# Labor 1 G406, Regulation, ch. 9 Eric Rasmusen, October 31, 2013.

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Labor 1 G406, Regulation, ch. 9 Eric Rasmusen, erasmuse@indiana.edu October 31, 2013

Derived Demand If you hire workers to wash your windows, that is DIRECT DEMAND. You are not intending to resell. If you hire workers to chop wood that you will then sell, that is DERIVED DEMAND. It is derived from the demand for wood, and if nobody wanted to buy wood, you wouldnt hire the labor. 2

Choosing Inputs Think of Quantity of output as a function of inputs, Q(K, L). Then Profit = P(Q(K, L)) Q(K,L) - wL – rK Differentiating with respect to L, we get so 3

MRPL = w so MR * MPL = w, where MPL = Marginal product of labor (tons per worker) MRPL = The marginal revenue product of labor (\$ per worker) 4

P * MPL = w In a perfectly competitive market, MR = P, so the equation is the simpler version above, rather than MR*MPL=w. As L rises, MPL falls, because of diminishing returns. Suppose w rises. Then MPL must rise, so L must fall. Suppose P rises. Then MPL must fall, so L must rise. The demand curve for labor is L(w, P). 5

Capital and Labor What if the price of capital, r, rises? How does that affect the quantity demanded of labor? Complements (not compl I ments) or Substitutes? Remember, too, that there are many classes of labor, and they too can be complements and substitutes. Doctors, computers and nurses. 6

A Supply Shift from a Wage Increase 7

Restrictions on Labor Supply 1. The minimum wage 2. Licensing 3. Unions 8

Setting the Minimum Wage 9 What story can you tell that would give us this shape of supply curve? What story can you tell for why the demand curve shifts?

Setting the Minimum Wage 10

The Minimum Wage and Recession 11

The Workers Ideal if Qd=18-L But this will create unemployment too. Some workers get paid more, but some dont get a job at all. Or, maybe L does not change, but each worker works harder than is efficient. 12

The Minimum Wage 13 1938: Fair Labor Standards Act (FLSA) established a federal minimum wage. Now \$7.25/hour. \$8.00/hour in California, \$9.19 in Washington State. http://en.wikipedia.org/wiki/Minimum_wage_in_the_United_States http://en.wikipedia.org/wiki/Minimum_wage_in_the_United_States The FSLA also bans child labor and says pay must rise 50% for any hours beyond 40/week. Current discussion: Making it illegal to have ones children work on farms. The Chick-Fil-A example: A son cant help his Dad there, even for free.

Who Benefits from the Minimum Wage? 14 Labor unions support higher minimum wages, even though their mem- bers already earn well above the minimum wage. http://www.unionfacts.com/article/wp- content/uploads/2013/02/Union_Minimum_Wage_report.pdf http://www.unionfacts.com/article/wp- content/uploads/2013/02/Union_Minimum_Wage_report.pdf There is a public-interest argument: helping the poor. But many minimum-wage workers are young or new to the workforce. A subminimum wage is a lower minimum wage for young people. Ireland: minimum wage is \$11.94. Workers under 18 can be paid just 70% of that and the minimum wages in the rst and second year of employment after age 18 are at 80% and 90% to give employers incentive to hire workers new to the labor force.

In the long run, consumers bear more of the burden 15 The minimum wage raises prices, but not by as great a percentage as the wage. Why? In the short-run, firms have upward-sloping goods-supply curves and producer surplus there and in the employment market. Firm PS falls. Prices rise--- so CS falls too. In the long run, that quasi-rents pays for fixed costs, so producers are hurt less and consumers more. Consumers are rationally ignorant and so will not notice this consequence of the minimum wage.

Interns and the Minimum Wage Steve Cohen: Minimum Wage for Interns? It Misses the Point Yes, I did unpaid grunt work. But guess what: It was also an invaluable experience. 16

Licensing: Marriage Counsellors 17 IC 25-23.6-3-1 Unlawful practices Sec. 1. (a) An individual may not: (1) profess to be a licensed marriage and family therapist; (2) use the title: (A) "licensed marriage and family therapist"; (B) "marriage and family therapist"; or (C) "family therapist"; (3) use any other words, letters, abbreviations, or insignia indicating or implying that the individual is a licensed marriage and family therapist; or (4) practice marriage and family therapy for compensation; unless the individual is licensed under IC 25-22.5, IC 25-23.6-8-1, or IC 25-33. 9

The Coffin Case (2013) http://www.nola.com/crime/index.ssf/2012/10/federal_court_ rules_in_favor_o.html http://www.scribd.com/doc/131502115/St-Joseph-Abbey-v- State-Board-of-Embalmers-and-Funeral-Directors 19

Labor Law During the New Deal, the National Labor Relations Board (NLRB) was created in the Wagner Act to regulate unionized firms and unions. For example, the employer cannot: Threaten to fire employees who join a union. Threaten to close the plant if the employees form a union. Reject union offers without reading them (they mustbargain in good faith) The union cannot: Strike on issues unrelated to employment Threaten or assault non-striking workers. 20

Single Unions 21 A big principle of U.S. labor law is EXCLUSIVE REPRESENTION: if one union gets a majority of workers to sign up, it has the exclusive right to bargain on behalf of all the employees. The default federal rule is that all employees must then join the union and pay union dues. But states are now allowed to pass right to work laws, under which workers are not forced to join the union. (Taft-Hartley Act, more conservative, in 1947) Indiana passed Right to Work in 2012. Michigan followed.

Right to Work States in Green, 2013 22

Market Power in Labor 23

Union Lobbying 24 Unions are influential in state politics, as sources of votes, information, campaign workers, and contribution. Of the top 20 political action committees for federal contributions in 2011- 2012, 6 were unions, almost as many as the 7 corporations. Opensecrets.org:

Which Jobs Are Unionized? In 2011, 12% of wage and salary workers were unionized, down from 20% in 1983. 7.6 million were in the public sector (work for government) and 7.2 million in the private. 37% of public- sector workers are unionized, and 7% of private-sector. The job category with the lowest rate is Sales (3%). Why do we see this pattern? http://www.bls.gov/news.release/union2.nr0.htm 25

Employer Mandates 26 An employer mandate is a regulation requiring the employer to provide something desirable to the worker. The government doesn't pay for the mandates. Wages fall.

Unemployment Insurance 27 Employers must buy unemployment insurance. \$300/week, on average (states, jobs, differ), about \$15,000/year. It lasts 26 weeks in ordinary times. During the recession it has been extended to 99 weeks. http://economix.blogs.nytimes.com/2011/11/02/how- unemployment-benefits-became-twice-as-generous/

Workmens Compensation: Replacing Tort Lawsuits 28 Compensation Schedule, U.S. Code, x8107(c), Chapter 81 of Title 50 (in weeks of wages) (1) Arm lost, 312 weeks (2) Leg lost, 288 weeks (3) Hand lost, 244 weeks (4) Foot lost, 205 weeks (5) Eye lost, 160 weeks (6) Thumb lost, 75 weeks (7) First finger lost, 46 weeks (8) Great toe lost, 38 weeks (9) Second finger lost, 30 weeks (10) Third finger lost, 25 weeks (11) Toe other than great toe lost, 16 weeks

Fringe Benefits: 20% EMPLOYER COSTS FOR EMPLOYEE COMPENSATION – JUNE 2012 EMPLOYER COSTS FOR EMPLOYEE COMPENSATION – JUNE 2012 Private industry employer costs for noncash benefits was 30% of compensation (30% of pay + benefits) in 2012. This does not include mandates such as family leave, handicapped worker access, etc. Legally required benefits (Social Security, Medicare, unemployment insurance, workmans compensation): 8.2 percent. Insurance (life, health, and disability): 8.1 percent. Paid leave (vacation, holiday, sick leave, and personal leave): 6.8 percent. Supplemental pay (overtime and premium, shift differentials, and nonproduction bonuses): 2.9 percent. Retirement and Savings: 3.5 percent. (its 8.5% for govt.why?) Paid leave and supplemental pay shouldnt count, since they are cash. Subtracting them, we get 20 percent. 29

Health Insurance as an Efficient Fringe Benefit 30 Employers: If the wage dropped by x, they would be as happy as originally. The wage drops more than x, and L increases too. Workers: If the wage fell by less than y, they would be as happy as originally. It drops less, and L increases too. by workers by employers

An Inefficient Fringe Benefit: Free Haircuts 31 by employers by workers Employers: If the wage dropped by x, they would be as happy as originally. It drops less, and L falls too. Workers: If the wage fell by less than y, they would be as happy as originally. It drops more, and L falls too.

Mandates http://www.in.gov/legislative/igareports/agency/reports/IDOI 20.pdhttp://www.in.gov/legislative/igareports/agency/reports/IDOI 20.pdf 32

The Cost of Mandates Texas: Cost = 3.8% of premiums for 20 mandated benefits in 2005. http://www.ncsl.org/portals/1/documents/health/MandatesCauchi09.pdf Massachusetts: Cost = 12% of premiums for 26 mandates in 2008 --MA Division of Health Care Finance & Policy July 2008 maternity 3.73% mental health 2.21% home health 1.93% preventive care for children 1.12% infertility.89% 33

34 These are mandated fringe benefits. Romneycare is just for Massachusetts. Obamacare is for the whole country. Obamacare was challenged in court as being unconstitutional, beyond the powers of the federal government. The Individual Mandate says that each person must buy health insurance of a particular kind. The Supreme Court upheld it. One justice asked whether the federal government could require everyone to buy broccoli. It seems it can. Obamacare and Romneycare

Insurance Mandates: Birth Control 35 Part of Obamacare has come into effect. One part says that all employers must offer certain kinds of insurance coverage. All of them must cover birth control, for examples, though they do not have to cover abortions. Already, most or all states have this kind of requirement. Indiana requires mental health coverage for autism-related problems, for example.