Labor Markets & Wage Rates


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Labor Markets & Wage Rates

  1. 1. Labor Markets and Wage Rates <ul><li>Supply of and Demand for Labor </li></ul><ul><li>“ Economic Rent” and Wage Rates </li></ul><ul><li>Real Wages versus Money Wages </li></ul><ul><li>The Minimum Wage and the Living Wage </li></ul>
  2. 2. Demand and Supply of Labor <ul><li>Obvious: Some people are paid more than others </li></ul><ul><ul><li>George Lucas -- $200 million </li></ul></ul><ul><ul><li>Oprah Winfrey -- $150 million </li></ul></ul><ul><ul><li>Steven Spielberg -- $100 million </li></ul></ul><ul><ul><li>Average American Worker -- $25-35 thousand </li></ul></ul><ul><li>Primary Reason for disparity of income = Supply and Demand </li></ul>
  3. 3. The Supply of Labor Noncompeting Groups; Short-run vs Long-Run <ul><li>In the short-run there are at least three categories or strata of labor </li></ul><ul><ul><li>Skilled Labor </li></ul></ul><ul><ul><ul><li>Craftsmen </li></ul></ul></ul><ul><ul><ul><li>Professional </li></ul></ul></ul><ul><ul><ul><li>Other highly trained </li></ul></ul></ul><ul><ul><li>Semi Skilled </li></ul></ul><ul><ul><ul><li>Assembly line workers </li></ul></ul></ul><ul><ul><ul><li>Supermarket checkers </li></ul></ul></ul><ul><ul><li>Unskilled </li></ul></ul><ul><ul><ul><li>Dishwashers </li></ul></ul></ul><ul><ul><ul><li>General labor </li></ul></ul></ul><ul><ul><ul><li>Strength versus think type work </li></ul></ul></ul>
  4. 4. The Supply of Labor Noncompeting Groups: Long-run <ul><li>Opportunity for lesser trained to train for more skilled position </li></ul><ul><li>Higher paying jobs tend to attract more people who can then compete for those jobs </li></ul><ul><li>In the long run the categories tend to blur and </li></ul><ul><li>Labor becomes quite mobile </li></ul><ul><li>So, in the long run we are all competitors in the same employment pool </li></ul>
  5. 5. The Supply of Labor Theory of the Dual Labor Market <ul><li>A more radical, class theory of employment </li></ul><ul><li>Primary Labor Market </li></ul><ul><ul><li>The Good jobs, such as </li></ul></ul><ul><ul><li>Professional positions </li></ul></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Skilled technical </li></ul></ul><ul><li>Secondary Labor Market </li></ul><ul><ul><li>Not so good jobs Temporary </li></ul></ul><ul><ul><li>Low pay Little opportunity for advancement </li></ul></ul><ul><ul><li>Dead-end </li></ul></ul><ul><li>The Rich stay rich and the poor stay poor </li></ul>
  6. 6. The Supply of Labor The Backward-bending Labor Supply Curve <ul><li>Begins with the concept that the higher the pay, the more willing we are to substitute time at work for other activities </li></ul><ul><li>Who will work full time for $2/hour? </li></ul><ul><li>Who will work full time for $40/hour? </li></ul><ul><li>This is the substitution effect! As our pay is increased, we are willing to spend more hours at work </li></ul><ul><li>But there comes a time, when our incomes are sufficient to meet our needs and we now begin to value leisure time and want to work less </li></ul><ul><li>This is called the income effect of labor supply </li></ul>
  7. 7. Hypothetical Labor Supply Curve 29-8 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. A person will be willing to work an increasing amount of hours per week as the hourly wage rate goes up. But a some point (point J in this instance) he or she will begin to cut back on the hours worked as the wage rate continues to rise. Up to point J, work is substituted for leisure time (substitution effect) Beyond point J the curve bends backward as the income effect outweighs the substitution effect and the person is willing to trade away some money for more leisure time
  8. 8. The Demand for Labor <ul><li>Recall from Chapter 14, the demand for a factor is the Marginal Revenue Product (MRP) for that factor, where the MRP = the change in total revenue </li></ul><ul><li> the change in factor input </li></ul><ul><li>The demand curve for labor slopes downward to the right in conformance with the MRP calculation and the general law of demand </li></ul>
  9. 9. Determinants of Factor Demand <ul><li>Demand for Final Products Manufactured from Resources (Factors) – Called “Derived Demand” </li></ul><ul><li>Productivity of the Factor </li></ul><ul><li>Prices of Substitute Factors </li></ul>
  10. 10. Hypothetical General Demand Curve for Labor 29-10 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. This is the sum of every firm’s MRP curve. As the wage rate is lowered, increasing quantities of labor are demanded
  11. 11. Hypothetical General Demand and Supply for Labor 29-14 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. The wage rate is set by the intersection of the general demand and supply curves for labor. In this case the wage rate is about $16 an hour How much would the actual wage rate be? A lot lower? In many cases, yes. It all depends on the type of work you do and on the demand and supply schedules in each of hundreds, or even thousands of job markets
  12. 12. Reasons for Pay Differentials <ul><li>Supply/Demand factors in specific job markets </li></ul><ul><li>Productivity from industry to industry </li></ul><ul><li>Job content </li></ul><ul><li>Industry profitability </li></ul><ul><li>Culture and tradition </li></ul><ul><li>“ Winner take all markets” </li></ul>
  13. 13. High Wages and Economic Rent <ul><li>Some people are paid extremely well for what they do </li></ul><ul><ul><li>Professional Sports </li></ul></ul><ul><ul><li>Movies </li></ul></ul><ul><ul><li>Television personalities </li></ul></ul><ul><li>How Come? </li></ul><ul><ul><li>Special abilities </li></ul></ul><ul><ul><li>High visibility </li></ul></ul><ul><ul><li>Supply of one </li></ul></ul>
  14. 14. High Wages and Economic Rent <ul><li>Whenever someone is paid more than he/she would be willing to work for, the difference is called “economic rent” </li></ul><ul><li>Text example: David Letterman makes $30 million/year </li></ul><ul><li>If Mr. Letterman would be willing to work for $5 million/year, the difference of $25 million is called economic rent </li></ul><ul><li>Still, it all boils down to Supply and Demand </li></ul>
  15. 15. High Wage Rates and Economic Rents 29-15 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. Determination of Economic Rent by Supply and Demand How much of David Letterman’s earnings are economic rent? If his earnings of $30 million are set by supply and demand, 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 When ever a person gets paid more than the minimum she would be willing to accept, we call the excess economic rent.
  16. 16. Winner Take All Markets <ul><li>American CEO’s earn on average about 500 times the salary of the average production worker </li></ul><ul><li>In Japan and Europe, CEO salaries much, much lower than in the U.S. Why? </li></ul><ul><li>CEO’s in the U.S. appear to be far more mobile than in Japan and Europe and therefore have been able to create a very inelastic supply curve where a few top performers walk away with the lion’s share of the total rewards </li></ul><ul><li>Also applies to professional sports, entertainment </li></ul><ul><li>And is now impacting law, journalism, consulting, design, fashion, etc. </li></ul><ul><li>Diverting young talent into competition where most will lose </li></ul>
  17. 17. Real Wages versus Money Wages <ul><li>By real wages, economists mean what you can actually buy with your wages </li></ul><ul><li>Inflation will erode a person’s purchasing power </li></ul><ul><li>So, the important question is “what can you buy with your money?” not “How much money are you making?” </li></ul><ul><li>Real wages measures the purchasing power of your income </li></ul><ul><li>Real Wages = Money Wages x 100 </li></ul><ul><li>CPI (current Year) </li></ul>
  18. 18. Index of Real Wages, 1975-2001 (Base: Second Quarter of 1989 = 100) 29-28 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved. The real wage now is below the level in the late 1970s
  19. 19. Declining Real Wages, 1973-1997 <ul><li>Never before in our history have real wages fallen over such an extended period of time </li></ul><ul><li>Period marked by five recessions </li></ul><ul><li>Yet, Real GDP more than doubled </li></ul><ul><li>Why did real wages fall? and </li></ul><ul><ul><li>Productivity decline from late 1970’s thru mid 1990’s </li></ul></ul><ul><ul><li>U.S. manufacturing outsourced production to Mexico, Japan, Southeast Asia and China </li></ul></ul><ul><ul><li>Switch from manufacturing to service industries </li></ul></ul><ul><li>How did Americans maintain their standards of living? </li></ul><ul><ul><li>Continuing trend to two income households </li></ul></ul>
  20. 20. Barely Getting By? <ul><li>Beth Schulman – authored a book entitled </li></ul><ul><li>The Betrayal of Work , 2003 </li></ul><ul><li>Elizabeth Warren and Amelia Warren Tyagi </li></ul><ul><li>The Two Income Trap , 2003 </li></ul><ul><ul><li>Two income families worse off than their one income counterparts were in the 1970’s </li></ul></ul><ul><ul><li>Middle class eroding and working poor are hurting </li></ul></ul><ul><ul><li>An opulent lifestyle of some is subsidized by low wage work of millions </li></ul></ul><ul><ul><li>Perhaps law should mandate higher wages even if it meant higher prices?? </li></ul></ul>
  21. 21. Minimum Wage; Living Wage <ul><li>Minimum Wage – A price floor will cause a surplus of workers, ie. Unemployment & therefore </li></ul><ul><li>Minimum wage law hurts the very people it is supposed to help </li></ul><ul><li>Historical record is sporadic and would tend to indicate that other economic factors may outweigh the impact of present day minimum wage laws </li></ul><ul><li>Also, minimum wage increases have not kept pace with inflation – “real” minimum wage has fallen almost 40% since 1998 </li></ul>
  22. 22. The Living Wage <ul><li>Similar to a minimum wage but set higher to provide a “living wage” </li></ul><ul><li>Usually applied to contractors doing business with major municipalities </li></ul><ul><li>New York City Los Angeles Minneapolis </li></ul><ul><li>Boston Baltimore Denver </li></ul><ul><li>Cincinnati Chicago San Francisco </li></ul><ul><li>Studies show that unemployment slightly affected, but poverty rates have been moderately reduced </li></ul>
  23. 23. A Summing Up <ul><li>Will employment of unskilled and inexperienced workers rise if we eliminate the minimum wage? </li></ul><ul><ul><li>Yes. But the question is by how much </li></ul></ul><ul><ul><li>It will rise very little if the demand for labor is very elastic </li></ul></ul><ul><li>There is no question that teenagers, particular nonwhite teenagers are the last hired and the most poorly paid </li></ul><ul><ul><li>Is this because they are relatively unskilled and inexperienced? </li></ul></ul><ul><ul><li>Is this because they are discriminated against? </li></ul></ul><ul><ul><li>Are older workers really more productive? </li></ul></ul><ul><ul><li>Would teenagers work for lower than minimum wage? </li></ul></ul>29-36 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved.