1 labor markets l principles of microeconomic theory, eco 284 l john eastwood l cba 247 l 523-7353 l...
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1
Labor MarketsPrinciples of
Microeconomic Theory, ECO 284
John EastwoodCBA 247523-7353 e-mail address:
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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
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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
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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
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6Labor (thousands of hours per day)
Wag
e ra
te (
dol
lars
per
hou
r)
1
5.00
10.00
Skill Differentials
0 2 3 4
DL
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7Labor (thousands of hours per day)
Wag
e ra
te (
dol
lars
per
hou
r)
1
5.00
10.00
12.50
Skill Differentials
0 2 3 4
DL
DH
MRPof skill
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8
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.
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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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10Labor (thousands of hours per day)
Wag
e ra
te (
dol
lars
per
hou
r)
1
5.00
10.00
Skill Differentials
0 2 3 4
SL
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11Labor (thousands of hours per day)
Wag
e ra
te (
dol
lars
per
hou
r)
1
5.00
10.00
Skill Differentials
0 2 3 4
SL
SH
Compensationfor cost ofacquiring skill
8.50
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12
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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13Labor (thousands of hours per day)
Wag
e ra
te (
dol
lars
per
hou
r)
1
5.00
10.00
Skill Differentials
0 2 3 4
SL
DL
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14Labor (thousands of hours per day)
Wag
e ra
te (
dol
lars
per
hou
r)
1
5.00
10.00
Skill Differentials
0 2 3 4
SL
SH
DL
DH
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15
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
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16
Education and Earnings
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17
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
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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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19
Union-NonunionWage Differentials
• 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.
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20
Unions with the Largest Membership
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21
Union-NonunionWage Differentials
• 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
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22
Union-NonunionWage Differentials
• 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.
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23
Union-NonunionWage Differentials
• 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.
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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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25
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.
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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.
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27Labor (hours per day
Wag
e ra
te (
dol
lars
per
hou
r)
85
7
8
9
A Union in a CompetitiveLabor Market
0 90 100
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28Labor (hours per day
Wag
e ra
te (
dol
lars
per
hou
r)
85
7
8
9
A Union in a CompetitiveLabor Market
0 90 100
DC
SC
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29Labor (hours per day
Wag
e ra
te (
dol
lars
per
hou
r)
85
7
8
9
A Union in a CompetitiveLabor Market
0 100
DC
SC
SU
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30Labor (hours per day
Wag
e ra
te (
dol
lars
per
hou
r)
85
7
8
9
A Union in a CompetitiveLabor Market
0 90 100
DC
SC
SU
DU
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31
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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32
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
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33
Featherbedding
• n., coercion, as by a union, for the hiring and retaining of unnecessary workers
American Century Dictionary
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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%.
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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%.
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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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37Labor (hours per day
Wag
e ra
te (
dol
lars
per
hou
r)
50
5.00
7.50
10.00
A Monopsony Labor Market
0 75
MRP = D
MRCL
S
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38
A Monopsony Labor Market
Labor (hours per day
Wag
e ra
te (
dol
lars
per
hou
r)
50
5.00
7.50
10.00
0 75
MRP = D
S
Monopsonyequilibrium
Competitiveequilibrium
MRCL
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39
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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40
Monopsony Tendencies
• Monopsony is rare
• Worker can commute long distances
• There is usually a union
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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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42
Monopsony and Unions
• 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
Wag
e ra
te (
dol
lars
per
hou
r)
50
5.00
7.50
10.00
0 75
MRP = D
MRCL
S
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43
Monopsony and Unions
• 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).
Labor (hours per day
Wag
e ra
te (
dol
lars
per
hou
r)
50
5.00
7.50
10.00
0 75
MRP = D
MRCL
S
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44
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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45
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.
Labor (hours per day
Wag
e ra
te (
dol
lars
per
hou
r)
50
5.00
7.50
10.00
0 75
MRP = D
MRCL
S
Minimum wage
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46
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.
Labor (hours per day
Wag
e ra
te (
dol
lars
per
hou
r)
50
5.00
7.50
10.00
0 75
MRP = D
MRCL
S
Minimum wage
Increase in employment
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47
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
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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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49
Sex and Race Differentials
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50
Wage DifferentialsBetween Sexes and Races
• 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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51
Wage DifferentialsBetween Sexes and Races
• 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
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52Investment advisors (thousands)
Wag
e (t
hou
san
ds
of d
olla
rs/y
ear)
40
Discrimination
0 2
S
Black Females
1
20MRP
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53
Discrimination
40
Discrimination
0 2
MRP
S
Black Females
Investment advisors (thousands)
Wag
e (t
hou
san
ds
of d
olla
rs/y
ear)
1
20
MRPDA
Nodiscrimination
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54
Discrimination
40
Discrimination
0 2
MRP
S
White Males
Investment advisors (thousands)
Wag
e (t
hou
san
ds
of d
olla
rs/y
ear)
3
MRPDF
Nodiscrimination
60
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55
Wage DifferentialsBetween Sexes and Races
• 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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56
Wage DifferentialsBetween Sexes and Races
• Differences in Degree of Specialization• Men specialize, women diversify.
• This specialization improves husbands’ labor.
• Wives care of husband.
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57
Learning Objectives (cont.)
• Predict the effects of a comparable-worth program
• Explain the effects of immigration on the wages of immigrants and native Americans
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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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59
The Problem with Comparable Worth
Oil rig operators
Wag
e ra
te
0
WR
T
SR
Wag
e ra
te
R
ST
WT
Teachers
MRPR MRPT
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60
The Problem with Comparable Worth
Oil rig operators
Wag
e ra
te
0
WR
TeachersT
MRPR
SR
Wag
e ra
te
R
MRPT
ST
WT
WC WC
Court-enforcedwage rate
Court-enforcedwage rate
SR DR DT ST
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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62
Learning Objectives (cont.)
• Predict the effects of a comparable-worth program
• Explain the effects of immigration on the wages of immigrants and native Americans
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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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64
Immigration
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65
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
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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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69
Factor Price Equalization
Quantity of labor (millions
Wag
e ra
te (
dol
lars
per
hou
r)
0Quantity of labor (millions
Wag
e ra
te (
dol
lars
per
hou
r)
5
10
15
20
25
75 100 125 150 175 0
5
10
15
20
25
75 100 125 150 175
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70
Factor Price Equalization
Quantity of labor (millions
Wag
e ra
te (
dol
lars
per
hou
r)
0Quantity of labor (millions
Wag
e ra
te (
dol
lars
per
hou
r)
5
10
15
20
25
75 100 125 150 175 0
5
10
15
20
25
25 50 75 100 1251
LDUS LDM
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Factor Price Equalization
Quantity of labor (millions
Wag
e ra
te (
dol
lars
per
hou
r)
0Quantity of labor (millions
Wag
e ra
te (
dol
lars
per
hou
r)
5
10
15
20
25
75 100 125 150 175 0
5
10
15
20
25
25 50 75 100 125
8 8
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
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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.
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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.
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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