Government and The Labour Market

1. WEBEX 6
CHAPTER 13
GOVERNMENT AND THE
LABOUR MARKET:
LEGISLATION AND
REGULATION

2. • Laws governing labour relations in general and collective bargaining
in particular constitute a significant institutional factor influencing
wages, employment, and resource allocation.
• Government engages in the important task of establishing the legal
rules for the economy.
• We will limit our analysis of the role of government here to two main
topics;
(1) the influence of labour relations law on labour markets,
(2) the effects of federal minimum wage laws,
LABOUR LAW

3. The labour relations laws summarized in that table affect the labour
market in diverse ways, two of which are
(1) by influencing the extent and growth of union membership,
which in turn influences the ability of unions to secure wage
gains; and
(2) by establishing the rules under which collective bargaining
transpires.
LABOUR LAW

4. labour Law and Union Membership
• The effect of labour relations law and regulations, or the absence thereof, on
union membership is not always easy to determine.
• Such factors as changes in industry structure and altered worker attitudes may
create conditions that simultaneously foster both new labour laws and changes
in union membership.
• That is, observed changes in union membership may not necessarily result from
changes in labour laws.
• Nevertheless, there can be no doubt that labour law per se can be an important
determinant of union membership.
• This relationship between labour law and union membership is observable in
both the private and public sectors.

5. labour Law and Public-Sector Union Membership
At the state level, the main factors explaining the rapid rise in
public employee unionism were
(1) laws recognizing the rights of state workers to organize
and
(2) laws establishing public employee relations boards to
conduct elections to determine whether workers desire union
representation.

6. labour Law And Bargaining Power
The overall body of labour law and specific provisions of the
law influence bargaining power independently of effects on the
level of union membership.
Many provisions of labour law enhance the bargaining power
of unions, enabling them to secure higher wage gains; other
provisions strengthen the negotiating positions of employers.

7. MINIMUM WAGE LAWS
• The Fair labour Standards Act of 1938, which established
a minimum wage of $.25 per hour, is another way
government legislation affects the labour market.
 Before undertaking a detailed analysis of these effects, it
will be useful to establish some facts about the minimum
wage law and provide a brief synopsis of the alternative
positions taken on the wisdom of this government
intervention into the labour market.

8.  Congress has amended the Fair labour Standards Act many times to increase the
legal minimum wage in monetary terms. Between 1991 and 1996 the legal minimum
wage was $4.25 per hour.
 Because inflation occurred during this period, the ratio of the minimum wage to the
average wage fell from 37.3 percent to 32.4 percent. As a result, in 1996 Congress
upped the minimum wage to $5.15 per hour (after September 1997). In mid-2007
Congress raised the minimum wage over two years to $7.25.
 Congress has extended the coverage of the minimum wage law over the years.
 The original legislation placed about 44 percent of all non-supervisory workers
under its coverage; today about 88 percent of all such workers are included.
 Recent statistics reveal that 52 percent of workers earning the minimum wage are
age 16 to 24, 63 percent are women, and 17 percent are African-American. About 94
percent of minimum-wage employees work in private sector industries.
Approximately 67 percent of those receiving the minimum wage work part-time.
Facts and Controversy

9. The Competitive Model
 The competitive labour supply and demand model is the
best starting place for analyzing the possible labour
market effects of the minimum wage.
 Considering figure 13.1, suppose that all employees in
the economy are covered by the minimum wage law and
that labour and product markets are perfectly competitive
(MRP=VMP=MWC=PL).
 The figure depicts the impact of a specific minimum
wage Wm on a labour market in which the equilibrium
wage and employment levels are W0 and Q0. one point
needs to be stressed at the outset.
 If the minimum wage Wm is at or below the equilibrium
wage W0, which is true for higher-wage labour markets,
then the law is irrelevant and has no direct wage and
employment consequence.
 The actual wage and employment outcome will remain at
W0 and Q0. this is not the situation in Figure 13.1, where
Wm exceeds the equilibrium wage W0.
Figure 13.1 Minimum Wage Effects: Competitive Model

10.  What employment, unemployment, and
allocation effects will this government imposed
minimum wage produce?
 First, observe that at Wm, employers will hire
only Qd workers rather than the original Q0.
stated differently, the MRP of the Qd through
Q0 workers will be less than the minimum
wage; therefore, profit-maximizing employers
will reduce employment.
 Second, the supply curve suggests that the
minimum wage will attract Qs, as apposed to
Q0 workers to the market.
 The minimum wage changes the behavior of
employers and labour suppliers so that
employment declines by the amount ba and
unemployment increases by the larger amount
ac.

11. • The above equilibrium minimum wage Wm reduces employment
in this low-wage labour market by ab and creates unemployment
of ac.
- The more elastic the labour supply and demand curves, the
greater the unemployment consequences of the law.
- the higher the minimum wage relative to the equilibrium wage,
the greater negative employment and allocation effects
-The minimum wage Wm creates allocative inefficiency
-Notice from segment ae of the labour demand curve that the value
of the marginal product (VMP) for each of the Qd to Q0 workers
exceeds the supply price of these individuals (as shown by segment
fe of SL).
- This implies that society is giving up output of greater value
(QdaeQ0) than the QdQ0 displaced workers can contribute in
their next most productive employment (QdfeQ0).
- The net loss of domestic output is shown then by area fae (=
QdaeQ0-QdfeQ0)
.
Figure 13.1 Minimum Wage Effects: Competitive Model

12. Refer to the diagram below, which shows a competitive low-wage labour market:
DL = VMP
SL
Labour
Wage
50 70 85
RM
6.00
RM
7.00
RM
3.00
suppose the government establishes a minimum
wage of rm7.00 in this market. employment would
decline by 20 workers and unemployment would
increase by 35 workers.
Suppose the government establishes a
minimum wage of RM 7.00 in this market. If all
displaced workers subsequently contribute an
amount equal to their next most productive
employment, the net loss of domestic output is
40
Demand= (RM7-RM6)* (70-50)=20
Supply= (RM 6-RM3)*(70-50)=60
Net loss domestic= 60-20=40

13. Monopsony
 assumed that the low-wage labour market is perfectly competitive. We now
dispose of this assumption and analyze the potential employment effects of the
minimum wage under conditions of non-discriminating monopsony.
 Figure 13.2 portrays a labour market comprising only a single employer of
labour services or several employers colluding to set a below-competitive
wage. Recall from Figure 6.7 that a monopsonist’s marginal wage cost (MWC)
exceeds its average wage cost (AWC) at each level of employment. Because it
is the only buyer of labour services, the monopsonist faces the typical upword-
sloping market supply of labour curve.
 To hire more workers it must attract them away from other occupations, and it
accomplishes this by raising the wage it pays.
 But because the non-discriminating monopsonist must pay all its workers the
same wage, it discovers that its extra cost of hiring one more worker (WMC)
exceeds the higher wage payment to that worker alone (AWC).

14.  Without the minimum wage, this
monopsonist will choose to hire Q0
workers and pay a wage equal to W0.
-Any legal minimum wage above W0 and
below W2 will transform the firm into a
wage taker, and the firm will choose to
increase its level of employment.
-For example, if the minimum wage is
W1, this firm will hire the same number
of workers as if competition existed in
this labour market. Thus it is possible that
a minimum wage might increase
employment in some industries.
Figure 13.2 Minimum Wage Effects : Monopsony

15.  The monopsonist depicted in Figure 13.2 will use the profit-maximizing hiring rule (MRP=MWC)
and employ Q0 workers.
 As we see from point c on the labour supply curve, to attract that number of workers it has to pay a
wage of W0.
 but now suppose that government sets a minimum wage somewhere between W0 and W2 – say W1.
in effect, the labour supply curve becomes perfectly horizontal at W1 over the 0Q1 range of
employment.
 Because the firm can hire up to Q1 extra workers at the minimum wage, its marginal wage cost
equals its average wage cost over this entire range. Contrast this to the previous situation where it
has to raise the wage to attract more workers (MWC > AWC).
 With the legal minimum wage of W1, the monopsonist becomes a wage taker rather than a wage
setter and maximizes its profits by hiring Q1 workers. The additional Q0 through Q1 workers are
now hired because their MRPs exceed the minimum wage (WMC).
 In this case, the minimum wage increases employment from Q0 to Q1 by perfectly countervailing
the monopsony power of the employer. Close scrutiny of Figure 13.2 shows that any legal wage
above W0 and below W2 will increase employment above Q0. it therefore is possible that a well-
chosen and selectively implemented minimum wage might increase employment and improve
allocative efficiency.

16.  But much caution is needed here.
 - First, if government sets the minimum wage above W2, employment will decline.
 Second, even though employment may be equal to or greater than Q0 at minimum wage levels
above the monopsony wage W0, unemployment could easily be higher. For example, b labourers
seek employment in this market at wage rate W2, whereas firms hire only a workers.
 At W2, although employment is the same as at the monopsony wage W0, the excess supply of
workers – unemployment – rises from zero to ab.
 Third, being the only employer of a specific type of low-wage labour, a monopsonist might be
able to discriminate – that is, pay each worker a wage just sufficient to attract her or his
employment.
 If so, the MWC curve will coincide with the labour supply curve, and the firm’s profit-
maximizing level of employment (MRP=MWC) will be the competitive one, Q1, rather than Q0.
 this is true because the firm must pay the higher wage that is necessary to attract each extra
worker only to that particular worker.
 Where discriminating monopsony exists, a minimum wage will either be ineffective or reduce
employment; it cannot increase employment. Fourth, empirical studies on this subject find little
evidence of monopsony in most labour markets.

17. FIGURE 13-3 Minimum Wage: The Shock Effect
 An increase in the wage rate could increase
the marginal product of labour and therefore
increase labour demand.
 This possibility may be applicable to the
imposition of a legal minimum wage.
 <figure 13-3> A minimum wage may shock
firms out of their organizational inefficiency.
 As a result, the marginal product of labour
may rise, shifting the labour demand curve
rightward.
 Consequently, a portion of the
unemployment predicted by the basic model
may be mitigated.

18. Empirical Evidence
Investments in Human Capital - The minimum wage reduces O-J-T.
Some firms may decide against providing general job training if the
minimum wage does not allow them to pay a lower wage during the training
period, and thus the minimum wage may reduce the formation of this type
of human capital. Also, there is some evidence that the minimum wage
encourages teenagers to drop out of school to seek employment.
Income Inequality and Poverty Most analysis indicates that the
minimum wage does not affect the overall distribution of income or
appreciably reduce poverty. About 70% of minimum-wage workers reside in
families with incomes above 300% of the poverty line.

19. Empirical Evidence
 Economists have devoted much attention to estimating the effects of the
minimum wage on employment. Additionally, they have used statistical studies
to try to determine whether the minimum wage influences human capital
investment decisions and achieves the goal of creating more equality in the
distribution of earnings and household income. The results of several of these
studies are summarized as follows.
(1) Employment
Many studies have analyzed the employment effects of the minimum wage.
Much of this analysis has been devoted to examining teenagers because this is
the age group most likely to be affected by the minimum wage. Until recently,
a 10 percent increase in the minimum wage typically caused 1-3 percent
decline in the number of jobs held by teenagers, if all other factors were
constant. This long-standing research finding, however, has been challenged
by some recent and controversial studies.

20. (2) Investment in Human Capital
 The effect of the minimum wage on investment in human capital is likely
negative.
 The minimum wage probably reduces on-the-job training.
 Recall from Chapter 4 that the firms sometimes hire workers and provide them
with general on-the-job training.
 To cover the expense, they pay a lower wage during the training period. But the
minimum wage places a floor on the wage firms can offer.
 Therefore, some firms may decide against providing general job training under
these circumstances, and thus the minimum wage may reduce the formation of this
type of human capital.
 Also, empirical evidence indicates that a higher minimum wage encourages
teenagers to seek employment and drop out of school.

21. (3) Income Inequality and Poverty
 The minimum wage does not generally alter the overall distribution of family
income or appreciable reduce poverty.
 This somewhat surprising conclusion rests on the empirical evidence that people
paid a minimum wage are more likely to be members of middle-or higher- income
families than low-income families.
 About 84 percent of minimum-wage workers reside in families that have family
income above the poverty line.
 Thus the minimum wage appears to be poorly targeted as an anti-poverty weapon.
Furthermore, wage growth among the average minimum-wageworkers is
substantial, rising more than 60 percent above the minimum wage within a year.

22. Final Remarks
 The minimum wage does increase the annual earnings of some low-income
workers.
 Perhaps this is the reason for the strong public support for the minimum wage
and the fact that the debate over it has largely moved away from the question
of whether it should exist and toward the issue of how high it should be set.
 Economists commonly agree that there is some real minimum wage that
would be so high that it would severely reduce employment and economic
efficiency. But based on the evidence summarized here, it does not appear that
this level has yet been reached.
 In this regard, one knowledgeable reviewer of the minimum wage literature
has concluded that “the minimum wage is overrated: by its critics as well as its
supporters.

23. CHAPTER SUMMARY
labour relations laws and regulations have influenced the growth of
both private and public sector unionism in the United States. To the
extent that union membership and union bargaining power are
positively correlated, labour law influences the determination of wages
and employment in labour markets.
labour law in general and specific provisions of labour law in
particular influence union bargaining power- and therefore labour
market results- independently of impacts on union membership.
The basic model of a competitive labour market predicts that an
above-equilibrium minimum wage applied to all sections of the
economy will reduce employment. The more elastic the supply and
demand for labour, the greater the resulting unemployment.

24.  The existence of a nondiscriminatory monopsony may cause the negative
employment and efficiency consequences predicted by the competitive model to
not fully materialize.
 Empirical evidence indicates that the minimum wage (a) reduces employment,
particularly for teenagers; (b) increases unemployment of teenagers by less than the
reduction in employment; (c) reduces the amount of on-the-job training offered to
low-wage workers; and (d) does not greatly alter the degree of family income
inequality and extent of poverty.
 A firm incurs both costs and benefits when it improves the safety of its workplace.
A profit-maximizing firm will provide a level of job safety at which its marginal
benefit and marginal cost of safety are equal.

25. If workers have full information about possible work hazards and
accurately assess job risks, the profit-maximizing level of job safety
will tend to be optimal from society’s viewpoint. If information is
incomplete and job risks are inaccurately assessed, then society’s
optimal level of job safety may be greater than the level willingly
provided by profit-maximizing firms.
Government affects wages and employment in specific occupations
through its rent provision activities. Two examples are (a) occupational
licensure that restricts labour supply; and (b) tariffs, import quotas, and
domestic content laws, which increase labour demand for protected
domestic workers.

26. TUTORIAL
Explain how an increase in the minimum wage could
a. Reduce teenage employment but leave the teenage
unemployment rate unaffected.
b. Reduce investment in human capital .
c. Leave the poverty rate unchanged.