Chapter 6: Determination of Wages Importance of wages: wage structure at point in time and changes over time serve to efficiently allocate labor and to keep S and D in balance. Why care? – Implications for well-being; – inequality; –L market trends over time. –Policy relevance.

Wages Use term “wage” loosely! –1) price of labor per hour of work –2) use: average hourly earnings. Two data sources: –1) CPS: –2) BLS: –Both published in Employment and Earnings. –See Table 6.1:

Wage Determination in Competitive Markets 5 Assumptions in P.C. Model 1) firm’s goal: worker’s goal: 2) information.: 3) homogeneity: 4) no mkt power: 5) no barriers/no mobility costs. Result: Law of One Wage.

Market Imperfections 1) Nonmaximizing behavior: 2) Imperfect information 3) Heterogeneity: 4) Collusion: 5) Costly mobility:

Minimum Wage Laws First established in 1938 by the Fair Labor Standards Act (FLSA). See movement over time. Without legislative adjustment, real value falls over time.

More on W min Evaluating effectiveness of W min laws. Policy’s goal: “..maintenance of minimum standards of living..” Who holds W min jobs? –1) 1999: about 3.3 million workers (4.6% of workforce) –2) –3)

Effect of Minimum Wage On living standard: 2001 poverty line for family of four = $18,022. FT work at W min = $10,300. Effect of W min on labor market: –1) –2) –3)

Labor Market Segmentation Allows for violation of one of the assumptions of p.c.: –Violated assumption: All jobs in market are open to competition. –Allows for strong barriers to entry. Forms of barriers to entry: –1) –2) –3) –4) Barrier can cause segmented labor market.

Dual Labor Market Theory Labor market stratified into: primary labor market; secondary labor market. Little/no mobility between sectors. Primary sector: good jobs: Typically found in large firms, union jobs, or high tech jobs. –1) –2) –3)

More on Theory Secondary sector: bad jobs: Good work habits not rewarded. Therefore, bad work habits can be created or reinforced. May result in self-perpetuating cycle that reinforces the segmentation into the 2 markets.

More on Segmentation Empirical evidence in favor of dual labor market theory: Segmented workforce within single employer: permanent workers versus contingent workers (temp workers, out- sourcing, etc.) –Percent contingent has . –Microsoft case: “permanent” temps.