Wage Structure, Government Regulation, and Job Search

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

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

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

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

Hourly Compensation Around the World, 2007

Reasons for Wage Differentials Heterogeneous jobs Heterogeneous workers Labor market imperfections

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

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

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

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

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

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

Labor Market Imperfections Immobilities Geographic Transportation costs Family concerns Institutional Licensing Pension plans Health insurance Sociological Discrimination Cultural

Government Regulation Minimum Wage Laws Occupational Health and Safety Regulation Occupational Licensing

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

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

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: http://www.dol.gov/dol/topic/wages/minimumwage.htm minimum wage in current dollars 18

Minimum Wage Relative to the Average Hourly Wage Rate 1965-2008 19

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

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: http://aspe.hhs.gov/poverty/09poverty.shtml

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

A majority of the workers earning the minimum wage: are males are females work full-time are teenagers

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

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

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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

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

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

Workplace Safety Rate of Occupational Fatalities by Industry, 2002 Occupational Safety and Health Act (1970) Permissable exposure levels Protective equipment Process safety management

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*

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.

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.

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

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

Job Search Model: Implications wA 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

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

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

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

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.

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.