1. MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 11 th Edition, Copyright 2012 PowerPoint prepared by Della L. Sue, Marist College Chapter 18: Using Input Market Analysis

2. Copyright 2012John Wiley & Sons, Inc. 2 Learning Objectives Analyze the effects of the minimum wage on the employment of unskilled workers. Determine the extent to which employers versus employees bear the burden of the Social Security program. Explore an important hidden cost of Social Security that results on account of the program’s long-run impact on saving and capital accumulation. (continued)

3. Copyright 2012John Wiley & Sons, Inc. 3 Learning Objectives (continued) Explain the benefits to firms from colluding in hiring some input through examining the NCAA cartel. Show how employment discrimination can affect wage rates and employment. Outline the benefits and costs of immigration.

4. The Minimum Wage Law Fair Labor Standards Act Passed by Congress in 1938 Minimum wage is periodically increased Consequences depend on magnitude of the legal minimum relative to the prevailing wage rate in the economy Disemployment effect – the tendency of employers to respond to a higher wage rate by hiring fewer workers Magnitude of unemployment depends upon elasticity of demand and supply Who bears cost? Displaced workers Society – due to higher prices of products produced by covered labor and to lower prices for products produced by complementary factors of production Copyright 2012John Wiley & Sons, Inc. 4

5. Copyright 2012John Wiley & Sons, Inc. 5 Figure 18.1 - The Minimum Wage

6. Copyright 2012John Wiley & Sons, Inc. 6 Further Considerations of the Minimum Wage Law The reduction in employment can take the form of a reduction in hours each worker is employed rather than a reduction in the number of workers employed. When the government requires firms to pay a higher money wage, employers will respond, if possible, by reducing fringe benefits of employment. The minimum wage law does not cover all unskilled jobs. With a surplus of workers created by the minimum wage, employers can be more selective about whom they hire.

7. Does the Minimum Wage Harm the Poor? Objective of minimum wage: help the poor However: Low wage earners are in families that are not poor Most people in poor families who work are paid more than the minimum wage Most poor families are poor because they have no earnings at all Most of the minimum wage earners live in households with incomes above the poverty line Copyright 2012John Wiley & Sons, Inc. 7

8. Copyright 2012John Wiley & Sons, Inc. 8 Figure 18.2 – The Effects of an Increase in the Minimum Wage Cost: Net income change = Area W 1 GFW - Area FBL 1 L 2 Higher prices due to higher wages (factor input price)

9. Copyright 2012John Wiley & Sons, Inc. 9 The Minimum Wage: An Example of an Efficiency Wage? Efficiency wage – a wage higher than the prevailing market-determined level that serves to increase firms’ profits by lowering the costs of searching for, selecting, and training new workers

10. Who Really Pays for Social Security? The real effects of the tax are the same whether the tax is collected from employers or employees. Workers bear most, if not all, of the cost of the tax in the form of reduced wages. If income and substitution effects exactly offset each other, the labor supply curve is vertical. Vertical labor supply curve => net wage received by workers falls by the amount of the tax = workers bear entire burden of the tax Copyright 2012John Wiley & Sons, Inc. 10

11. Figure 18.3 – Tax on Employers versus Tax on Employees Copyright 2012John Wiley & Sons, Inc. 11

12. Copyright 2012John Wiley & Sons, Inc. 12 Figure 18.4 – The Burden of the Social Security Tax

13. The Hidden Cost of Social Security Pay-as-you-go (PAYGO) basis – retirement benefits are financed from payroll taxes collected from workers If workers save less for retirement, there is a reduction in investment and an increase in the interest rate. Consequence: slower growth rate for the economy level of GDP is lower than it would have been had Social Security never been implemented Copyright 2012John Wiley & Sons, Inc. 13

14. Figure 18.5 – The Effect of Social Security on Investment and the Interest Rate Copyright 2012John Wiley & Sons, Inc. 14

15. Copyright 2012John Wiley & Sons, Inc. 15 Figure 18.6 – The Long-Run Effect of PAYGO Social Security on GDP

16. Copyright 2012John Wiley & Sons, Inc. 16 The Effect on Labor Markets In addition to the direct effect of paying payroll taxes on earnings due to PAYGO Social Security: Capital stock is substantially lower. Worker productivity is lower. The demand curve for labor is lower. The before-tax wage rate is lower.

17. Copyright 2012John Wiley & Sons, Inc. 17 Figure 18.7 - The Effect of Social Security on Before-Tax Wage Rates

18. The NCAA Cartel Cartel incentives in input market: Limit input use Lower price paid for the input Monopsony power Example: National Collegiate Athletic Association (NCAA) Copyright 2012John Wiley & Sons, Inc. 18

19. Copyright 2012John Wiley & Sons, Inc. 19 Figure 18.8 - An Input Buyers’ Cartel

20. Copyright 2012John Wiley & Sons, Inc. 20 Hindrances to Input Buyers’ Cartels Firms have an incentive to cheat on the cartel agreement. Participating firms will find it difficult to reach agreement on the levels of permitted employment and the wage rate. The lower wage rate invites entry into the market by other firms that are not parties to the cartel. Coordinating hiring decisions among a large number of firms within and across industries is difficult. A firm usually hires many different inputs, and the potential profit from reducing the price of only one input may be small.

21. Copyright 2012John Wiley & Sons, Inc. 21 The NCAA as a Cartel of Buyers National Collegiate Athletic Association (NCAA) – a private organization empowered to regulate various aspects of college athletics Determines the maximum financial reward a student- athlete can receive Determines the number of student-athletes who may be recruited with scholarships at each school Applies sanctions to punish cheaters who are caught sanctions have become increasingly severe

22. Copyright 2012John Wiley & Sons, Inc. 22 Eliminate the Cartel Restrictions on Pay? Should colleges be permitted to pay student- athletes? Arguments in favor of the current system: Some schools would have to drop their athlete programs if they had to pay their athletes a competitive “wage”. Paying college athletes would destroy their amateur status and turn college athletics into a business. Paying athletes might adversely affect the education they receive.

23. Discrimination in Employment How can employment discrimination affect wage rates and employment? Produce segregated employment patterns Have no effect on wage differentials between the two groups Discrimination bears a cost in the form of sacrificed profits Copyright 2012John Wiley & Sons, Inc. 23

24. Copyright 2012John Wiley & Sons, Inc. 24 Figure 18.9 - Discrimination in Labor Markets

25. Copyright 2012John Wiley & Sons, Inc. 25 What Causes Average Wage Rates to Differ? Incomes and earnings differ among groups – Why? Reasons Discrimination Differences in labor market productivity Differences in labor market participation

26. The Benefits and Costs of Immigration Immigration increases the labor supply. Assume labor supply is perfectly inelastic. Quantity of capital is constant. Marginal product of labor=height of demand curve. Workers lose: total earnings fall Capital owners gain: total income rises Additionally, immigration tends to increase inequality: Immigrants have lower incomes than U.S. native residents. Immigration lowers wages of U.S. residents and increases the incomes of capital owners. Copyright 2012John Wiley & Sons, Inc. 26

27. Copyright 2012John Wiley & Sons, Inc. 27 Figure 18.10- The Effects of Immigration on the U.S. Labor Market

28. More on Gains and Losses Capital owners gain more than native workers lose but net gain is small Compare taxes paid by immigrants with the government benefits that they receive Effect is a redistribution of income Net gains from immigration could be increased with an emphasis on skill level in determining immigration: Skilled workers usually pay more in taxes than they receive in government benefits Increasing the supply of skilled workers would decrease wages among skilled workers which would reduce inequality Copyright 2012John Wiley & Sons, Inc. 28

29. Copyright 2012John Wiley & Sons, Inc. 29 Figure 18.11 – A Further Look at the Effects of Immigration

30. Copyright 2012John Wiley & Sons, Inc. 30 Copyright © 2012 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back- up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.