CHAPTER 13 THE LABOR MARKET Fundamentals of

CHAPTER 13 THE LABOR MARKET

Fundamentals of Wage Determination • Average Real wages have increased in the United States over the past century. • This does not mean that all workers in the economy have experienced the same good fortune or that all occupations have experienced continual wage growth. • rising trend in the average wage is indicative of an increase in labor productivity and a general improvement in economic well-being.

Chapter 13 Figure 13 -1 Wages Have Improved as Hours of Work Have Declined

Demand for labor • (Marginal revenue product = MRP = marginal revenue x marginal product. ) • This function is downward-sloping because of the law of diminishing returns and, in imperfectly competitive markets, also because marginal revenue is declining. • Given this scenario, the demand ( wage) for labor increases when the marginal product of labor increases.

Chapter 13 Figure 13 -2 Demand for Labor Reflects Marginal Productivity

Education and high wages • In this century, the marginal products of many types of labor have increased tremendously due to increases in capital that allow workers to be more productive on the job, and also due to improvements in education. • We can test this theory by looking across countries and noting that where education, literacy, and capital bases are low, wages also tend to be low.

Chapter 13 Table 13 -1

Chapter 13 Figure 13 -3 Favorable Resources, Skills, Management, Capital, and Technology Explain High U. S. Wages Higher MP VS. Lower MP

Labor supply • Labor supply refers to the number of hours that a particular population desires to work in exchange for wages. • Three key elements help to determine the shape and position of the supply curve in any particular labor market. Hours worked, LFP, immigration.

Chapter 13 Figure 13 -4 As Wages Rise, Workers May Work Fewer Hours

Hours worked • the number of hours worked determines the individual labor supply curve. • The opposing forces of income and substitution effects on labor supply create the possibility of a backwardbending labor supply curve.

substitution effects The substitution effect says that higher wages lead to higher “opportunity costs” of leisure; that is, when wages increase the “cost” of not working increases. This encourages workers to substitute away from leisure. • If the substitution effect dominates, an increase in wages inspires an increase in the quantity of labor supplied and thus an upward-sloping labor supply curve.

the income effect • The income effect says that higher wages lead to higher worker income. With more income, people can afford to buy more of all goods, including leisure. • If the income effect dominates, as it may for high wages, then an increase in wages might actually inspire a reduction in the quantity of labor supplied.

Second: labor force participation • labor force participation helps to determine the shape and position of the market supply curve. • Some people may choose not to participate in the labor force but may instead become homemakers or do volunteer work. • economists only count as employed those who work in exchange for a wage or salary, and only count in the work force those who are employed or actively seeking work.

Chapter 13 Table 13 -2

Third: immigration • immigration can have an impact on the market labor supply curve. As people from other countries have moved into the United States over the course of the century, the labor supply curve has shifted to the right. • Many of these people enter into markets as noncompeting groups; that is, they enter lowskill, low-wage. • As their job skills and English skills improve, they have the opportunity to enter a wider range of job markets.

the supply curve in the less productive labor market shifts to the right further widening the wage differentials that exist

wage differentials • In spite of the fact that the average wage is increasing in the United States, wide wage differentials exist

Chapter 13 Figure 13 -5 Earnings Benefit from Education and Experience

Chapter 13 Figure 13 -6 Relative Income Gains Have Been Dramatic for College Graduates

Chapter 13 Table 13 -3

The sources of wage differentials(1) Jobs attractiveness • Jobs differ in their features and in their attractiveness. • Jobs that are particularly unpleasant earn compensating differentials. • This means that supply and demand reflect the utility or “disutility” that workers get from doing particular tasks. • Examples • This wage differential compensates individuals for experiencing relatively unpleasant circumstances.

The sources of wage differentials(2) Differences across people • Second; Differences across people also lead to wage dispersion. • physical and mental abilities, education and training, and experience make workers heterogeneous. • Labor quality depends upon human capital, the stock of useful and productive knowledge that workers accumulate during their lifetimes. All of these factors help to explain why some workers earn more than other workers. • For example,

The sources of wage differentials(3) markets are divided into noncompeting groups • the absence of competition in markets can lead to wage dispersion. • it is difficult and costly for a member of one profession to enter another. • For example, although a college economics professor might be a “doctor of philosophy, ” he or she cannot costlessly begin a medical practice tomorrow!

Chapter 13 Table 13 -4

Economics of Labor Unions • 13 percent, of the work force in the United States remained unionized in 2002.

Chapter 13 Figure 13 -7 Unions Set High Standard Wage and Limit Employment

main task of unions • The main task of unions is to engage employers in collective bargaining. • Unions negotiate over compensation issues and also over work rules (job assignments, tasks, job security, etc. ) and features (seniority, layoff policy, dispute resolution, etc. )

Did unions success • Empirical evidence shows that unions have been somewhat successful at increasing the wages of members. • They have achieved this goal most successfully by monopolizing labor supply and controlling entry into particular occupations.

Discrimination by Race and Gender • Labor market discrimination occurs when a difference in earnings arises simply because of an irrelevant personal characteristic, such as race, gender, religion, or age. • These characteristics are difficult, if not impossible, for the worker to change, and there is no reason for the worker to desire changes in these characteristics.

Discrimination and productivity • Employers who discriminate are hiring from a smaller pool of potential applicants or failing to take advantage of the productive talents of those already employed.

prejudice • Discrimination based upon prejudice can become so integrated into social behavior that minority groups with particular characteristics are often discriminated against in education and training programs, making them unable to compete for certain jobs.

Nondiscrimination factors • Empirical evidence shows that differentials across gender and racial groups are not entirely due to discrimination. • Women and out of work. • Hispanic and short of education. • Blacks and poverty.