilateral monopoly exists when a union (monopoly seller) faces a monopsony buyer.

• Wages are determined by bargaining.

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• The monopsony hires 50 hours and pays $5/hour.

• The union can call a strike.

• The union may agree to work 50 hours, but seeks the highest wage rate the employer can be forced to pay — $10/hour.

• This equals labor’s MRP.Labor (hours per day

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• It is unlikely the union will get $10/hour.

• It is also unlikely that the firm can keep wages at $5/hour.

• The monopsony firm and union bargain over the wage rate (and inflict costs on each other).

• It will settle between $5 & $10/hour (depending upon who is stronger).


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Monopsony and the Minimum Wage

• In a monopsony labor market, a minimum wage can increase both the wage rate and employment.

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Minimum Wage in Monopsony

• If a minimum wage law is passed, the supply curve now becomes perfectly elastic at the minimum wage ($7.50) up to 75 hours.

• Above 75 hours, a higher wage must be paid.

• To maximize profit, the monopsony sets the marginal cost of labor equal to its marginal revenue product.


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Minimum wage

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Minimum Wage in Monopsony

• The monopsony hires 75 hours at $7.50 an hour.

• This minimum wage law has made the supply of labor perfectly elastic and made the marginal cost of labor the same as the wage rate up to 75 hours.

• The minimum wage has succeeded in raising the wage rate by $2.50 an hour and increasing the amount of labor employed by 25 hours a day.


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Minimum wage

Increase in employment

47

Learning Objectives




48

Wage DifferentialsBetween Sexes and Races

• In 1995, the incomes, as a percentage of the wages of white men were:• 73% for white women

• 73% for black men

• 62% for Hispanic men

• 63% for black women

• 54% for Hispanic women

Why do these differences exist?

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Sex and Race Differentials

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• Four Possible Explanations for the Difference in Wages• Job types

• Discrimination

• Differences in human capital

• Differences in the degree of specialization

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• Job Types• Men and women do different jobs.

• However, some women and minorities earn less than white men doing the same job

• What is a possible explanation?

• Discrimination

52Investment advisors (thousands)

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Discrimination

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Black Females

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Discrimination

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Discrimination

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Black Females

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Nodiscrimination

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Discrimination

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Discrimination

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White Males

Investment advisors (thousands)

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Nodiscrimination

60

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• Differences in Human Capital

• Measured by:

• Years of schooling

• 1960 — whites 11 years in school

• 1997 — none

• Years of work experience

• Number of job interruptions

• Women, due to child bearing, have more interruptions

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• Differences in Degree of Specialization• Men specialize, women diversify.

• This specialization improves husbands’ labor.

• Wives care of husband.

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58

Comparable-Worth Laws

• The Equal Pay Act of 1963 and the Civil Rights Act of 1964 require equal pay for equal work.

• Paying the same wage for different jobs that are judged to be comparable is called comparable worth.

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The Problem with Comparable Worth

Oil rig operators

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The Problem with Comparable Worth

Oil rig operators

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Court-enforcedwage rate

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Shortage

Unemployment

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Effective Wage Policies

• Effective policies can operate on the level of education.

• An effective wage policy is one that emphasizes the importance of ongoing education and training.

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63

Immigration

• Sixty million people have migrated from their country of birth

• 1.2% of world’s current population

• Almost 1/3 of them now live in the US

• ~800,000 legal immigrants per year recently

• Significant portion of US population growth

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Immigration

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US Immigration

• Once mainly European

• Directly

• Indirectly

• Mexico

> ¼ of legal immigrants

+ 200,000 to 300,000 others

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Immigration

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Immigration

• Scale, Origin, and Skills of U.S. Immigrants

• The skills of immigrants vary considerably.

• On average, immigrants are less productive than native Americans.

• During the 1960’s, new immigrants earned 17% less than comparable Americans — 1970’s – 28% less — 1980’s – 32% less

68

Immigration

• Immigrants and the Labor Market

• Immigration increases the supply of labor.

• This lowers the wage rates of existing workers.

• It also decreases the supply of labor in the country the immigrants are leaving.

• This raises their country’s wage rates.

• Let’s see what would happen with free movement of immigrants.

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Factor Price Equalization

Quantity of labor (millions

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LDUS LDM

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1LDUS LDM

WorldEquilibrium

WorldEquilibrium

Employment increasesand wage rate fallsin United States

Employment decreasesand wage rate risesin Mexico

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…Doesn’t Necessarily Occur

• Actual effects appear to be small

• Restrictions slow immigration

• Immigration also increases the demand for labor

• Immigrants purchase goods & services

• Substitute for native low-skill labor

• Complement capital & high-skilled labor

• Indeterminate result

73

Immigration

• How Do New Immigrants Perform in the United States?

• As a rule, immigrants’ earnings grow more rapidly than the earnings of native Americans.

• However, they still do not catch up.

74

Immigration

• Immigrants and the Government Budget

• In 1970, 6% of all native households and 5.9% of immigrant households received some form of welfare.

• By 1990, the percentages were 7.4% for native households and 9.1% for immigrant households.

75

Minimum Wages Compared

• Huge gap in statutory minimum wages between rich and poor countries

• Even within the European Union there are wide differences

• Chart based on market exchange rates, & understates purchasing power in poor countries

• The Economist6 Dec 2001

1 Labor Markets l Principles of Microeconomic Theory, ECO 284 l John Eastwood l CBA 247 l 523-7353 l...

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Transcript of 1 Labor Markets l Principles of Microeconomic Theory, ECO 284 l John Eastwood l CBA 247 l 523-7353 l...