MODERN LABOR ECONOMICS THEORY AND PUBLIC POLICY CHAPTER Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith 11 TH EDITION Copyright ©2012 by Pearson Education, Inc. All rights reserved. The Demand for Labor 3

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Table 3.1 The Marginal Product of Labor in a Hypothetical Car Dealership (Capital Held Constant)

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Figure 3.1 Demand for Labor in the Short Run (Real Wage)

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Table 3.2 Hypothetical Schedule of Marginal Revenue Productivity of Labor for Store Detectives

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Figure 3.2 Demand for Labor in the Short Run (Money Wage)

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Figure 3.3 Effect of Increase in the Price of One Input (k) on Demand for Another Input (j), Where Inputs Are Substitutes in Production

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Figure 3.4 The Market Demand Curve and Effects of an Employer-Financed Payroll Tax

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Figure 3.5 Payroll Tax with a Vertical Supply Curve

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Go to webcast link in Ziad & Peter’s Videos

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Labor Demand Labor Supply Wage Labor Employed

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Labor Demand Labor Supply Wage Labor Employed We Le

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Minimum Wage Controversy Labor Demand Labor Supply Wage Labor Employed We Le

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Minimum Wage Controversy Labor Demand Labor Supply Wage Labor Employed We Le

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Minimum Wage Controversy Labor Demand Labor Supply Wage Labor Employed We Le

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Minimum Wage Controversy Labor Demand Labor Supply Wage Labor Employed We Le Wm Lm

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Minimum Wage Controversy Labor Demand Labor Supply Wage Labor Employed We Le Wm Lm

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Minimum Wage Controversy Labor Demand Labor Supply Wage Labor Employed We Le Wm Lm

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith The Winners Labor Demand Labor Supply Wage Labor Employed We Le Wm Lm

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith The Losers Labor Demand Labor Supply Wage Labor Employed We Le Wm Lm

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Even More Losers Labor Demand Labor Supply Wage Labor Employed We Le Wm Lm

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith How Does He Take Sides? WinnersLosers

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Winners & Losers Depends on Shape of Demand Curve Labor Demand Labor Supply Wage Labor Employed We Le Wm Lm

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith What would the demand curve look like if employers were willing to hire the same amount of people even if wages were raised 10% or 50% of 100%??? Labor Demand Labor Supply Wage Labor Employed

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith A completely “Inelastic” (or perfectly inelastic) demand cure: Labor Demand Labor Supply Wage Labor Employed $7.50 $15.00

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith A completely “Inelastic” (or perfectly inelastic) demand cure: Labor Demand Labor Supply Wage Labor Employed $7.50 $15.00

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith A completely “Inelastic” (or perfectly inelastic) demand cure: Labor Demand Labor Supply Wage Labor Employed $7.50 $15.00

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Losses depend on both the shape of the demand curve and supply curve Labor Demand Labor Supply Wage Labor Employed $7.50 $15.00 Labor Supply*

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith What do the demand and supply curves for fast food workers look like? Labor Demand Labor Supply Wage Labor Employed $7.50 $10.00 $15.00 $20.00

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith It is also possible that an increase in fast food wages and other low wage worker wages will increase the demand for fast food services increasing the demand for fast food workers. Labor Demand Labor Supply Wage Labor Employed Labor Demand*

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Minimum wage is raised Labor Demand Labor Supply Wage Labor Employed

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Higher incomes for low wage workers leads to a shift in the demand for fast foods. Labor Demand Labor Supply Wage Labor Employed Labor Demand*

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Increased fast foods demand leads to more workers employed all at a higher wage. Labor Demand Labor Supply Wage Labor Employed Labor Demand*

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Increased fast foods demand leads to more workers employed all at a higher wage. Labor Demand Labor Supply Wage Labor Employed Labor Demand*

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Wage Rates Are Spreading Out “INCOME inequality in the United States has been growing for decades, but the trend appears to have accelerated during the Obama administration. One measure of this is the relationship between median and average wages.” wider-and-faster.html?partner=yahoofinance&_r=1&

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith NY Times Analysis “One way to see the acceleration in inequality is to look at the ratio of average to median annual wages. From 2001 through 2008, during the George W. Bush administration, that ratio grew at 0.28 percentage point per year. From 2009 through 2011, the latest year for which the data is available, the ratio increased 1.14 percentage points annually, or roughly four times faster.” wider-and-faster.html?partner=yahoofinance&_r=1&

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith When mean is above the median, wages in the high range are pulling the mean up. When the distribution is not skewed, the mean, median and mode are all the same.

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Got Data from the BLS Occupational Employment Survey Page

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Technology? Globalization? Austerity? “We’re seeing the continued effects of the weak labor market and the long-term trends involving technology and globalization,” said Lawrence Katz, an economics professor at Harvard, “Our self- inflicted wounds from austerity are also exacerbating things.”Lawrence Katz wider-and-faster.html?partner=yahoofinance&_r=1&

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith Does the Minimum Wage Debate Relate to These Trends? Is the widening gap between workers driving the unrest? Can raising the minimum wage reverse this trend?

Copyright ©2012 by Pearson Education, Inc. All rights reserved. Modern Labor Economics: Theory and Public Policy, Eleventh Edition Ronald G. Ehrenberg Robert S. Smith CONCLUSION The debate over the minimum wage is an empirical debate over what would be the effect on jobs of an increase in the wage. This, in part, depends on the elasticities of demand and supply for labor and in part on how much the minimum wage is increased. It also depends on economic growth involving outward shifts in the demand and supply curves.