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Wage Structure, Government Regulation, and Job Search.

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Presentation on theme: "Wage Structure, Government Regulation, and Job Search."— Presentation transcript:

1 Wage Structure, Government Regulation, and Job Search

2 Wage Structure Law of One Price? Observed wage differentials Occupational Industry Geographic Reasons Heterogeneous jobs Heterogeneous workers Labor market imperfections

3 Hourly Earnings By Occupational Group 2008 Occupational GroupHourly Wage Management, Business, And Financial$31.50 Professional and related workers Installation, Maintenance, And Repair Construction and extraction workers Sales Workers Office and Administrative Support Service Workers Farming, Fishing, And Forestry 11.29

4 Industry GroupHourly Wage Finance, Insurance, Real Estate$25.55 Public Administration25.27 Mining25.32 Transportation and Warehousing22.88 Manufacturing22.60 Construction20.23 Services19.63 Retail Trade14.50 Agriculture, forestry, and fisheries12.53 Hourly Earnings By Industry Group 2008

5 StateHourly Wage Connecticut$29.30 New Jersey29.69 California27.16 Massachusetts26.08 Michigan24.30 Texas22.79 New York22.42 Pennsylvania22.01 Florida20.71 Ohio20.40 Alabama18.23 Arkansas15.77 Mississippi14.95 Private Manufacturing Hourly Earnings By State 2008

6 Hourly Compensation Around the World, 2007

7 Reasons for Wage Differentials Heterogeneous jobs Heterogeneous workers Labor market imperfections

8 Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium: a) the wage at Ajax will be higher than at Acme b) the wage at Ajax will be lower than at Acme c) workers will have lower net utility at Acme d) employment will be lower at Ajax if demand is the same in both markets

9 Heterogeneous Jobs Compensating differentials risky jobs fringe benefits job status job security Differing skill requirements Differences based on efficiency wages Other factors Union status Discrimination Firm size

10 Beauty and the Labor Market Hammermesh and Biddle (1994) Beauty premium: 10-15% higher wages Hire ugly. All other things being equal, I'd give the nod to an ugly candidate. Its not charity: They have less value in the marketplace and can be hired less expensively, even though looks have, for most jobs, little or no bearing on job performance. I've found that, on average, ugly people are more likely to be kind and to work harder because they know they're working at a disadvantage. And unattractive people are more likely to stay with me because they tend to have a tough time getting hired, in part because they generally dont network efficiently. If I treat unattractive employees well, theyre usually very loyal. Marty Nemko, professional career advisor

11 Which of the following research findings would support an efficiency wage explanation of pay differentials? a) Firms with higher turnover costs pay lower than average wages b) Firms with higher costs of detecting shirking pay higher than average wages c) Pay is positively correlated with human capital investments in a given industry d) Differences in observable worker characteristics explain most of the variance in pay across industries

12 Heterogeneous Workers Differing human capital Non-competing groups Differing individual preferences Time preferences Tastes for nonwage aspects Married vs Single Males Married men received 8-40% higher wages Differing personal attributes Differing incentives to accumulate HK Differing costs of acquiring HK

13 Labor Market Imperfections Imperfect information Makes job search costly A distribution of wage rates result Wage rates

14 Labor Market Imperfections Immobilities Geographic Transportation costs Family concerns Institutional Licensing Pension plans Health insurance Sociological Discrimination Cultural

15 Government Regulation Minimum Wage Laws Occupational Health and Safety Regulation Occupational Licensing

16 Fair Labor Standards Act (1938) established: Federal minimum wage 1938: $ : $7.25 Overtime premium Child labor restrictions Minimum Wage Law Ohios minimum wage went up to $7.30 this past January

17 States with minimum wage rates higher than the Federal rate States with minimum wage rates the same as the Federal rate States with minimum wage rates lower than the Federal rate States with no minimum wage law

18 minimum wage in 2008 dollars minimum wage in current dollars

19 Minimum Wage Relative to the Average Hourly Wage Rate

20 Characteristics of Minimum Wage Workers, 2008 At or Below $6.55Total # Hourly Workers2.2 million75.3 million % Employment2.3%100% Gender Male Female Race White Black Hispanic Asian Age Hours of Work Part-time Full-time Occupation Sales Service Industry Retail Leisure & Hospitality Manufacturing Education Less than HS HS only Some college BA

21 2009 Poverty Guidelines (48 Contiguous States and DC) Persons in FamilyPoverty Threshold 1$10,830 2$14,570 3$18,310 4$22,050 5$25,790 6$29,530 7$33,270 8$37,010 For families with more than 8 persons, add $3,740 for each additional person. Source:

22 Competitive Labor Market Free Market: W 1, Q 1 no unemployment: Q D = Q S Govt imposes min. wage at W 2 at W 2 : Q D < Q S Unemployment occurs How can employers offset impact? Reduce hours of work Reduce fringe benefits Raise price Reduce quality Hire illegal aliens Labor Wage D1D1 S1S1 Q1Q1 W 2 = $7 unemployment new entrantslayoffs W 1 = $6 QDQD QSQS WB DWL What happens in the uncovered sector? Covered sector

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24 A majority of the workers earning the minimum wage: a)are males b)are females c)work full-time d)are teenagers

25 Suppose that the equilibrium wage in the low-skilled labor market is $8.00. Further, suppose the federal government raises the minimum wage to $7.25 an hour from its present level of $6.55. The governments action of increasing the minimum wage will result in: a)a decrease in unemployment b)an increase in unemployment c)a shortage of low-skilled labor. d)neither a shortage nor a surplus of labor in the low-skilled labor market.

26 Monopsony Model Monopsony hiring rule: MRP = MWC Monopsony outcome: W 1, L 1 Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve Monopsonist will hire L 2 workers at W* Minimum wage increases employment! Labor Wage D1D1 S1S1 L2L2 W* W1W1 L1L1 MWC 1

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28 Suppose this labor market is competitive, so that the wage rate is W 2. If W* is imposed as the minimum wage, then employment in this market: Labor $ MRP S MWC W* W2W2 W1W1 Q 1 Q 3 Q 4 0 Q2Q2 a)will rise b)will fall c)remain the same d)may or may not change; more info is required

29 Suppose this labor market is monopsonistic, so that the wage rate is W 1. If W* is imposed as the minimum wage, then employment in this market: Labor $ MRP S MWC W* W2W2 W1W1 Q 1 Q 3 Q 4 0 Q2Q2 a)will rise to Q 2 b)will rise to Q 4 c)will fall d)Remain the same

30 Empirical Evidence Brown (1982) 10% increase in MW reduces employment of teens/low-skilled workers by 1 to 3% Card and Krueger (1994) MW had no negative effect on employment at fast food restaurants in NJ surveyed before and after the increase Neumark and Wascher (1995) Rexamined payroll data from NJ fastfood restaurants MW had negative effects on employment consistent with conventional wisdom New research is looking at impact on Human Capital and Poverty

31 Workplace Safety Occupational Safety and Health Act (1970) Permissable exposure levels Protective equipment Process safety management Occupational Safety and Health Act (1970) Permissable exposure levels Protective equipment Process safety management Rate of Occupational Fatalities by Industry, 2002

32 Model of Optimal Safety MC slopes upward to reflect the rising opportunity cost of providing safety MB slopes downward to reflect diminishing returns to safety Permits paying lower wages Reduced worker turnover Lower worker comp rates MB = MC determines optimal safety MC slopes upward to reflect the rising opportunity cost of providing safety MB slopes downward to reflect diminishing returns to safety Permits paying lower wages Reduced worker turnover Lower worker comp rates MB = MC determines optimal safety MC 1 MB 1 $ Safety S* MB 2 S2S2 If workers possess perfect information about potential risks, then S* is socially optimal If workers underestimate potential risks, they wont demand a proper wage premium: Safety will be less than optimal: S 2 < S* If workers possess perfect information about potential risks, then S* is socially optimal If workers underestimate potential risks, they wont demand a proper wage premium: Safety will be less than optimal: S 2 < S* Uninformed workers

33 OSHA Revisited Case for OSHA Imperfect information Barriers to occupational mobility Case against OSHA Workers might overestimate potential risks Workplace standards often bear no relationship to reductions to job injuries and illness Empirical evidence There is mixed evidence that OSHA has reduced occupational injuries. If OSHA has reduced job risks, wage premiums between hazardous and safe jobs should decline over time. Case for OSHA Imperfect information Barriers to occupational mobility Case against OSHA Workers might overestimate potential risks Workplace standards often bear no relationship to reductions to job injuries and illness Empirical evidence There is mixed evidence that OSHA has reduced occupational injuries. If OSHA has reduced job risks, wage premiums between hazardous and safe jobs should decline over time.

34 Job Search External search Internal search Why Search? Workers search for the best job offer and firms search for employees to fill job vacancies. Search occurs because: Workers and jobs are highly heterogeneous. Information about differences in jobs and workers is imperfect and takes time to obtain. Why Search? Workers search for the best job offer and firms search for employees to fill job vacancies. Search occurs because: Workers and jobs are highly heterogeneous. Information about differences in jobs and workers is imperfect and takes time to obtain.

35 Job Search Model Assumptions Job searcher is unemployed and seeking work Job seeker knows distribution of wage offers (mean and variance), but does not know which employer is offering which wage Assumptions Job searcher is unemployed and seeking work Job seeker knows distribution of wage offers (mean and variance), but does not know which employer is offering which wage

36 Job Search Model Worker formulates an acceptance wage, w A If w > w A accept wage offer If w < w A reject wage offer Benefits of search Get additional wage offers Costs of search Explicit: employment agency fees + transportation Implicit: foregone earnings Benefits of search Get additional wage offers Costs of search Explicit: employment agency fees + transportation Implicit: foregone earnings

37 The higher the acceptance wage, the lower the probability of finding a job (the longer the unemployment duration) Inflation will shift the distribution of wage offers to the right Expected inflation will shift acceptance wage Unexpected inflation will not shift the acceptance wage Unemployment compensation increases acceptance wage The higher the acceptance wage, the lower the probability of finding a job (the longer the unemployment duration) Inflation will shift the distribution of wage offers to the right Expected inflation will shift acceptance wage Unexpected inflation will not shift the acceptance wage Unemployment compensation increases acceptance wage Job Search Model: Implications wAwA If w A = $20,000, what is probability that first offer will be accepted?

38 If $8.50 is the acceptance wage, what is the probability of Sally finding her next wage offer acceptable? a) 0.25 b) 0.30 c) 0.50 d) 0.70 a) 0.25 b) 0.30 c) 0.50 d) 0.70

39 If the rate of inflation increases but Sally mistakenly believes it has not, then: a) both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged b) the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration c) the acceptance wage will shift to the right, thereby reducing excepted search duration d) both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged a) both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged b) the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration c) the acceptance wage will shift to the right, thereby reducing excepted search duration d) both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged

40 Internal Labor Markets Port of Entry External Labor Market A worker typically enters an internal labor market at the least-skilled port-of- entry job in the job ladder or mobility chain. Wage rates and the allocation of workers within the internal labor market are governed primarily by administrative rules and procedures. Shipping Department Loader Packer Long-distance driver Dispatcher Local Driver

41 Firms use job ladders as method to reduce worker turnover. The lower turnover increases the return on firm investments in specific training. Firms can lower recruiting and screening costs since they will have a lot of information about the existing workforce. The job ladder also provides an incentive for workers to seek new skills and work hard. Workers get the benefits of increased job security, opportunities for promotion and training, protection from the external labor market. Also, the formal rules protect workers from arbitrary management decisions. Reasons for Internal Labor Markets

42 Government as Economic Rent Provider Economic rent in the labor market is the difference between the wage paid to a particular worker and the wage just sufficient to keep that person in his or her employment. Government provides economic rents through occupational licensing and trade barriers.


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