1. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 14 Labor Markets

2. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-2 In this chapter you will learn to 1. Explain why wage differentials exist in both competitive and noncompetitive labor markets. 3. Explain why unions face a tradeoff between wages and employment. 2. Describe the effects of legislated minimum wages. 5. Explain why the trend away from manufacturing jobs and toward service jobs is not necessarily a problem for the economy as a whole. 4. Describe facts and to recognize government policies related to gender and race issues in the labor market.

3. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-3 Wage Differentials in Competitive Markets In competitive labour markets, supply and demand set the equilibrium wage and level of employment. But wages will still differ across workers if there are compensating differentials. Wage Differentials

4. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-4 - inherited skills are different across workers and can be important - investment in human capital is costly, and the return is usually in terms of higher future wages Even if all jobs are the same (no compensating differentials), there may still be some equilibrium wage differentials: - different working conditions Wage Differentials

5. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-5 Figure 14.1 Education and Earned Income in the United States, 2005

6. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-6 Changes in the pattern of human-capital acquisition lead to changes in the supply of high-skilled versus low-skilled labour. These changes erode the wage differentials. But as long as human capital is costly to acquire, some wage differentials will persist in equilibrium. Wage Differentials and Human Capital

7. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-7 Wage Differentials in Noncompetitive Markets A Union in a Competitive Labor Market A labor union has monopoly power: - it can change the supply of labor  driving up the wage Firms are generally able to choose the level of employment, once the wage is determined in negotiations.

8. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-8 Figure 14.2 A Union in a Competitive Labor Market

9. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-9 Figure 14.3 Monopsony in a Labor Market

10. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-10 Figure 14.4 Bilateral Monopoly in a Labor Market

11. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-11 Bilateral Monopoly: Monopsony with a Labor Union Quantity of Labor Wage Rate MRP S = AC L0L0 E1E1 w1w1 L1L1 E0E0 w0w0 MC The union can raise wages and employment above the monopsony levels. If the union pushes wages up only to the competitive level, employment would also rise to the competitive level.

12. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-12 But if the union pushes the wage up to w 2, employment will fall below the competitive level… Quantity of Labor Wage Rate MRP S = AC L0L0 E1E1 w1w1 L1L1 E0E0 w0w0 MC w2w2 L2L2 L3L3 E2E2 x …and some unemployment occur. Bilateral Monopoly: Monopsony with a Labor Union

13. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-13 Legislated Minimum Wages Government policy can affect labor markets by legislating minimum wages. In a competitive market, a binding minimum wage reduces employment and creates unemployment. But in the presence of monopsony power, a binding minimum wage may simultaneously increase wages and employment.

14. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-14 Figure 14.5 The Effects of Legislated Minimum Wages

15. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-15 APPLYING ECONOMIC CONCEPTS 14.1 Inequality and Shifts in the Labor Market A Final Word We have learned several explanations for why some workers get paid more than others, including: 1.workers’ education and skills 2.job characteristics 3.structure of labor markets

16. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-16 Labor Unions Labor unions are not as important in the U.S. today than they have been in the past. Only 7.8% of all private-sector workers were members of a union in 2005, as compared to almost 25% in the early 1970s. LESSONS FROM HISTORY 14.1 Unions in the United States

17. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-17 Figure 14.6 U.S. Union Membership by Industry, 2005

18. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-18 Collective Bargaining In collective bargaining, the firm and the union typically bargain over wages and other working conditions. The firm usually retains the right to choose the level of employment. The more successful a union is at raising wages, the fewer union members will be employed.

19. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-19 Unionized workers earn, on average, between 10 and 20 percent higher wages than non-unionized workers with similar characteristics. Some economists explain this apparent contradiction with the concept of featherbedding. But there is little empirical evidence that firms hire fewer workers as a result of the higher wages. Union Wage Premium

20. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-20 Figure 14.7 The Union Employment Effect

21. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-21 Unions may reduce long-run productivity through a process known as the hold-up of capital. Much physical capital, once installed, has a very inelastic supply, and the union may hold up the firm by forcing it to pay higher wages. Unanswered Questions If firms are forward-looking, they will anticipate this behavior, and might reduce investment. Lower investment may reduce productivity growth in the industry.

22. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-22 Gender and Race in the Labor Market In 2005, black workers on average earned 70% and Hispanic workers earned 63% of non-Hispanic whites. Female workers earned about 69% of what male workers earned. Possible explanations for the observed disparity: - differences in education and human capital - occupational segregation Policies to eliminate discrimination: - equal opportunity and access in the workplace - affirmative action

23. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-23 Figure 14.8 The Effects of Gender, Race, and Ethnicity on Income, 2005

24. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-24 Figure 14.9 The Effect of Discrimination on Wages

25. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-25 Policies to Eliminate Discrimination Prior to the civil rights movement of the 1960s, discrimination was tolerated and in some cases even promoted. In the 1960s, two types of policies were introduced to counter the effects of discrimination: 1.Equal opportunity and access (Equal Pay Act of 1963 and Title VII of the Civil Rights Act 2.Affirmative action policies

26. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-26 In 1945, the goods-producing sector accounted for 40% of U.S. employment, and services accounted for less than 50%. Today the numbers are 17% for goods and over 70% for services. One concern is that many of the “good jobs” in the manufacturing sector appear to have been replaced by “bad jobs” in the service sector. Is the shift toward services a problem? The “Good Jobs–Bad Jobs” Debate

27. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-27 Figure 14.10 Nonfarm Employment Shares

28. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-28 Table 14.1 The Importance of Service-Sector Employment, 2004

29. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-29 Five Observations 1.Real income per hour worked has been rising throughout the past century. As a nation, we are getting wealthier. 2. Low-paying service-sector jobs play an important role in the U.S. economy, especially for young workers. 3. The fall in manufacturing’s employment share is partly due to that sector’s dynamism.

30. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-30 4. As income grows, demand naturally switches to many services. 5. Increases in the quality of services lead to rising living standards. Five Observations

31. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 14-31 A Mixed Blessing? The transition of workers from agriculture to manufacturing to services can be difficult for the individuals involved. This suggests a role for government to maintain the income of those who are temporarily unemployed. The goal is to ease such transitions, not block them.