The threat of unionization causes some non-union employers to offer wages and benefits at least comparable to union standards.Only 1 in 6 workers belongs to a union, down from 1 in 3 in the 1930s and 1950s
Announcements• New homework assigned: Due a week fromtoday, Wednesday, May 22• No class / office hours Friday (have fun!)
Schedule for Remainder of CourseMon Wed FriMay 13: Finish Info, startLabor15 17: Class Cancelled20 22 Start Environmental 2427 29 Start Public Goods 31June 3 5 Final Review 1 7 Final Review 2June 12: Final
Last Class• Labor demand– Firms take their production technology and price of thegood they produce as given.– Compute profit-maximizing level of labor demand• Just mentioned to roll of human capital indistinguish a worker’s “marginal benefit” to the firm
Today• How wages are determined:– Human capital– Union membership• Labor market discrimination• Compensating wage differentials
Human Capital Theory• Human capital: a collection of factors such as education, training,experience, intelligence, energy, work habits, trustworthiness, andinitiative that affects a worker’s marginal productivity.• Human capital theory: holds that a workers wage is proportional tohis or her stock of human capital
Human Capital Theory and EarningsDifferences• Some people have more human capital than others.– These people are paid more.– People with a college degree• Some jobs require more human capital.– These jobs pay more.– Doctors• There are differences in the relative supply and demand of differenttypes of human capital.– People who possess the types of human capital that are in highdemand and short supply will earn more.
U.S. Industries with High/Low ExpectedEmployment and Wage Growth• High growth– Home healthcare services– Management scientific and technical consultingservices.– Junior colleges, colleges, universities and professionalschools.• Low growth:– Printing and related support activities.– Apparel knitting mills.– Postal serviceSource: BLS Employment Projections
This leads us to a natural question…• Do new technologies result in higher wagesfor people with those skills?• Consider wages of computer programmers in1999 versus wages of programmers now.
An increase in the popularity of technological goodswill cause in increase in the wages of computerprogrammers…A. NeverB. In the short run and the long runC. In the short run but not in the long runD. Not in the short run but in the long run
How Do Labor Unions Affect Earnings?• Labor union a group of workers who bargain collectively withemployers for better wages and working conditions.• Simple Model with Two Markets– Each market produces a different output (oranges and apples).– Both employ the same category of labor (meaning the skills ofthe workers employed in both markets are identical).– There are 200 workers.
Market 1 Unionizes• Workers in market 1 negotiate awage of $12 => 25 workers lose theirjobs.• In market 2, labor increases by 25workers and wage decreases to $6• Net welfare loss to society becausewe could move workers from lowVMPL market to high VMPL marketand increase total surplusWage($/hour)1259D1 = VMP1Market 1EmploymentWage($/hour)759D2 = VMP2Market 2121006100
Market 1 Unionizes• Workers in market 1 negotiate awage of $12 => 25 workers lose theirjobs.• In market 2, labor increases by 25workers and wage decreases to $6• Net welfare loss to society becausewe could move workers from lowVMPL market to high VMPL marketand increase total surplusWage($/hour)1259D1 = VMP1Market 1EmploymentWage($/hour)759D2 = VMP2Market 2121006100Initial Surplus: 9x125+9x75=1800
Market 1 Unionizes• Workers in market 1 negotiate awage of $12 => 25 workers lose theirjobs.• In market 2, labor increases by 25workers and wage decreases to $6• Net welfare loss to society becausewe could move workers from lowVMPL market to high VMPL marketand increase total surplusWage($/hour)1259D1 = VMP1Market 1EmploymentWage($/hour)759D2 = VMP2Market 2121006100Unionized Surplus: 12x100+6x100=1800
Why is the latter outcome inefficient?• Move one out of Market2, lose about 6 in VMP• Move that same oneinto Market 1, gainabout 12 in VMPWage($/hour)1259D1 = VMP1Market 1EmploymentWage($/hour)759D2 = VMP2Market 2121006100
Size of the Union Wage Advantage• Our analysis of two markets resulted in union workers earning twice thenon-union wage.• How do unionized firms remain competitive?– Unions attract most productive workers• Union worker are more skilled and experienced• Wage gap is 10% for comparable human capital– Unions increase productivity• Improved communications and motivation• Lower labor turnover means lower costs– Big unions expand to many markets• TAs at UCSD are part of UAW (United Autoworkers Union – yes,really)
Which state do you think suffers the most in termsof surplus from unionized labor?A. CaliforniaB. FloridaC. MichiganD. New YorkE. Washington
Discrimination in the Labor MarketMedian weeklyearnings 2011Men, 16 years and over832Women, 16 years and over 684White 775Black or African American 615Asian 866Hispanic or Latino 549Source:Bureau of Labor StatisticsPeople who identify as:
Discrimination in the Labor Market• Are the differences because of differences in human capital?– Partly, but the earnings differences persist even after controlling fordifferences in human capital.• One way to explain the remaining differential is that some humancapital differences are not measured in standard data sets– Cultural perspectives on work, etc. are hard to measure.• Another view attributes the differential to discrimination.
Employer Discrimination• Employer discrimination is an arbitrary preference by an employerfor one group of workers over another.• Simple model– Assume men and women are equally productive– Employers prefer to hire men and act as if there’s less marginalbenefit from hiring women (a “psychic misconception”).
The Labor Market WithoutDiscriminationwLD0S0wLS0Women MenD0w0
The Labor Market With DiscriminationwLD0S0wLS0Women MenD0w0
Employer Discrimination• Prediction 1– Equilibrium wage differential between men and women even thoughthey are equally productive.• Prediction 2– Discriminatory firms are not maximizing profits because they are NOTbasing their decision about who to hire based solely on the VPML.That is, they are basing their decisions partly on the psychic cost ofhiring women.• Prediction 3– Competition should drive discriminatory firms out of business.
Other Sources of Discrimination• Customer discrimination: causes buyers to pay more for goods producedby favored group for the same product– Attorneys: Some groups may be more credible with certain juries orclients than others– May reduce the incentives for non-favored groups to enter theprofession.• Statistical discrimination• Social norms– In some countries, social norms may mean that women receive lesseducation than do men.– Or some groups may feel an expectation that they enter into specificprofessions.
How many people do you personally know that are“underemployed” due to some type of discrimination?A. 0B. 1C. 2D. 3E. 4+
Compensating Wage Differentials• Suppose there are two summer jobs open to UCSD undergraduatesin La Jolla.LifeguardGarbage Collector
Compensating Wage Differentials• If both jobs offer to pay $15 per hour, where will most studentsapply?• If wages respond to supply and demand in the usual way, how willthe equilibrium wages in the two jobs differ?• The wage premium earned by garbage collectors is called a positivecompensating wage differential.• The wage disadvantage earned by lifeguards is a negativecompensating wage differential.
Compensating Wage Differentials• Compensating wage differentials: the difference in the wage rate(positive or negative) that reflects the attractiveness of a job’sworking conditions.• Can be based on workers’ preferences for– Type of work– Location of the work– Hours of work– Flexibility of work hours– Safety of work environment– Fringe benefits