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  1. 1. THE LABOR MARKET( with respect to Human Capital ) Principle #7: People’s Skills Influence Their Income. 1
  2. 2. Relative Income: Why?$5 million $30,000 2
  3. 3. What determinesa person’s income? The SUPPLY of and the DEMAND for their (particular brand of) HUMAN CAPITAL 3
  4. 4. High or Low Incomes if you have High DEMAND with low supply then you get high income (wage rates) if you have Low DEMAND with high supply then you get low income (wage rates) the Wage Rate is the measurement of the relative scarcity of particular types of workers. If you want a high income you should develop skills and capabilities in high DEMAND low SUPPLY occupations. Make yourself stand out in the crowd. 4
  5. 5. to do: MAKE YOURSELF SCARCE!!!! Fine ~ now how would or should you go aboutachieving this objective??? 5
  7. 7. The UnitedStatesEconomy (a) Services Knowledge Agricultural 7
  8. 8. Information The United States Economy (b) ImaginationManufacturing 8
  9. 9. The DEMAND for Labor is a Derived Demand Business managers hire workers to produce a good or service to be sold for a profit. Product demand changes so particular jobs change. Transferable skills are useful. Education and training are ongoing. 9
  10. 10. Table I: Then & Now Information and/or Industrial Age Knowledge AgeTechnology change Took years to accomplish Months, weeks to accomplish Competition Local, state, national GlobalType of production Service, Information & Manufacturing Knowledge Role of workers Manual Laborer Designer, Engineer or ManagerSkill requirements Strength, dexterity, stamina Scans (see Table II) Employment Lifetime with one employer Changes jobs at least 6 times. Changes careers 3 times Learning span Kindergarten-12th grade Lifetime 10
  11. 11. The Demand for Labor is a Derived Demand Employers hire workers to help the business produce goods and services. If the value of the workers’ production is greater than the wage the workers are being paid then the employer will keep the workers. If the workers “production” value is less than their wages the workers won’t be kept. 11
  12. 12. The Principle of ExchangeEmployers will hire workers if theygain more from hiring the workersthan the value the employer gives up ~ via lost output ~ by not making the hire. 12
  13. 13. CONSIDER 13
  14. 14. … ~ he’s identified his “employment” problem ~and what can we concludeabout your own particular and “special” situation? 14
  15. 15. ( ceteris paribus ) All other things “being equal”You can count on your higher education leading to your higher lifetime income 15
  16. 16. Dreams Deferred [@ 2002]: Average Earnings & Education for Adults E $120,000 a $100,000 r $80,000 n Dropout $60,000 High School i n $40,000 Some College g $20,000 Associates s $0 Bachelors Masters Education Doctorate ProfessionalSource: U.S. Census Bureau, Statistical Abstract of the United States: 2004 - 2005 16
  17. 17. remember: if you want to make a good income youshould make yourself scarce. Develop marketable skills through:  more education  more training What skills are likely to be marketable? 17
  18. 18. Table II: SCANS 2000 Skills DescriptionsBasics Reading, writing, mathematics, listening, speakingThinking Creative thinking, decision making, problem solving, knowing how to learn, reasoningPersonal Responsibility, self-esteem, sociability, self management, integrityResources Planning, organizing, monitoring, assessing, evaluating, adjustingInterpersonal Teamwork, teaching, serving clients/customers, leadership, negotiating, working with people of diverse cultural backgroundsSystems Understand social, organizational and technological systems; monitor and correct systemsInformation Acquiring and evaluating, organizing and maintaining, interpreting and communicating, using computers to process informationTechnology Selecting equipment and tools, applying technology to specific tasks, maintaining and troubleshooting technologies, learning new technologies 18
  19. 19. Basic Skills reading writing mathematics listening speaking 19
  20. 20. Thinking Skills reasoning visualizing creative thinking decision-making problem solving knowing how to learn 20
  21. 21. Personal Qualities responsibility self--esteem sociability integrity self-management 21
  22. 22. Resource Allocation planning organizing monitoring assessing evaluating adjusting 22
  23. 23. Interpersonal Skills team skills teaching leadership negotiating serving clients/customers working with people of diverse cultural backgrounds 23
  24. 24. Systems Types - Social,Organizational & Technological  monitoring  correcting  understanding 24
  25. 25. Informational To Do acquiring and evaluating organizing and maintaining using computers to process interpreting and communicating 25
  26. 26. Technology To Do learning selecting keeping up to date applying to specific tasks maintaining and troubleshooting 26
  27. 27. To compete in aglobal economy you will need these skills 27
  28. 28. The Mirror: An Incredibly Powerful Package of Human Capital! 28
  29. 29. You are the only one who can develop yourhuman capital ~ not your teachers nor your parents ~ ONLY YOU 29
  30. 30. example: The Labor Market (a)(Assume a wage of $100 per day) Marginal Product MarginalWorkers Total Revenue Product Product Price Product 3 18 $15 4 30 12 $15 $180 5 40 $15 6 48 $15 7 54 $15 8 58 $15 30
  31. 31. example: The Labor Market (b)(Assume a wage of $100 per day) Marginal Product MarginalWorkers Total Revenue Product Product Price Product 3 18 $15 4 30 12 $15 $180 5 40 10 $15 $150 6 48 8 $15 $120 7 54 6 $15 $90 8 58 4 $15 $60 31
  32. 32. The Marginal Principle in the Labor MarketA firm will hire workers up to the pointwhere their wage is equal to theirmarginal revenue product W = MRPIf the employer expect to gain more thanthe employer gives up via wages paidthe employer will hire the workers. 32
  33. 33. The Hiring Decision and theConstant Search for Substitutes The Employer makes the decision  to Hire YOU?  or to Hire a Different Worker?  or to Hire a Machine? 33
  34. 34. Main Points ~ Part I Relative wage is the measure of the relativescarcity of particular workers.Relative wages are not a matter of fair or moralvalue.The labor market of the 21st century will becharacterized by rapid technological change,global competition, demand for highly skilledworkers, numerous job and career changes, andconstant upgrades of skills and knowledge. 34
  35. 35. Main Points ~ Part II The DEMAND for labor is a derived demand. Education and training improve human capital and increase peoples’ expected income. Relative wages are determined by SUPPLY and DEMAND.[+] High wages are earned by workers with very scarce human capital skills ~ thus there is a low SUPPLY of these workers with those “special” human capital skills and a high DEMAND for those same workers. 35
  36. 36. Main Points ~ Part III[+] Lower wages are earned by workers with less“special” human capital skills ~ thus there is a higherSUPPLY of workers with similar human capital and alower DEMAND for those workers.[+] Employers hire workers as long as the employerexpects to gain more than she gives up ~ thus as long asthe expected marginal revenue product of the worker isgreater than the wage the employee will be hired. REMEMBER YOU NEED TO MAKE YOURSELF SCARCE!!!! 36