1. Chapter 5: Nonwage labor costs

2. Nonwage labor costs Nonwage labor costs include: hiring costs,
training costs, and
employee benefits.

3. Hiring costs Hiring costs include the costs associated with:
placing advertisements,
selecting candidates for interviews,
interviewing candidates,
selecting candidates for job offers,
negotiating job offers, and
processing the worker's employment (filling out W4 forms, I9 forms, and adding the worker to the company's insurance and pension plans) in the human resources department of the firm.

4. Hiring costs differences across firms
In the secondary labor market, hiring costs are generally relatively low.
Hiring costs in the primary labor market, however, can be very substantial, particularly when a firm is operating in a national labor market.

5. Training costs Training costs include:
the explicit cost of hiring trainers and using materials (such as manuals, videotapes, and capital equipment) for training purposes,
the implicit cost of using other workers, raw materials, and capital during informal on-the-job training, and
the opportunity cost of the trainee's time during training.

6. Training costs and wage offers
low wages - higher turnover rates and lower quality applicants, leading to higher training costs.
high wages - lower turnover rates and higher quality applicants, leading to lower training costs

7. Employee benefits
legally mandated social insurance programs (such as social security and unemployment compensation), and
privately provided benefits such as health insurance, vacation pay, and pension plans.

8. Quasi-fixed costs
Quasi-fixed costs are costs that vary with the number of workers hired by the firm, but not with hours worked per employee.

9. Optimal mix of employment and hours
Firms may increase their use of labor by:
adding additional workers,
increasing the length of the workweek, or
some combination of increases in hours and increases in the number of workers.

10. Production function Q=f(M,H) where: Q = quantity of output
M = number of workers
H = length of average work week
MP of M declines as M increases
MP of H declines as H increases

11. Optimal mix of M and H

12. Effect of an increase in mandated overtime premium
equivalent to an increase in MEH
substitution effect: M increases and H decreases
scale effect: M and H both decrease

13. Effect of an increase in mandated overtime premium
In a more complete model, other effects would occur:
a substitution of capital and other inputs for labor,
increased noncompliance,
only limited substitution of less skilled unemployed workers for the skilled workers who tend to work overtime hours,
increased moonlighting, and
a decline in the base rate of compensation in those industries that use significant amounts of overtime.

14. Part-time employment and mandated benefits
The quasi-fixed costs associated with full-time employees is usually higher than the quasi-fixed costs associated with part-time employees.
Mandatory health insurance would reduce the use of part-time employment.

15. Multi-period demand for labor
firms may lose money during a training period if they can receive a sufficient return on the training investment in subsequent periods.

16. Present value The present value of a future payment is lower when:
the payment is received in the more-distant future, and/or
the interest rate is relatively high.

17. Two period model: definitions
Wo = wage during training
W1 = post-training wage
W* = wage if no training is received (the same in each period)
Z = hiring and training cost (paid during the training period)
MPo = marginal product during training
MP1 = marginal product after training
MP* = marginal product if no training is received (assumed to be the same in each period)

18. Shifts in MP due to training

19. Optimal employment when training costs are present
PV(MRP) = PV(MFC)
Definitions:
PVP = MPo + MP1/(1+r), and
PVE = Wo + Z + W1/(1+r).
Optimal employment:
PVP=PVE
MPo + MP1/(1+r) = Wo + Z + W1/(1+r)

20. Optimal employment when training costs are present

21. Optimal employment when training costs are present
Wo + Z - MPo = (MP1 - W1) / (1 + r), or
NCo = G

22. General and firm-specific training
General training is training that raises a worker's productivity in more than one firm.
Firm-specific training increases the worker's productivity only in the current firm.

23. Costs of general training
Since general training raises the productivity of the worker in more than one firm, the costs (and benefits) of general training are expected to be borne by the worker.
Wo = MPo - Z, and
W1 = MP1

24. Costs of firm-specific training
If workers bear the costs, there is no reason for the firm to keep the worker.
If firms bear the costs, there is no reason for workers to stay.
It is expected that the costs of (and benefits from) firm-specific training will be shared.
MPo - Z < Wo < MP*
MP* < W1 < MP1

25. Layoffs, productivity, and training
a firm will be more reluctant to lay off workers who have received training investments paid for by the firm,

26. Layoffs, productivity, and training
a firm will be more reluctant to lay off workers who have received training investments paid for by the firm,
firms are more likely to rely on overtime rather than using additional employees in those markets in which firms pay a substantial share of training costs,
productivity falls during a recession, and
rises during an expansion.

27. Minimum wage and training costs
For workers to bear part or all of the cost of their training, they must be paid less during the training period.
The minimum wage sets a floor on this wage that limits the ability of workers to bear the costs of such training by accepting a lower wage.
Firms faced with such a system may respond by providing less training, thereby limiting the rate of growth of earnings for minimum-wage workers.

28. Credentials, Signals, and statistical discrimination
Firms have imperfect information and may make decisions based on observable worker characteristics.

29. Credentials, Signals, and statistical discrimination
Firms have imperfect information and may make decisions based on observable worker characteristics.
This may lead to statistical discrimination.
Statistical discrimination is expected to be less severe when internal labor markets are used.