1. Wage Structure, Government Regulation, and Job Search

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

3. Hourly Earnings By Occupational Group 2008
Hourly Wage
Management, Business, And Financial
$31.50
Professional and related workers
27.16
Installation, Maintenance, And Repair
19.76
Construction and extraction workers
18.91
Sales Workers
17.58
Office and Administrative Support
15.78
Service Workers
12.74
Farming, Fishing, And Forestry
11.29

4. Hourly Earnings By Industry Group 2008
Hourly Wage
Finance, Insurance, Real Estate
$25.55
Public Administration
25.27
Mining
25.32
Transportation and Warehousing
22.88
Manufacturing
22.60
Construction
20.23
Services
19.63
Retail Trade
14.50
Agriculture, forestry, and fisheries
12.53

5. Private Manufacturing Hourly Earnings By State 2008
Hourly Wage
Connecticut
$29.30
New Jersey
29.69
California
27.16
Massachusetts
26.08
Michigan
24.30
Texas
22.79
New York
22.42
Pennsylvania
22.01
Florida
20.71
Ohio
20.40
Alabama
18.23
Arkansas
15.77
Mississippi
14.95

6. Hourly Compensation Around the World, 2007

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

8. the wage at Ajax will be higher than at Acme
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:
the wage at Ajax will be higher than at Acme
the wage at Ajax will be lower than at Acme
workers will have lower net utility at Acme
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. It’s 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 don’t network efficiently. If I treat unattractive employees well, they’re usually very loyal.”
Marty Nemko, professional career advisor

11. Which of the following research findings would support an efficiency wage explanation of pay differentials?
Firms with higher turnover costs pay lower than average wages
Firms with higher costs of detecting shirking pay higher than average wages
Pay is positively correlated with human capital investments in a given industry
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
8.00
8.20
8.40
8.60
8.80
9.00
9.20
9.40
9.60
9.80
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. Ohio’s minimum wage went up to $7.30 this past January
Minimum Wage Law
Fair Labor Standards Act (1938) established:
Federal minimum wage
1938: $0.25
2009: $7.25
Overtime premium
Child labor restrictions
Ohio’s minimum wage went up to $7.30 this past January 16

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
The trend in the real minimum wage rises until the mid to late 1970s, then falls. This is fairly similar to the trend of the natural rate of unemployment.
The U.S. Department of Labor has lots of good information on the minimum wage, at:
minimum wage in current dollars 18

19. Minimum Wage Relative to the Average Hourly Wage Rate 19

20. Characteristics of Minimum Wage Workers, 2008
At or Below $6.55
Total
# Hourly Workers
2.2 million
75.3 million
% Employment
2.3%
100%
Gender
Male
Female
31.5
68.5
49.6
50.4
Race
White
Black
Hispanic
Asian
80.1
13.8
14.6
3.1
80.3
13.1
17.4
3.8
Age
16-19
20 +
24.5
75.5
6.8
93.2
Hours of Work
Part-time
Full-time
60.8
39.2
24.3
Occupation
Sales
Service
16.3
69.2
27.3
22.9
Industry
Retail
Leisure & Hospitality
Manufacturing
11.7
56.0
2.8
14.2
11.5
12.7
Education
Less than HS
HS only
Some college
BA +
26.0
31.9
33.8
8.4
14.9
36.1
33.6
15.4 20

21. 2009 Poverty Guidelines (48 Contiguous States and DC)
Persons in Family
Poverty 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
Covered sector
Free Market: W1, Q1
no unemployment: QD = QS
Gov’t imposes min. wage at W2
at W2: QD < QS
Unemployment occurs
How can employers offset impact?
Reduce hours of work
Reduce fringe benefits
Raise price
Reduce quality
Hire illegal aliens
Wage
unemployment S1
W2 = $7
W1= $6
DWL D1 QD Q1 QS
Labor B W
layoffs
new entrants
What happens in the uncovered sector? 22

24. A majority of the workers earning the minimum wage:
are males
are females
work full-time
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 government’s action of increasing the minimum wage will result in:
a decrease in unemployment
an increase in unemployment
a shortage of low-skilled labor.
neither a shortage nor a surplus of labor in the low-skilled labor market. 25

26. Monopsony Model MWC1 Monopsony hiring rule: MRP = MWC
Monopsony outcome: W1, L1
Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve
Monopsonist will hire L2 workers at W*
Minimum wage increases employment!
Wage S1 W* W1 D1 L1 L2
Labor

27. 27

28. may or may not change; more info is required
Suppose this labor market is competitive, so that the wage rate is W2. If W* is imposed as the minimum wage, then employment in this market:
will rise
will fall
remain the same
may or may not change; more info is required
Labor $
MRP S
MWC W* W2 W1 Q1 Q3 Q4 Q2

29. Suppose this labor market is monopsonistic, so that the wage rate is W1. If W* is imposed as the minimum wage, then employment in this market:
will rise to Q2
will rise to Q4
will fall
Remain the same
Labor $
MRP S
MWC W* W2 W1 Q1 Q3 Q4 Q2

30. Empirical Evidence Brown (1982) Card and Krueger (1994)
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 Rate of Occupational Fatalities by Industry, 2002
Occupational Safety and Health Act (1970)
Permissable exposure levels
Protective equipment
Process safety management

32. Model of Optimal Safety$
MC1
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
Uninformed workers
MB1
MB2 S2 S*
Safety
If workers possess perfect information about potential risks, then S* is socially optimal
If workers underestimate potential risks, they won’t demand a proper wage premium:
Safety will be less than optimal: S2 < S*

33. OSHA Revisited Case for OSHA Case against OSHA Empirical evidence
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.

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

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

37. Job Search Model: ImplicationswA
If wA = $20,000, what is probability that first offer will be accepted?
.30
.20
.10
.05
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

38. If $8.50 is the acceptance wage, what is the probability of Sally finding her next wage offer acceptable?
0.25
0.30
0.50
0.70

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

40. Internal Labor Markets
Shipping Department
Loader
Packer
Long-distance driver
Dispatcher
Local Driver
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.
External
Labor
Market
Port of
Entry

41. Reasons for Internal Labor Markets
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.

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.