1. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 28 CHAPTER 28 LABOR MARKETS AND WAGE RATES

2. 28-2 Learning Objectives 1. Distinguish among the various groups constituting the supply of labor. 2. Interpret the back-ward bending labor supply curve. 3. Discuss the factors influencing the demand for labor. 4. Explain and analyze how the wage rate is determined by supply and demand. 5. Analyze the relationship between high wage rates and economic rent. 6. Differentiate between real wages and money wages and calculate real wages. 7. Define and distinguish between the minimum wage and the living wage. 8. Explain the effects of employment discrimination on wages. 9. Discuss the education gap between rich and poor. After this chapter, you should be able to:

3. 28-3 The Supply of Labor There are 3 classes of labor: skilled, semiskilled, unskilled. In a sense, there are thousands of noncompeting groups. If there are opportunities in certain fields, people will go through the necessary training and compete for the jobs. So in another sense, we are all competitors in the same employment pool—as partial substitutes for one another in the short run. In the long run, most can learn to do many different jobs.

4. 28-4 The Theory of the Dual Labor Market The theory of the dual labor market places the labor force into 2 broad categories: 1. Primary market: Good jobs with good wages, benefits, opportunities. 2. Secondary market: Leftover jobs; disposable workers in low-paid, dead end, and often temporary jobs

5. 28-5 The Theory of the Dual Labor Market (continued) The “class” theory of employment:  The rich stay rich and the poor stay poor.  The college bachelor’s degree is a typical dividing line. Note: This theory does not account for the huge middle level of occupations, but it does support the contention that there are noncompeting groups in the labor market.

6. 28-6 The Backward-Bending Labor Supply Curve The substitution effect  As the wage rate rises, people are willing to substitute more work for leisure because leisure time is becoming more expensive. The income effect  At some point, as your wage rate continues to rise, you are willing to give up some income in exchange for more leisure time. After all, you need more leisure time to spend all the money you are now making.

7. 28-7 Hypothetical Labor Supply Curve (for an individual) Backward bend

8. 28-8 The Market Supply of Labor In the aggregate, the labor supply curve for all individuals in the market is upward sloping.

9. 28-9 The Demand for Labor Demand is the firm’s Marginal Revenue Product schedule (MRP). The MRP curve slopes down and to the right.  Inverse relationship between P and Qd.  The demand for labor is a derived demand. It is derived from the demand for the final product that the labor produces.

10. 28-10 Hypothetical Labor MRP Curve This is the market demand for labor, the sum of all firms

11. 28-11 Determination of the Wage: Supply and Demand W* or equilibrium

12. 28-12 What Affects Wages? (Behind the Curves) Productivity: workers who are more productive will generally be in more demand and better paid than less productive workers.  Education and training  Work experience  Greater natural abilities (talent) Compensating pay differentials: higher pay for jobs that are harder, more unpleasant working conditions. Shift differentials (nights and weekends)

13. 28-13 Hypothetical Labor Market: Decrease in Supply What happens to W* if labor supply decreases?

14. 28-14 High Wage Rates and Economic Rent Whenever a person gets paid more than the minimum she would be willing to accept, we call the excess economic rent. How much of David Letterman’s earnings are economic rent? If his earnings of $30 million are set by S & D, then his economic rent would depend on the minimum wage he would be willing to accept. If that were $5 million, then his economic rent would be $25 million.

15. 28-15 Real Wages versus Money Wages How does the U.S. stack up against other industrial countries? Let’s look at the hourly wage and fringe benefits in manufacturing in selected countries. (2011)

16. 28-16 Real Wages versus Money Wages: Where Else Do We Stand? Real wages = wages after inflation Key question: “What can you buy with your money?” (not “How much are you making?”) Real wages  national standard of living The national standard of living cannot rise unless productivity rises.  From 1947–1978 productivity (output per labor-hour) rose 104%.  During this period real wages rose 105%.  Since 1978, output per labor-hour has risen only 1% a year.  Real wages have not increased at all since 1973.

17. 28-17 Real Wages rate and Money Wage Rate, 1972-2012

18. 28-18 Application: Time is Money How many minutes do we need to work to pay for a gallon of gas in the U.S.?

19. 28-19 Question for Discussion: Why Did Real Wages Fall in the U.S.? Slowdown in productivity growth. De-industrialization (decline in manufacturing sector). Decline in union membership. Rise in healthcare costs/premiums. Globalization and outsourcing.

20. 28-20 The Minimum Wage and the Living Wage The Fair Labor Standards Act (FLSA) of 1938 1 st federal minimum wage @ 25 cent/hr and 44-hour work week (reduced to 40 hours in 1940).  30 cents in 1939 and raise regularly until 1981  $4.25 in 1991  $5.15 in 1997  $7.25 in 2009 FLSA called for the payment of time and ½ for overtime. Minimum wages have not kept pace with inflation or average wages in U.S.

21. 28-21 U.S. Minimum Hourly Wage, 1950-2013

22. 28-22 Should There Be a Minimum Wage Rate? Conservatives: the minimum wage hurts the very people it is supposed to help.  Basic effect is to cause millions of marginal workers to be unemployed.  Point to high teenage unemployment as proof. Would people lose their jobs? Why do we have a minimum wage? Is the minimum wage above equilibrium?

23. 28-23 How Much Does the Minimum Wage Lower Employment? It depends!

24. 28-24 Minimum Hourly Wage in Selected Industrial Countries, 2012

25. 28-25 The Living Wage Living wage: a minimum hourly wage that must be paid to employees of major contractors who do business with over 150 municipalities.  Most range from $7.50–$10.00 an hour.  Covers about 150,000 workers nationwide.  Unlikely to be large percent of the labor force. About 20% of U.S. workers are affected by unions, the minimum wage, or the living wage; more from “ripple effects”. Studies show some effects on reducing urban poverty.

26. 28-26 The Effects of Employment Discrimination on Wages Historically, people from many different groups have been discriminated against.  Two largest targets: women and African Americans.  In 1964, women made 59% of what men made. By 2009, 77%.  Only in lower-paying jobs do women make roughly the same as men.  The further up the pay scale and the higher the education, the wider the earnings gap.  The “glass ceiling” at the corporate level is still in place, e.g. medicine, law, business.

27. 28-27 Unequal Pay for Equal Work

28. 28-28 Employment Discrimination Against African Americans Despite fantastic employment gains African American men earn just 75% of what white men earn. African American women earn only 67% of what white men earn. Hispanic men earn 68% and Hispanic women earn 61% compared to white male earnings. It appears that discrimination still exists in the American workplace.

29. 28-29 Economics in Action: The Education Gap Societies are almost always divided between the “haves” and “have nots”. Today, a college degree factors greatly into where you fall on that scale. Lack of money is no longer a major deterrent to a college degree. Today, cultural differences appear to be the major determinant as to whether or not children will go to college. If you believe society can be dichotomized between those with college degrees and those without, you are probably among those that intend to end up a “have” rather than a “have not”.

30. 28-30 Median Annual Earnings by Amount of Education, 2011