CHAPTER Labor Markets PowerPoint Slides Slides prepared prepared by: by: PowerPoint Andreea CHIRITESCU CHIRITESCU Andreea Eastern Illinois Illinois University University Eastern © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Labor Markets in Perspective • Product markets – Markets in which firms sell goods and services to households • Factor markets – Markets in which resources (labor, capital, land and natural resources, and entrepreneurship) are sold to firms • Demand for a resource: derived demand – Arises from, and varies with, the demand for the product it helps to produce © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Figure 1 Product Markets and Factor Markets In product markets, households demand goods and services, and firms supply them. In factor markets, the roles are reversed: Firms demand resources— such as labor, capital, land—and households supply them. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Labor Markets in Perspective • Defining a labor market – Broadly or narrowly • Wage rate – Hourly rate = Price in the labor market • Perfectly competitive labor market – Many buyers and sellers (wage takers) – Standardized labor quality – Easy entry and exit – Well-informed buyers and sellers © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Labor Demand • Market labor demand – Demand by all firms for the type of labor being traded in that market • Labor demand curve – Total number of workers all firms in a labor market want to employ at each wage rate – Slopes downward © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Figure 2 The Labor Demand Curve Hourly Wage The labor demand curve slopes downward because, all else equal, firms want to employ fewer workers from a labor market when the wage rate is higher. For the hypothetical labor demand curve shown here, firms will want to hire 1 million nurses when the wage rate is $25 per hour, but only 0.5 million nurses at a wage rate of $35. $35 $25 LD 0.5 1.0 Number of Nurses (millions) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Labor Demand • Labor – Variable input, used to calculate the firm’s marginal cost • When the wage rate rises – A firm’s marginal cost curve shifts upward – Decreasing the firm’s profit-maximizing output level – Employ fewer workers © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Figure 3 The Output Effect of a Rise in the Wage Rate $ MC2 MC1 P d=MR Wage Output q2 q1 Quantity of Labor Demanded Units of Output All else equal, a rise in the wage rate shifts up a firm’s marginal cost curve, and therefore lowers its profit-maximizing output level (from q1 to q2). Because it is producing less output, the firm will want to employ fewer workers. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Labor Demand • Output effect – A change in the wage rate alters the profitmaximizing output level – And changes the quantity of labor demanded • Input-substitution effect – A change in the wage rate alters the price of labor relative to the costs of other inputs – And changes the quantity of labor demanded © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Labor Demand • Market labor demand curve slopes downward – Because a rise in the wage rate has two effects: • The output effect: increases firms’ marginal costs – Decrease production and employ fewer workers • The input-substitution effect: increases the relative cost of labor from that market – Firms substitute other inputs © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Labor Demand • Shifts in the labor demand curve – Changes in demand for the product – Changes involving other inputs • Changes in demand for the product – Increase in the demand for the product leads to an increase in the demand for labor • Labor demand: derived demand © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Labor Demand • Complementary input – Input used by a particular type of labor, making it more productive • Increase in the demand for labor – New complementary inputs (due to technological advance) – Or cheaper complementary inputs © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Labor Demand • Substitutable input – Input that can be used instead of a particular type of labor • Decrease in the demand for labor – New substitutable input (due to technological change) – Or cheaper substitutable inputs © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Figure 4 A Rightward Shift in the Labor Demand Curve Hourly Wage $25 L2D L1D 1.0 2.0 When firms in a labor market want to employ more labor at any given wage rate, the demand curve shifts rightward. Here, the number of nurses firms want to employ at a wage of $25 per hour rises from 1 million to 2 million. The rightward shift could be caused by an increased demand for a product that nurses help produce (such as home health care services), a new or cheaper complementary input, or a rise in the price of a substitutable input. Number of Nurses (millions) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Labor Supply • Labor supply curve – Number of people who want jobs in a labor market at each wage rate • Short-run labor supply curve slopes upward – A rise in the wage rate – Causes some additional people to want to work • Already qualified but previously not working in that labor market © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Figure 5 The Labor Supply Curve Hourly Wage LS $35 $25 1.0 1.2 The labor supply curve in a market slopes upward because, all else equal (including the number of people qualified for that job), more people will want to work in that market when the wage rate rises. For the labor supply curve shown here, 1 million qualified nurses want to work in the nursing market if the wage rate is $25 per hour, while 1.2 million want to work as nurses if the wage rate is $35. Number of Nurses (millions) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 Labor Supply • Shifts in the labor supply curve – Changes in the number of qualified people – Changes in other labor markets – Changes in tastes • The labor supply curve will shift rightward – If the number of qualified people rises – If wages fall in other labor markets – If tastes change to favor more work © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Figure 6 A Rightward Shift in the Labor Supply Curve Hourly Wage L1S L2S $25 1.0 1.5 When more people want to work in a labor market at any given wage rate, the supply curve shifts rightward. Here, the number of people who want to work as nurses at a wage of $25 per hour rises from 1 million to 1.5 million. The rightward shift could be caused by an increase in the number of qualified nurses over time, a decrease in the pay or attractiveness of jobs in alternative labor markets, or a change in tastes in favor of nursing work. Number of Nurses (millions) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 Labor Market Equilibrium • Wage rate above equilibrium – Excess supply of labor – Wage rate decreases • Wage rate below equilibrium – Excess demand of labor – Wage rate increases © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 Figure 7 Equilibrium in a Labor Market Hourly Wage LS A $25 LD 1.0 The equilibrium wage rate and employment level in a labor market are found where the labor supply and labor demand curves intersect. Here, the equilibrium wage rate for nurses is $25 per hour, and equilibrium employment is 1 million. If the wage rate were greater than $25, the quantity of nurses supplied would exceed the quantity demanded, and the wage rate would fall. If the wage rate were less than $25, the quantity demanded would exceed the quantity supplied, and the wage rate would rise. Number of Nurses (millions) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 Labor Market Equilibrium • Increase in labor demand – Higher equilibrium wage rate – Higher equilibrium level of employment • Increase in labor supply – Lower equilibrium wage rate – Higher equilibrium level of employment © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Figure 8 An Increase in Labor Demand Hourly Wage LS B $35 A $25 L2D Initially, the market for nurses is in equilibrium at point A, with an hourly wage of $25 and 1 million people working as nurses. When labor demand increases (the labor demand curve shifts rightward), the equilibrium moves to point B. The wage rate rises to $35, and employment rises to 1.2 million. L1D 1.0 1.2 Number of Nurses (millions) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 Figure 9 An Increase in Labor Supply Hourly Wage L1S L2S B $35 C $30 Initially, the market for nurses is in equilibrium at point B, with an hourly wage of $35 and 1.2 million people working as nurses. When labor supply increases (a rightward shift of the labor supply curve), the equilibrium moves to point C. The hourly wage falls to $30, and employment rises to 1.3 million. LD 1.2 1.3 Number of Nurses (millions) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 Why Do Wages Differ? • Persistent wage inequality – Among different occupations – Within the same occupation • Three assumptions for an imaginary world (“To understand why wages differ in the real world, let’s start by imagining an unreal world with three features”, p. 366) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 3 Unreal Assumptions – All labor markets are perfectly competitive – All jobs are equally attractive to all workers – In the long run, all workers can costlessly acquire the qualifications for any job © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 Table 1 Hourly Earnings of Full-time Workers in Selected Occupations, 2010 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 Figure 10 Disappearing Wage Differentials Hourly Wage (a) Hourly Wage L2S L1S $55 (b) L2S L1S B A’ $37 $37 B’ A $14 LD LD Number of Preschool Teachers Number of Pharmacists Initially, the supply and demand for preschool teachers in panel (a) determine an equilibrium wage of $14 per hour—at point A. In panel (b), the equilibrium wage for pharmacists is initially $55 per hour. If these markets are competitive, if the two jobs are equally attractive, and if all workers can costlessly acquire the qualifications to do either job, this wage differential cannot persist. Some preschool teachers will give up that occupation, reducing supply in panel (a), and become pharmacists, increasing supply in panel (b). This migration will continue until the wage in both markets is equal—at $37 in the figure. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 Why Do Wages Differ? • Expectations for an imaginary world – Every worker will earn an identical wage in the long run • Sources of wage inequality in the real world: – A violation of one or more of our three unreal (p. 366) assumptions © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Question to Ponder…. • But those assumptions were unreal…. • How can you explain reality when it’s a deviation from an unreal (imaginary) model of the world? © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 Why Do Wages Differ? • Compensating wage differential – A difference in wages that makes two jobs equally attractive to a worker • Nonmonetary characteristics of different jobs – Give rise to compensating wage differentials © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 • Jobs considered intrinsically less attractive will tend to pay higher wages, other things being equal (Is this empirically true?) • How about garbage collectors versus Wall Street executives? © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31 • See http://money.usnews.com/careers/bestjobs/garbage-collector/salary • And • http://buzz.money.cnn.com/2013/02/25/wa ll-street-ceo-pay/ © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32 • Are (exorbitant) salaries due to supply/demand? • http://dealbook.nytimes.com/2014/11/10/ more-transparency-more-pay-for-c-e-os/?_r=0 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33 Why Do Wages Differ? • Differences in human capital requirements – Give rise to compensating differentials – Jobs that require more costly training will tend to pay higher wages • Differences in ability to become qualified – Jobs that require skills that relatively few people have the ability to acquire • Will pay persistently higher wage rates • In excess of compensating wage differentials – All else equal © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34 Why Do Wages Differ? • Differences in ability among those qualified – Those with greater ability to perform a job better • Talent, experience, motivation, or perseverance – Will be more valuable to their employers – Will generally be able to command a higher wage rate – All else equal © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35 • In other words, we would expect people who are more productive to earn more wages. • In neoclassical economics, this conclusion follows from marginal productivity theory (appendix to chapter 12) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36 • Marginal product of labor = MPL = additional output produced by the hiring of 1 more worker • Let each firm be tiny and a passive pricetaker (i.e. perfect competition in product markets hold) • The perfect competition assumption is crucial because it implies that the additional output has no impact on market prices © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 37 • Let p = market price of the product • MR = additional revenue generated by each additional unit of output produced • MRP = marginal revenue product of labor = additional revenue generated from the output produced by an additional worker © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38 • Firm’s marginal revenue product of labor MRP = MPL x MR • For a perfectly competitive firm MR = p = since each firm’s additional revenue is just the price of the product which by definition remains unchanged (each firm’s demand curve is horizontal) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 39 • Firm’s marginal revenue product of labor = price of the output x marginal product of labor • MRP = MPL x p • Now MC = firm’s marginal cost in hiring an additional unit of labor = w (= money wage rate) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40 • • • • So profit-maximizing involves MRP = MC p*MPL= w ➔ MPL = w/p ➔ marginal product of labor = real wage rate ➔ this determines the level of employment • Each worker get a real wage rate equal to the output they produce. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41 • Note that only under perfect competition can one make the substitution MR = p • Under imperfect competition the above condition does not hold since each additional output produced sells at a lower price (each firm’s demand curve is downward-sloping) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 42 • Under imperfect competition • MRP = MPL x MR = w • and each worker does not get a real wage rate equal to the output they produce © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43 • But under perfect competition every worker gets a real wage rate equal to what s/he contributes (compare with surplus production in political economy). • Is this true empirically? © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 44 • On the empirical question, marginal productivity runs into trouble when one considers labor productivity and real hourly compensation data from Bureau of Labor Statistics for the US for the nonfarm business sector (1947 through the first quarter of 2012). • Say chart next slide © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45 Employee Compensation and Labor Productivity in the Non-Farm Business Sector Source: Fleck, Glaser, and Sprague (2011) and Bureau of Labor Statistics © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46 Why Do Wages Differ? • The economics of superstars – Superstar: an individual widely viewed as among the top few in his or her profession – Labor markets for talented professionals • In which there is mass-distribution of their product and substantial agreement about rankings • Small differences in ability can lead to disproportionate differences in pay © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 47 Why Do Wages Differ? • Barriers to entry – Occupational licensing • Keep out potential entrants • Higher cost of acquiring human capital – Union wage setting • A labor union represents the collective interests of its members • Negotiate a higher-than competitive wage © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 48 Table 2 Examples of Occupational License Requirements © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 49 Why Do Wages Differ? • Union in a competitive labor market – Raises the wage firms must pay – Decreases total employment in the union sector – Wages in the nonunion sector drop – Wage differential between union and nonunion wages © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 50 Figure 11 Union Wage Differentials (a) Wage (b) 3. Unemployed long-haul truckers move to the nonunion short-haul Wage market, and the labor supply curve shifts rightward . . . 2. A union wage of W2 for long-haul truckers creates an excess supply of workers. LS A’ L1S L2S W2 W1 A W1 W3 B B’ LD 300,000 Number of 350,000 Long-haul 250,000 Truckers 1. With no labor union, both long- and shorthaul truckers earn the same wage rate, W1. LD 200,000 225,000 Number of Short-haul Truckers 4. pushing the short-haul wage rate down to W3. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 51 Why Do Wages Differ? • Discrimination – When a group of people have different opportunities • Because of personal characteristics that have nothing to do with their abilities – Tough laws and government incentive programs have lessened overt job discrimination • Less obvious forms of discrimination remain © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 52 Why Do Wages Differ? • Employer prejudice – One of the least important sources of labor market discrimination – Competitive labor markets discourage discrimination – Reduce or eliminate any wage gap between the favored and the disfavored group © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 53 Figure 12 Employer Discrimination and Wage Rates Wage Sector A (Discriminating) Wage Sector B (Nondiscriminating) L2S L1S E’ L1S L2S W3 E W1 W1 W2 LD Number Of Workers F F’ LD Number Of Workers In the absence of discrimination, the wage rate would be W 1 in both sector A and sector B. If firms in sector A discriminate against some group—such as women—the group would seek work in the nondiscriminating sector, B. The increased labor supply in sector B causes the wage there to fall to W2, while the decreased supply in sector A causes the wage there to rise to W 3. But only temporarily, if the discrimination results from employer prejudice. As men migrate from sector B to the now higher wage sector A, the labor supply changes in both sectors are reversed. The wage returns to W 1 in both sectors. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 54 • The above dynamic presupposes that overall the economy is at full employment so that workers can seamlessly migrate from Sector A to Sector B. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 55 Why Do Wages Differ? • Employee and customer prejudice – Market forces may encourage, rather than discourage, discrimination – Can lead to a permanent wage gap between the favored and disfavored groups © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 56 Why Do Wages Differ? • Statistical discrimination – Individuals are excluded based on the statistical probability of behavior in their group rather than their own personal traits – Discrimination without prejudice – Can also be a cover for prejudice © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 57 Why Do Wages Differ? • Discrimination and wage differentials – Simple wage gap between two groups • Tends to overstate the impact of job-market discrimination on earnings • It fails to account for differences in worker skill, experience, and job choice – Controlling for these characteristics • May understate the impact of discrimination – These characteristics may in part result from discrimination © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 58 Table 3 Median Weekly Earnings, 2011 (Full-time Wage and Salary Workers Over Age 25) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 59 Figure 13 The Vicious Cycle of Discrimination © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 60 The Minimum Wage Controversy • Who pays for a higher minimum wage? – Higher average and marginal costs in industries that employ minimum wage labor – Higher product prices – The cost of higher minimum wage is paid by • Consumers and firms in the short run • Only consumers in the long run © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 61 The Minimum Wage Controversy • Who benefits from a higher minimum wage? – Higher minimum wage -rather blunt instrument for helping the poor – Applies to any worker earning the minimum • Regardless of their economic situation © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 62 The Minimum Wage Controversy • Effects of the minimum wage in the covered, unskilled market – Excess supply of labor – Workers who keep their jobs are paid more – Some workers lose their jobs – Especially harmful to young workers who are not college bound • Cannot build job history © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 63 Figure 14 Minimum Wage Effects in Three Labor Markets (a, b) (a) Unskilled Labor, Covered by Law Wage (b) Unskilled Labor, Not Covered by Law Wage LS L1S A’ L2S $8 A 6 $6 4 B B’ LD L2 L1 L3 A minimum wage raises pay, but decreases jobs in the covered sector. Number of workers LD Number of workers Some who can’t find work go to the uncovered sector, lowering wages there. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 64 The Minimum Wage Controversy • Effects of the minimum wage in the uncovered, unskilled market – Increase in the supply of labor – Lower wages • Effects of the minimum wage in the skilled market – Firms substitute capital for unskilled labor – Demand for skilled labor increases – Higher wages © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 65 Figure 14 Minimum Wage Effects in Three Labor Markets (c) (c) Skilled Labor Wage LS C’ $24 20 As capital is substituted for unskilled labor, demand for skilled workers goes up, raising the skilled wage rate C L2D L1D Number of workers © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 66 The Minimum Wage Controversy • Higher minimum wage benefits: – Unskilled workers who maintain their jobs and are paid more – Skilled workers by raising their equilibrium wages • Higher minimum wage harms: – Unskilled workers who cannot find work – Unskilled workers who work in the uncovered sector, where wages decrease © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 67 The Minimum Wage Controversy • Earned income tax credit (EITC) – An alternative to minimum wage – Supplements incomes of low-income working people • Especially those with children – 2011, a worker with two children • $5,100 from the federal government • $1,000 from a state EITC © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 68 The Minimum Wage Controversy • Advantages of increasing EITC over increasing minimum wage – The minimum wage applies to any unskilled worker in the covered sector – EITC is only available to low-income households • Provides greater benefits to those supporting children © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 69 The Minimum Wage Controversy • Advantages of increasing EITC over increasing minimum wage – The costs of the minimum wage are spread among households rather haphazardly, with no regard to income – The funds for the EITC come from a progressive federal tax system • Redistributive from higher income to lower income households © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 70 The Minimum Wage Controversy • Advantages of increasing EITC over increasing minimum wage – The minimum wage is likely to reduce employment – EITC tends to increase employment • Provides subsidy to labor suppliers • Shifts the labor supply curve downward and rightward © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 71 The Minimum Wage Controversy • Support for a higher minimum wage – Modest employment effects of a small increase in the minimum wage – Political reason • Funds to expand EITC come from government revenue – Constrained by federal budget discipline • Costs of a higher minimum wage are nonbugetary – More easily hidden from view © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 72 The College Wage Premium • College wage premium: – Percentage by which the median college graduate’s wage rate exceeds the median high school graduate’s wage – Over 50% since 1980 – Reaching 66% in 2011 – Growing consistently over the last several decades © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 73 The College Wage Premium • Skill-biased technological change – Technological advance simultaneously • Increases the demand for high-skilled labor • Decreases the demand for less-skilled labor • Demand shift relative to the supply shift – Much smaller for high school than for college graduates • Average wage of high school graduates – little higher • College wage rate grew faster © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 74 Figure 15 The College and High School Labor Markets over Time (b) High School Graduates (a) College Graduates Hourly Wage (2008 Dollars) Hourly Wage (2008 Dollars) LS1998 LS2008 LS1998 B $25.30 LS2008 A $24.05 LD2008 E $15.30 LD2008 LD1998 L1 L2 Millions of Workers F LD1998 L1 L2 Millions of Workers In 1998, the average college graduate earned $24.05 per hour, at point A in panel (a). That same year, the average high school graduate earned $15.30, at point E in panel (b). Over the next 10 years, supply and demand curves shifted right in both markets. But in the college graduate market in panel (a), demand increased more rapidly than supply, so the equilibrium moved to point B, with a higher wage of $25.30. For high school graduates in panel (b), the increases in supply and demand were about equal. The equilibrium moved to point F, and the wage rate hardly changed at all. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 75 The College Wage Premium • Increase in the college wage premium – A slowdown in the growth of college attendance • Barriers to entry (financial or psychological barriers) • Complex social forces that limit college attendance (teenage pregnancy, extreme poverty, or failing public schools) • We may be approaching the upper limit of the fraction of the population intrinsically capable of succeeding at college © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 76 The College Wage Premium • The future of the college wage premium – Likely to rise rapidly for some jobs as it falls rapidly for others • The new technologies that have been so highly complementary with college-educated labor in the past are now creating substitutes for that labor © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 77 The College Wage Premium • High-skill jobs most vulnerable to new substitutability inputs – Jobs that involve routine work – Jobs that can be done by an equally educated (but lower-wage) worker overseas © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 78 The College Wage Premium • Jobs where the higher-education premium is likely to continue rising - those that require – Considerable judgment and mental agility – Close familiarity with American culture – Personal contact © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 79 • Neoclassical Theory of Income Distribution (contrast with the surplusbased approach of Ricardo or Marx). © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 80 The Profit-Maximizing Employment Level • Marginal approach to profit – A firm should take any action that adds more to its revenue that it adds to its cost • Marginal revenue product of labor (MRP = ΔTR/ΔL ) – Change in the firm’s total revenue (ΔTR) – Divided by the change in the number of workers employed (ΔL) • MRP of Labor = MPL ˣ P • MPL: marginal product of labor © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 81 Table A.1 Data for Spotless Car Wash © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 82 The Profit-Maximizing Employment Level • As employment increases – MRP first rises then falls – MPL: increasing marginal returns to labor, then diminishing marginal returns to labor • The wage rate, W – The number of dollars the firm pays for each employee per unit of time • Competitive labor market – The firm is a wage taker © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 83 The Profit-Maximizing Employment Level • Hire another worker – When MRP > W – But not when MRP < W • Maximize profit – Firm: hire the number of workers such that MRP = W – Closest to the point where the MRP curve intersects the wage line from above © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 84 Figure A.1 The Profit-Maximizing Employment Level Dollars 1. Hiring another worker increases profit by adding more to revenue . . . $400 300 3. until profit is maximized at 5 workers. 200 120 100 Wage MRP 1 2 3 4 5 6 7 8 Number of workers 2. than it adds to cost . . . © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 85 The Profit-Maximizing Employment Level • If MRP > W for a change in employment – Then MR > MC for the associated rise in output • If MRP < W for a change in employment – Then MR < MC for the associated rise in output • If MRP = W for a change in employment – Then MR = MC for the associated change in output © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 86 The Profit-Maximizing Employment Level • Firm’s labor demand curve – Downward-sloping portion of the MRP curve – How much labor the firm will want to employ at each wage rate – Slopes downward • Market labor demand curve – Adding the labor demand curves for every firm that employs labor in that market – Slopes downward © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 87 Figure A.2 The Firm’s Labor Demand Curve Dollars Firm's Labor Demand Curve A W1 W1 B W2 W2 As the wage rate varies, the firm moves along its MRP curve in deciding how many workers to hire. As a result, the downward-sloping portion of the MRP curve is the firm’s labor demand curve. It shows how many workers will be demanded at each wage rate. MRP L1 L2 Number of workers © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 88 Question 6, chapter 12 • See “Chapter 12, Question 6.docx” • The EITC is a subsidy given to workers for working. Suppose everyone in a particular unskilled labor market is receiving EITC payments of a given amount for each hour they work. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 89 • a. Draw a diagram of the labor market before and after the EITC. • b. What happens to the wage rate that workers get after the EITC? © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 90 • a. Before the EITC is introduced, the labor market is in equilibrium with Q1 workers employed at the wage rate w1. With the introduction of the EITC, the labor supply curve shifts up by exactly the amount of the EITC (the extra amount that is paid for each hour of work). The EITC does not affect labor demand because it does not directly affect the firms. After the shift of the supply curve, the new resulting equilibrium wage paid by the firms increases to w2, and the equilibrium employment level decreases to Q2, as with an effectively higher wage workers find they don’t need to work as many hours as they worked before. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 91 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 92 • b. As explained in part a. employers pay their workers a higher wage after the EITC. • c. After the introduction of EITC, the employers pay the new equilibrium wage w2, and the workers get w2 plus the EITC subsidy. • © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 93
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