1 Labor Markets l Principles of Microeconomic Theory, ECO 284 l John Eastwood l CBA 247 l l address:

2 Learning Objectives Explain why college graduates earn more, on the average, than high school graduates Explain why union workers earn higher wages than nonunion workers Explain why, on the average, men earn more than women and whites earn more than minorities

3 Learning Objectives (cont.) Predict the effects of a comparable-worth program Explain the effects of immigration on the wages of immigrants and native Americans

4 Learning Objectives Explain why college graduates earn more, on the average, than high school graduates Explain why union workers earn higher wages than nonunion workers Explain why, on the average, men earn more than women and whites earn more than minorities

5 Skill Differentials The Demand for High-Skilled and Low- Skilled Labor High skilled workers can perform more tasks than low skilled workers Different MRP's

6 Labor (thousands of hours per day) Wage rate (dollars per hour) Skill Differentials DLDL

7 Labor (thousands of hours per day) Wage rate (dollars per hour) Skill Differentials DLDL DHDH MRP of skill

8 Skill Differentials The Supply of High-Skilled and Low- Skilled Labor The acquisition of a skill is an investment in human capital It is costly. The cost is paid prior to receiving a higher wage. Human capital is the accumulated skill and knowledge of human beings.

9 Skill Differentials Supply Curves of High-Skilled and Low- Skilled Labor Wages compensate labor for time spent on the job. High-skilled labor must be compensated for time and cost of acquiring the skill.

10 Labor (thousands of hours per day) Wage rate (dollars per hour) Skill Differentials SLSL

11 Labor (thousands of hours per day) Wage rate (dollars per hour) Skill Differentials SLSL SHSH Compensation for cost of acquiring skill 8.50

12 Skill Differentials Supply Curves of High-Skilled and Low- Skilled Labor The Equilibrium Wage The equilibrium wage rate is higher for high-skilled labor than for low-skilled labor MRP Quantity supplied of labor

13 Labor (thousands of hours per day) Wage rate (dollars per hour) Skill Differentials SLSL DLDL

14 Labor (thousands of hours per day) Wage rate (dollars per hour) Skill Differentials SLSL SHSH DLDL DHDH

15 Do Education and Training Pay? Amount of education is related to income. Age is correlated to income. Age is related to experience and training. 5%–10% return/year on high school and college education

16 Education and Earnings

17 Learning Objectives Explain why college graduates earn more, on the average, than high school graduates Explain why union workers earn higher wages than nonunion workers Explain why, on the average, men earn more than women and whites earn more than minorities

18 Union-Nonunion Wage Differentials Monopoly Power in the Labor Market Labor unions are the main source of monopoly power in the labor market. A labor union is an organized group of workers whose purpose it is to increase wages and influence other job conditions for its members.

19 Union-Nonunion Wage Differentials Two Types of Union Craft unions Industrial unions Most unions are members of the AFL-CIO Union membership has declined from 35% in 1950 to 12% today Unions vary tremendously in size.

20 Unions with the Largest Membership

21 Union-Nonunion Wage Differentials A local is a subunit of a union that organizes the individual workers. Three Possible Forms of Organization for a Local: Open shop Closed shop Union shop Right-to-work

22 Union-Nonunion Wage Differentials Collective bargaining is the process of negotiation between employers and union representatives. A strike is a group decision to refuse to work under prevailing conditions. A lockout is a firm’s refusal to operate its plant and employ its workers.

23 Union-Nonunion Wage Differentials Binding arbitration is a process in which a third party — an arbitrator — determines wages and other employment conditions on behalf of the negotiating parties. A professional association is an organized group of professional workers such as lawyers, dentists, or physicians. These act similar to unions.

24 Union’s Objectives and Constraints Three Broad Objectives of Unions To increase compensation To improve working conditions To expand job opportunities

25 Union’s Objectives and Constraints Two Constraints on Unions Limited by how well it can restrict nonunion workers from offering their labor in the same market. Higher wages result in a decrease in the quantity demanded of labor.

26 Unions in a Competitive Labor Market Unions seek to increase compensation and to limit employee reductions by increasing the demand for the labor of its members.

27 Labor (hours per day Wage rate (dollars per hour) A Union in a Competitive Labor Market

28 Labor (hours per day Wage rate (dollars per hour) A Union in a Competitive Labor Market DCDC SCSC

29 Labor (hours per day Wage rate (dollars per hour) A Union in a Competitive Labor Market DCDC SCSC SUSU

30 Labor (hours per day Wage rate (dollars per hour) A Union in a Competitive Labor Market DCDC SCSC SUSU DUDU

31 How Unions Try to Change the Demand for Labor How Unions Attempt to Increase Demand It tries to make the demand for union labor less elastic. It tries to increase the demand for union labor

32 How Unions Try to Change the Demand for Labor Methods used by unions to increase the demand for labor include: Increase the marginal product of union members Encourage import restrictions Support minimum wage laws Support immigration restrictions Increase demand for the good produced

33 Featherbedding n., coercion, as by a union, for the hiring and retaining of unnecessary workers American Century Dictionary

34 The Scale of Union-Nonunion Wage Differentials On the average, union wage rates are 30% higher than nonunion wage rates. In services, manufacturing, and transportation the difference is between 11% and 19%. In wholesale, and retail trade the difference is 28%.

35 The Scale of Union-Nonunion Wage Differentials In construction the difference is 65%. Allowing for skill differences, the wage differential lies between 10% and 25%.

36 Monopsony A monopsony is a market in which there is a single buyer. Some areas have a major employer. The employer will pay the last worker hired an amount equal to the extra total revenue brought in.

37 Labor (hours per day Wage rate (dollars per hour) A Monopsony Labor Market 075 MRP = D MRC L S

38 A Monopsony Labor Market Labor (hours per day Wage rate (dollars per hour) MRP = D S Monopsony equilibrium Competitive equilibrium MRC L

39 Monopsony Monopsony decreases the level of employment and the wage rate. How much they are able to do so depends upon the elasticity of labor supply.

40 Monopsony Tendencies Monopsony is rare Worker can commute long distances There is usually a union

41 Monopsony and Unions Recall Unions attempt to monopolize the labor market Monopsony is the only buyer A bilateral monopoly exists when a union (monopoly seller) faces a monopsony buyer. Wages are determined by bargaining.

42 Monopsony and Unions The monopsony hires 50 hours and pays $5/hour. The union can call a strike. The union may agree to work 50 hours, but seeks the highest wage rate the employer can be forced to pay — $10/hour. This equals labor’s MRP. Labor (hours per day Wage rate (dollars per hour) MRP = D MRC L S

43 Monopsony and Unions It is unlikely the union will get $10/hour. It is also unlikely that the firm can keep wages at $5/hour. The monopsony firm and union bargain over the wage rate (and inflict costs on each other). It will settle between $5 & $10/hour (depending upon who is stronger). Labor (hours per day Wage rate (dollars per hour) MRP = D MRC L S

44 Monopsony and the Minimum Wage In a monopsony labor market, a minimum wage can increase both the wage rate and employment.

45 Minimum Wage in Monopsony If a minimum wage law is passed, the supply curve now becomes perfectly elastic at the minimum wage ($7.50) up to 75 hours. Above 75 hours, a higher wage must be paid. To maximize profit, the monopsony sets the marginal cost of labor equal to its marginal revenue product. Labor (hours per day Wage rate (dollars per hour) MRP = D MRC L S Minimum wage

46 Minimum Wage in Monopsony The monopsony hires 75 hours at $7.50 an hour. This minimum wage law has made the supply of labor perfectly elastic and made the marginal cost of labor the same as the wage rate up to 75 hours. The minimum wage has succeeded in raising the wage rate by $2.50 an hour and increasing the amount of labor employed by 25 hours a day. Labor (hours per day Wage rate (dollars per hour) MRP = D MRC L S Minimum wage Increase in employment

47 Learning Objectives Explain why college graduates earn more, on the average, than high school graduates Explain why union workers earn higher wages than nonunion workers Explain why, on the average, men earn more than women and whites earn more than minorities

48 Wage Differentials Between Sexes and Races In 1995, the incomes, as a percentage of the wages of white men were: 73% for white women 73% for black men 62% for Hispanic men 63% for black women 54% for Hispanic women Why do these differences exist?

49 Sex and Race Differentials

50 Wage Differentials Between Sexes and Races Four Possible Explanations for the Difference in Wages Job types Discrimination Differences in human capital Differences in the degree of specialization

51 Wage Differentials Between Sexes and Races Job Types Men and women do different jobs. However, some women and minorities earn less than white men doing the same job What is a possible explanation? Discrimination

52 Investment advisors (thousands) Wage (thousands of dollars/year) 40 Discrimination 0 2 S Black Females 1 20 MRP

53 Discrimination 40 Discrimination 0 2 MRP S Black Females Investment advisors (thousands) Wage (thousands of dollars/year) 1 20 MRP DA No discrimination

54 Discrimination 40 Discrimination 0 2 MRP S White Males Investment advisors (thousands) Wage (thousands of dollars/year) 3 MRP DF No discrimination 60

55 Wage Differentials Between Sexes and Races Differences in Human Capital Measured by: Years of schooling 1960 — whites 11 years in school 1997 — none Years of work experience Number of job interruptions Women, due to child bearing, have more interruptions

56 Wage Differentials Between Sexes and Races Differences in Degree of Specialization Men specialize, women diversify. This specialization improves husbands’ labor. Wives care of husband.

57 Learning Objectives (cont.) Predict the effects of a comparable-worth program Explain the effects of immigration on the wages of immigrants and native Americans

58 Comparable-Worth Laws The Equal Pay Act of 1963 and the Civil Rights Act of 1964 require equal pay for equal work. Paying the same wage for different jobs that are judged to be comparable is called comparable worth.

59 The Problem with Comparable Worth Oil rig operators Wage rate 0 WRWR T SRSR R STST WTWT Teachers MRP R MRP T

60 The Problem with Comparable Worth Oil rig operators Wage rate 0 WRWR Teachers T MRP R SRSR Wage rate R MRP T STST WTWT WCWC WCWC Court-enforced wage rate Court-enforced wage rate SRSR DRDR DTDT STST Shortage Unemployment

61 Effective Wage Policies Effective policies can operate on the level of education. An effective wage policy is one that emphasizes the importance of ongoing education and training.

62 Learning Objectives (cont.) Predict the effects of a comparable-worth program Explain the effects of immigration on the wages of immigrants and native Americans

63 Immigration Sixty million people have migrated from their country of birth 1.2% of world’s current population Almost 1/3 of them now live in the US ~800,000 legal immigrants per year recently Significant portion of US population growth

64 Immigration

65 US Immigration Once mainly European Directly Indirectly Mexico > ¼ of legal immigrants + 200,000 to 300,000 others

66 Immigration

67 Immigration Scale, Origin, and Skills of U.S. Immigrants The skills of immigrants vary considerably. On average, immigrants are less productive than native Americans. During the 1960’s, new immigrants earned 17% less than comparable Americans — 1970’s – 28% less — 1980’s – 32% less

68 Immigration Immigrants and the Labor Market Immigration increases the supply of labor. This lowers the wage rates of existing workers. It also decreases the supply of labor in the country the immigrants are leaving. This raises their country’s wage rates. Let’s see what would happen with free movement of immigrants.

69 Factor Price Equalization Quantity of labor (millions Wage rate (dollars per hour) 0 Quantity of labor (millions Wage rate (dollars per hour)

70 Factor Price Equalization Quantity of labor (millions Wage rate (dollars per hour) 0 Quantity of labor (millions Wage rate (dollars per hour) LD US LD M

71 Factor Price Equalization Quantity of labor (millions Wage rate (dollars per hour) 0 Quantity of labor (millions Wage rate (dollars per hour) LD US LD M World Equilibrium World Equilibrium Employment increases and wage rate falls in United States Employment decreases and wage rate rises in Mexico

72 …Doesn’t Necessarily Occur Actual effects appear to be small Restrictions slow immigration Immigration also increases the demand for labor Immigrants purchase goods & services Substitute for native low-skill labor Complement capital & high-skilled labor Indeterminate result

73 Immigration How Do New Immigrants Perform in the United States? As a rule, immigrants’ earnings grow more rapidly than the earnings of native Americans. However, they still do not catch up.

74 Immigration Immigrants and the Government Budget In 1970, 6% of all native households and 5.9% of immigrant households received some form of welfare. By 1990, the percentages were 7.4% for native households and 9.1% for immigrant households.

75 Minimum Wages Compared Huge gap in statutory minimum wages between rich and poor countries Even within the European Union there are wide differences Chart based on market exchange rates, & understates purchasing power in poor countries The Economist 6 Dec 2001