chapter 5 labor market equilibrium. 2 competitive markets (firms and workers can freely enter and...
TRANSCRIPT
Chapter 5
Labor Market Equilibrium
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Labor Market Equilibrium
Competitive Markets (firms and workers can freely enter and exit ) Equilibrium outcome will be efficient
Monopsonies E*↓, w*↓ relative to competitive markets
Monopolies:Applications: Taxes Subsidies Immigration
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Equilibrium in a Single Competitive Labor Market
Equilibrium:
Each firm hires up to the point whereNo unemployment Anyone who wants to work at
w* can Individuals not working are
looking for w_w*
Firms not finding employees are offering w_w*
Realistically, equilibrium will not last because of shocks in modern industrialized nations
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Competitive Equilibrium Across Labor Markets
Labor markets may be differentiated by: Region (north, south, etc) Industry (2 different production industries)
Assume: Markets in two regions (north, south) Workers in the two regions have similar
skills and can substitute for one another Initially, ws < wn
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Competitive Equilibrium Across Labor Markets, cont.
If workers have full mobility, southern workers will ___________ ____________ where they can earn a higher wage
If firms have full mobility, northern firms will _______________ where they can pay a lower wage (not shown)
In the end,
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Competitive Equilibrium Across Labor Markets Efficiency
Efficiency: Also maximizes national income If ws < wn, VMPs _ VMPn since profit-
maximizing firms hire up to the point where
As workers migrate north, MPn_ and MPs_ until the two are equated, and
In the end, ___________________, and profits are maximized
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Empirical Evidence
Do wages equate over time? In the US, there is a strong ____________ correlation
between wages and annual growth of wages Roughly 30% of the wage gap between states
disappeared over a 30-year period (states with lowest wages had highest growth rate)
Similar evidence in Japan, a less mobile country
Across countries: “Conditional convergence”
Does not apply to the wage gap between the rich and poor countries because countries with lower human capital levels do not grow as rapidly
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NAFTA: Mexico and the US
Mobility of firms should: __crease demand for Mexican workers __crease demand for US workers with similar
skills Eventually _______ wages across the two
countries
Some workers will clearly benefit and some will be harmed, but the total income of the two countries should increase as North America moves to a more __________ outcome
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Policy Application: Payroll Tax
Payroll tax Employers pay a tax on total
wage bill
Employers who first paid w1 will now be willing to pay only _____ to E1 workers _____ward shift of labor
demand curve New wage paid to workers: Firms pay _____, because they pay tax t to the government ______ workers hired (E2 _ E1) Tax burden Firms: Employees:
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Policy Application: Employee Tax
Tax on workers E1 workers first earned w1,
Workers now demand ______ ______ward shift of labor supply
curve
New wage is ____Workers earn _____, because they pay tax t to government _____ workers hired (E2 _ E1)
Tax burden Firms: Employees:
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Tax policy application: Summary
Note that the outcome is the same regardless of who is taxed Employee Tax: w_, so ______ bears the cost by having to
________________ Full amount of tax not recovered for ________ (tax is
greater than the wage increase)
Payroll Tax: w_, so _______bear the cost by ____________ Full amount of tax is not covered for ___________ by
the wage decrease (tax is greater than the wage decrease)
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Tax with no burden on the firm
Assume firm is taxed Assume perfectly inelastic supply With tax, firm is only willing to pay ______ Number of workers ________ _____________ Firm passes entire
incidence of the tax onto workers
Therefore, a more ________ supply curve passes more tax burden onto employees Recall that labor supply
curve for men is inelastic
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Empirical Example
Note: Evidence suggests firms pass approximately 90% of tax burden onto employeesSuppose annual income = $30,000 Employee tax = 7.65% $2295 annually Employer tax = 7.65% $2295 annually
90% of tax shifted to worker: .9·2295 = $2066 Total employee tax = $2295 + 2066 = $4361 annually If $4361 were invested annually at 3%, worker would
accumulate $263,675 by age 65 If worker lives to age 80, would need SS benefits of
$21,000 annually Average worker only receives $7,200
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Policy Application: Government subsidy paid to employers
Subsidy lowers the cost of hiring workersFirms are willing to pay ______ (s recouped in the form of the subsidy, so in essence, the firm is only paying original wage, w1)New wage paid to worker: __ Cost of employment for the firm: _______ Benefits of subsidy Firm: Worker:
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Empirical Example
Assume: Elasticity of demand = -0.5 Elasticity of supply = 0.3
A 10% subsidy (reduction in hiring costs) would: Increase wage by 4% Increase employment by 2%
Gains of a government subsidy may be limited Firms may be unaware of programs Firms may place a stigma on hiring targeted workers
and do not hire them even to benefit from employer subsidy programs
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Noncompetitive Labor Markets: Monopsony
So far, competitive firms took p and w as given regardless of E* Recall that perfectly competitive firms face a horizontal demand curve given by the market price Analogously, an individual firm faces a horizontal labor supply curve, given w It can hire as many workers as it long as it pays wage = w
Monopsony:
Must pay higher wages to attract more workers (p taken as given)
Note that all markets have upward-sloping supply curves, but monopsonies are firms that face upward-sloping supply curves Ex: one-company town
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Perfectly discriminating monopsonist
Monopsonist can hire different workers at different wages w15 for worker 15, w20 for worker 20, etc.
Supply curve = ____ Wage paid for each worker is
his ______ ____________
Demand curve = ______ Price is taken as given
Firm hires up to the point where _____ ____ (E*,w*), or where _____ = ______ Same __ as a competitive market, but __ is the wage for the last worker, and all others were paid w _ w*
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Non-discriminating Monopsonist
Monopsonist pays all workers the same wage, regardless of their reservation wages Supply ≠ MC, but MC __creases as E increases S _ MC If the 9th worker costs $7, total labor bill = $63 If 10th worker demands $7.50, total labor bill = $75 MC of the 10th worker is $12, but wage was $7.50 Analogous to D > MR for a monopolist
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Non-discriminating Monopsonist, cont.
Firms hire up to the point where ___ = ____ (EM,wM)Monopsonist determines wage from _______ curve, not MCE curve Similar to how
monopolists choose P from the demand curve, not MR
EM _ EC and wM _ wC
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Monopsony and Minimum Wage
Set wmin > wM, and firm can hire E* employees MC = wmin up to E* employees, then returns to MC curve above supply curve Firm wants to hire where ______ = _____, which is E* employees (point A) at min wage, wmin Outcome: wmin _ wM and E* _ EM- no unemployment Better outcome: set wmin = __ so E = __ and w = __ Minimum wage law outcomes may be explained by fast food restaurants acting as monopolists to teenagers
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Competitive firms facing upward-sloping supply curves
Even if employees are mobile, the costs associated with moving to take advantage of a new higher paying job can be huge Competitive firms must offer large wages to
attract someone to move
As the number of employees increases, monitoring workers to discourage shirking becomes expensive Employers may want to pay higher wages to
make the cost to an employee of shirking more expensive
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Professional Athletes
Free agency If a player can go where he wants, he will present
his current team with an outside offer Current team evaluates VMP, and if VMP exceeds
offer,
If not, No free agency New team can offer current team a trade – pay
salary + bonus to total their value for the player Current team evaluates VMP and agrees to trade
if
If VMP exceeds offer,
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Professional Athletes, cont.
Allocation of resources (players)
Player may not be paid according to worth, but he ends up with the team that values him the most (VMP) in either case
Different income distribution __________ benefits from no free agency, but
________ benefits as a free agent
Empirical evidence: supports migration and income distribution predictions
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Noncompetitive Labor Markets: Monopoly
Monopoly:
Recall: Monopsonist did not control p, but could choose w
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Monopoly, cont.
When output increases, monopolist must ______ price on that unit and all previous units MR _ P, where P is
represented by ______ since the firm chooses P* from demand curve after Q* is chosen (MR=MC)
Competitive outcome: ______ PC _ PM and QC _ QM
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Monopoly, cont.
Since P≠MR, revenue generated by last worker hired is not equal to MPE·P = VMPE
Instead, marginal revenue product = MRPE = MPRE _ VMPE because MR <
P
π-max: w = ___, not w = VMP EM _ EC, where EC is found be equating wage to value of marginal product
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Empirical Evidence
Monopolists and oligopolists (few firms produce all of the output for an entire market) pay higher wages than competitive firms (approximately 10% more) Monopolists can pass high production costs onto consumers, so with little incentive to keep costs down, monopolists must pay high wages for the most desirable workers