1. 12 Labor: The Human Input Octavius (a wealthy young Englishman): “I believe most intensely in the dignity of labor.” The chauffeur: “That’s because you never done any.” GEORGE BERNARD SHAW, MAN AND SUPERMAN, ACT II Labor: The Human Input Octavius (a wealthy young Englishman): “I believe most intensely in the dignity of labor.” The chauffeur: “That’s because you never done any.” GEORGE BERNARD SHAW, MAN AND SUPERMAN, ACT II

2. ●Wage Determination in Competitive Labor Markets ●The Supply of Labor ●Why Do Wages Differ? ●Unions and Collective Bargaining ●Wage Determination in Competitive Labor Markets ●The Supply of Labor ●Why Do Wages Differ? ●Unions and Collective Bargaining Contents Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

3. FIGURE 1: Index of Trends in Real Wages, Compen., & Hours Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 180 160 140 120 100 80 60 40 0 1919192919091939194919691979195919892004 Index 1959 = 100 20 Hourly compensation (wages plus benefits) Hours worked per week Hourly wages

4. FIGURE 2: Income Inequality, 1967 versus 2003 Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 60.0 50.0 40.0 30.0 20.0 10.0 0.0 30027691 Sha r e of U.S. Agg r egate Household Income (pe r cent) Poorest one-fifth of U.S. households Richest one-fifth of U.S. households 4 43.8 49.8 3.4

5. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●The Demand for Labor and the Determination of Wages ♦Marginal productivity  demand for labor ♦Marginal revenue product of labor (MRP L ) = the increase in the employer’s total revenue that results when he or she hires an additional unit of labor ●The Demand for Labor and the Determination of Wages ♦Marginal productivity  demand for labor ♦Marginal revenue product of labor (MRP L ) = the increase in the employer’s total revenue that results when he or she hires an additional unit of labor Wage Determination in Competitive Labor Markets

6. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●Influences on MRP L : Shifts in the Demand for Labor ♦Investment in human capital   MRP L ♦Since the demand for labor is a derived demand, anything that improves the market for the goods and services that labor produces can shift the labor demand curve upward. ●Influences on MRP L : Shifts in the Demand for Labor ♦Investment in human capital   MRP L ♦Since the demand for labor is a derived demand, anything that improves the market for the goods and services that labor produces can shift the labor demand curve upward. Wage Determination in Competitive Labor Markets

7. FIGURE 3: Equilibrium in a Competitive Labor Market Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Weekly Wage Number of Workers 500,000 $300 D D S S E

8. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●Technical Change, Productivity Growth, and the Demand for Labor ♦Technical change that increases the worker’s productivity has two opposing effects on MRP L : ■  increase in the worker’s marginal physical product (MPP, i.e., the quantity of output that an additional worker can produce) ■  output price (P) ●Technical Change, Productivity Growth, and the Demand for Labor ♦Technical change that increases the worker’s productivity has two opposing effects on MRP L : ■  increase in the worker’s marginal physical product (MPP, i.e., the quantity of output that an additional worker can produce) ■  output price (P) Wage Determination in Competitive Labor Markets

9. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●Technical Change, Productivity Growth, and the Demand for Labor ♦Since a rise in productivity raises MPP but reduces P, we cannot be sure of the net effect on MRP; that is, the net effect on the demand curve for labor. ●Technical Change, Productivity Growth, and the Demand for Labor ♦Since a rise in productivity raises MPP but reduces P, we cannot be sure of the net effect on MRP; that is, the net effect on the demand curve for labor. Wage Determination in Competitive Labor Markets

10. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●The Service Economy and the Demand for Labor ♦  productivity   employment & wages sometimes in the short run ♦But in the long run,  productivity  reallocation of labor and higher incomes ♦  productivity in manufacturing   employment in service sector ●The Service Economy and the Demand for Labor ♦  productivity   employment & wages sometimes in the short run ♦But in the long run,  productivity  reallocation of labor and higher incomes ♦  productivity in manufacturing   employment in service sector Wage Determination in Competitive Labor Markets

11. FIGURE 4: Growing Service Sector Jobs in 9 Countries Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 40 Service-Sector Jobs as a Percentage of the Total Labor Force 10 70 80 20 30 50 60 0 1967 2003 90 Italy 38.3 62.9 Spain 36.2 63.6 Germany 42.8 65.6 Japan 45.1 66.6 France 44.8 73.0 Canada 58.7 74.7 U.K. 50.8 75.2 Sweden 48.8 75.2 U.S. 58.9 78.3

12. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●Labor supply trends ♦Total labor force increased from about 60 million jobholders right after the WWII to over 140 million today. ♦Proportion of population with jobs has grown from about 58% after WWII to 66% today. ♦Entry of new workers into labor force ♦Protracted and substantial relative decline in union membership ●Labor supply trends ♦Total labor force increased from about 60 million jobholders right after the WWII to over 140 million today. ♦Proportion of population with jobs has grown from about 58% after WWII to 66% today. ♦Entry of new workers into labor force ♦Protracted and substantial relative decline in union membership The Supply of Labor

13. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. The Supply of Labor ●Rising Labor-Force Participation ♦  labor force participation   wages, at least for a time: ■The sheer increase in the supply of workers tends to depress wages. ■A combination of discrimination and the initial lack of experience of the new entrants into the labor market has had a similar effect. ●Rising Labor-Force Participation ♦  labor force participation   wages, at least for a time: ■The sheer increase in the supply of workers tends to depress wages. ■A combination of discrimination and the initial lack of experience of the new entrants into the labor market has had a similar effect.

14. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●An Important Labor Supply Puzzle ♦Supply of labor = demand for leisure ♦Effects of wage increase ■Substitution effect:  cost of leisure  positively sloped supply curve (more hours worked) ■Income effect:  wealth  negatively sloped curve (fewer hours worked) ●An Important Labor Supply Puzzle ♦Supply of labor = demand for leisure ♦Effects of wage increase ■Substitution effect:  cost of leisure  positively sloped supply curve (more hours worked) ■Income effect:  wealth  negatively sloped curve (fewer hours worked) The Supply of Labor

15. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●An Important Labor Supply Puzzle ♦Over the long run, the income effect seems to have predominated, leading to a negative relationship between real wages and hours per worker. ●An Important Labor Supply Puzzle ♦Over the long run, the income effect seems to have predominated, leading to a negative relationship between real wages and hours per worker. The Supply of Labor

16. FIGURE 5: A Typical Labor Supply Schedule Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Quantity of Labor Supplied Wage Rate Substitution effects outweigh income effects Income effects balance substitution effects A Income effects outweigh substitution effects B

17. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. The Supply of Labor ●The Labor Supply Resolved ♦Rising wages enable workers to provide for their families with fewer hours of work. ♦Thus, it is the strong income effect of rising wages that may account for the fact that labor supply has responded in the “wrong” direction, with workers working ever-shorter hours as real wages rose and longer hours as wages fell. ●The Labor Supply Resolved ♦Rising wages enable workers to provide for their families with fewer hours of work. ♦Thus, it is the strong income effect of rising wages that may account for the fact that labor supply has responded in the “wrong” direction, with workers working ever-shorter hours as real wages rose and longer hours as wages fell.

18. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●The explanation of wage differences is the fact that there is not one labor market but many. ♦Each has its own supply and demand curves. ♦Each has its own equilibrium wage. ●The explanation of wage differences is the fact that there is not one labor market but many. ♦Each has its own supply and demand curves. ♦Each has its own equilibrium wage. Why Do Wages Differ?

19. FIGURE 6: Wage Differentials Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Wage (b) Number of Workers Wage (a) Number of Workers S 2 S 2 D 2 D 2 S 1 S 1 D 1 D 1 w 2 w 1

20. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Why Do Wages Differ? ●Labor Demand in General ♦Different workers have different productivities. ♦Each worker’s marginal physical product depends on: ■His or her own abilities ■His or her degree of effort ■The other factors of productions with which he or she has to work ●Labor Demand in General ♦Different workers have different productivities. ♦Each worker’s marginal physical product depends on: ■His or her own abilities ■His or her degree of effort ■The other factors of productions with which he or she has to work

21. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Why Do Wages Differ? ●Labor Supply in General ♦Factors that influence the supply side: ■The size of the available working population ■The non-monetary attractiveness of a job ■The abilities needed ■The amount and expense of the necessary training ●Labor Supply in General ♦Factors that influence the supply side: ■The size of the available working population ■The non-monetary attractiveness of a job ■The abilities needed ■The amount and expense of the necessary training

22. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Why Do Wages Differ? ●Ability and Earnings: The Rent Component of Wages ♦The concept of economic rent can explain at least part of the earnings of people whose abilities cannot (or at least not easily) be duplicated. ●Ability and Earnings: The Rent Component of Wages ♦The concept of economic rent can explain at least part of the earnings of people whose abilities cannot (or at least not easily) be duplicated.

23. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Why Do Wages Differ? ●Investment in Human Capital ♦Human capital theory sees education and training as investments, leading to a later payoff of higher earnings. ♦The higher earnings are necessary to induce the sacrifices needed in terms of education and training. ●Investment in Human Capital ♦Human capital theory sees education and training as investments, leading to a later payoff of higher earnings. ♦The higher earnings are necessary to induce the sacrifices needed in terms of education and training.

24. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Why Do Wages Differ? ●Education and Earnings: Dissenting Views ♦Education as a Sorting Mechanism ■Education viewed as a sorting device that does not itself increase productivity. ■The educational system sorts individuals by ability. The skills necessary to succeed in school are closely related to the skills that lead to success in jobs. ●Education and Earnings: Dissenting Views ♦Education as a Sorting Mechanism ■Education viewed as a sorting device that does not itself increase productivity. ■The educational system sorts individuals by ability. The skills necessary to succeed in school are closely related to the skills that lead to success in jobs.

25. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Why Do Wages Differ? ●Education and Earnings: Dissenting Views ♦Dual Labor Market Theory ■Two labor markets, not one: ● Primary labor market--good jobs ● Secondary labor market--“dead-end” jobs ■Dual labor market theorists see some people shunted into dead-end jobs where education is of little use. ●Education and Earnings: Dissenting Views ♦Dual Labor Market Theory ■Two labor markets, not one: ● Primary labor market--good jobs ● Secondary labor market--“dead-end” jobs ■Dual labor market theorists see some people shunted into dead-end jobs where education is of little use.

26. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Why Do Wages Differ? ●The Effects of Minimum Wage Legislation ♦Teenagers are more vulnerable to unemployment than other workers, and some observers have blamed minimum wage laws. ♦Recent research shows, however, that increases in the minimum wage do not reduce the number of teenage workers employed much, if at all. ♦In any case, the real value of the minimum wage has not increased over time. ●The Effects of Minimum Wage Legislation ♦Teenagers are more vulnerable to unemployment than other workers, and some observers have blamed minimum wage laws. ♦Recent research shows, however, that increases in the minimum wage do not reduce the number of teenage workers employed much, if at all. ♦In any case, the real value of the minimum wage has not increased over time.

27. FIGURE 7: The Teenage Unemployment Problem Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 5 10 15 20 25 30 35 40 45 50 0 19721977 1982 19871992 White male teenagers Black male teenagers All workers Unemployment Rate (Pe r cent) 19972004 Year

28. FIGURE 8: The Minimum Wage, 1950-2004 Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 5 6 Nominal rate Real rate (adjusted for inflation) 4 3 Minimum Hourly W age Rate 1 2 0 19501955196019651970 1975 19801985199019952004

29. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●Unions attempt to monopolize the sale of labor, so the competitive model breaks down in this case. ●Union membership is only a small and declining portion of the American labor force, however. ●Unions attempt to monopolize the sale of labor, so the competitive model breaks down in this case. ●Union membership is only a small and declining portion of the American labor force, however. Unions and Collective Bargaining

30. FIGURE 9: Unionization in the United States, 1930-2003 Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 25 30 20 15 Union Membership as a Percentage of Wage and Salary Workers 5 10 0 19301940195019601970 1980 19902003 Union Membership as a Percentage of Wage and Salary Workers

31. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Unions and Collective Bargaining ●Why has unionism been declining? ♦The shift of the U.S. labor force into service industries and out of manufacturing ♦Deregulation forced some industries to compete more intensely, and it may, thus, have influenced the firms to hire less-expensive, non-union labor. ●Why has unionism been declining? ♦The shift of the U.S. labor force into service industries and out of manufacturing ♦Deregulation forced some industries to compete more intensely, and it may, thus, have influenced the firms to hire less-expensive, non-union labor.

32. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. Unions and Collective Bargaining ●Why has unionism been declining? ♦American workers’ preferences seem to have shifted away from unions. ♦American unions have been under increasing pressure in the 1990s owing to stronger competition both at home and from abroad. ●Why has unionism been declining? ♦American workers’ preferences seem to have shifted away from unions. ♦American unions have been under increasing pressure in the 1990s owing to stronger competition both at home and from abroad.

33. Copyright© 2006 South-Western/Thomson Learning. All rights reserved. ●Unionization is much less prevalent in America than it is in most other industrialized countries. ●The main sector of the U.S. economy in which the unions are still fairly healthy is government employment. ●Unionization is much less prevalent in America than it is in most other industrialized countries. ●The main sector of the U.S. economy in which the unions are still fairly healthy is government employment. Unions and Collective Bargaining

34. ●Unions monopolize the supply of labor, but they are not all powerful. ●Unions must choose among competing goals, and they need to weigh alternative strategies. ♦Attaining the highest wage possible for current union members ♦Increasing the size of the union ●Unions monopolize the supply of labor, but they are not all powerful. ●Unions must choose among competing goals, and they need to weigh alternative strategies. ♦Attaining the highest wage possible for current union members ♦Increasing the size of the union Unions as a Labor Monopolies Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

35. ●Unions also try to  the demand for labor: ♦Featherbedding: forcing management to employ more workers than they really need ♦Institute a campaign to raise worker productivity ♦Raise the demand for the company’s product ■Flex political muscle (for example, by obtaining legislation to reduce foreign competition) ■Appeal to the public to buy union products. ●Unions also try to  the demand for labor: ♦Featherbedding: forcing management to employ more workers than they really need ♦Institute a campaign to raise worker productivity ♦Raise the demand for the company’s product ■Flex political muscle (for example, by obtaining legislation to reduce foreign competition) ■Appeal to the public to buy union products. Unions as a Labor Monopolies Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

36. FIGURE 10: Union Control over the Demand Curve Copyright© 2006 South-Western/Thomson Learning. All rights reserved. D 1 D 1 D 0 D 0 S S Number of Workers Wage E A

37. ●Have Unions Really Raised Wages? ♦Unionized workers generally receive somewhat higher wages (approximately 15 percent) than non-unionized workers, but it is not clear just how responsible unions have been for wage increases. ●Have Unions Really Raised Wages? ♦Unionized workers generally receive somewhat higher wages (approximately 15 percent) than non-unionized workers, but it is not clear just how responsible unions have been for wage increases. Unions as a Labor Monopolies Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

38. ●Monopolistic unions sometimes face employers who have a monopsony, or something close to it, in the hiring of labor. ♦Monopsony = market situation in which there is only one buyer ♦Bilateral monopoly = a market situation in which there is both a monopoly on the selling side and a monopsony on the buying side ●Monopolistic unions sometimes face employers who have a monopsony, or something close to it, in the hiring of labor. ♦Monopsony = market situation in which there is only one buyer ♦Bilateral monopoly = a market situation in which there is both a monopoly on the selling side and a monopsony on the buying side Monopsony and Bilateral Monopoly Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

39. ●It is almost impossible to develop models to predict the outcomes of collective bargaining. Collective Bargaining and Strikes Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

40. ●Mediation and Arbitration ♦Sometimes the parties come to a mutual agreement among themselves. ♦Sometimes they resort to a (non-binding) mediator or to a (binding) arbitrator. ♦Sometimes the bargaining breaks down and a strike ensues. ●Mediation and Arbitration ♦Sometimes the parties come to a mutual agreement among themselves. ♦Sometimes they resort to a (non-binding) mediator or to a (binding) arbitrator. ♦Sometimes the bargaining breaks down and a strike ensues. Collective Bargaining and Strikes Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

41. ●Strikes ♦It is important to the credibility of unions to be willing to strike, and to the credibility of employers to be willing to endure a strike. ●Strikes ♦It is important to the credibility of unions to be willing to strike, and to the credibility of employers to be willing to endure a strike. Collective Bargaining and Strikes Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

42. FIGURE 11: Work Time Lost in the U.S. Because of Strikes Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 0.20 Percentage of Work Time Lost 0.05 0.10 0.15 0.25 0.30 0.35 0.40 0.50 0.45 0 19481953 819631968 1973 19781983 81993 82004 Percentage of Work Time Lost

43. FIGURE 12: The Incidence of Strikes in 8 Industrial Countries Copyright© 2006 South-Western/Thomson Learning. All rights reserved. 160 140 120 100 80 60 40 20 0 Days Lost to Strikes per Thousand Workers per Year (5-year average) 200 180 y Canada 190.8 United States 55.6 Italy 53.1 France 22.7 United Kingdom 18.7 Sweden 8.3 German 1.4 Japan 1.3