Chapter 18 Econ Lecture

Compensating Differential

a difference in wages that offsets differences in working conditions. Fewer people are willing to work in dangerous or unpleasant jobs, so the supply of labor is reduced and the wage is increased.

Preference-Based Discrimination Discrimination by Employees:

-Discrimination can also arise from workers who do not wish to mix with people from different groups. -The profit incentive doesn't necessarily break down this sort of discrimination. -Employee-based discrimination is self-reinforcing and hard to identify: •Are fewer women applying or receiving training to enter male-dominated careers because of discrimination by other employees?

Why do wages differ across workers?

-General Economic Conditions in the Labor Market -Human Capital -Compensating Differentials -Unions -Discrimination

Customer-based preferences can also be more persistent.

-More difficult to "compete away" •Firms that employ these workers may lower costs on account of the lower wages, but the firms may also earn lower revenues as customers avoid their establishments. •Discriminating customers create an economic incentive for firms to discriminate. -Fewer legal remedies -Over time, trade may increase interactions between people from different groups and, as a result, maywork to change preferences, but there is no guarantee of this.

Why Wages Differ Reasons

1. Labor Market Conditions 2. Human Capital 3. Compensating differentials 4. Labor Unions 5. Labor Market Discrimination

The Demand for Labor and the Marginal Product of Labor

A firm is willing to hire a worker when the worker increases the firm's revenues more than the firm's costs. The increase in revenue created by hiring an additional worker is called the Marginal Product of Labor (MPL). The increase in costs from hiring an additional worker is (for a competitive firm) simply the worker's wage.

Labor Market Discrimination

Are otherwise identically-qualified individuals "priced" differently in the labor market? -Our analysis will focus on individuals already in the labor market. -Pre-market discrimination can also have an important impact on wages.

Labor Market Issues: Do Unions Raise Wages?

Are unions driving the wage differentials across countries?•The evidence seems to be: No. The U.S. and Switzerland have much lower levels of unionization (11% and 18%, respectively) than other developed countries (between 30-80% in W. Europe) but have very similar wage levels. It is true that wages in unionized jobs tend to be higher than those in non-unionized jobs. -Why? -Supply and demand ~ Union may restrict supply or simply negotiate an above market-clearingwage.

Competitive markets and employment discrimination laws have greatly reduced employment discrimination.

Competitive markets have played a large role. -Example: African American migration from southern to northern cities and manufacturing jobs from 1910-1970.

Discrimination

Groups: Race, sex, ethnicity ...

So a firm will hire a worker if

MPL > Wage.

Government policies now generally reduce race and sex discrimination.

Not always true historically. Governments have supported discrimination or segregation. •"Jim Crow" laws in the US south •Segregation policies in US school districts -Brown v. Board of Education (Topeka) - 1954 •Apartheid laws in South Africa54

After making a certain amount, backwards bend curve at the individual level

People value free time Only 24 hours in a person's day

Suppose a new government policy is implemented making college education free for anyone living in the US. If this policy greatly increases the number of college graduates in the US, what would we expect to happen to the wages of college graduates?

Since the labor supply of college graduates would increase, we would expect their wages to fall.

Types of Discrimination

Statistical Discrimination •Decisions about individuals based on group characteristics

1. The Demand for Labor and the Marginal Product of Labor...

The marginal product of labor falls as more labor is used. -Diminishing returns to labor -More generally, diminishing returns to any factor of production. -Note: We are holding capital (e.g., machinery, computers) constant and just varying labor.

Labor Market Issues:

The real wage of a job includes not just the pay but also other non-monetary factors. Compensating Differential

If the wage rate is high, not many will be hired,

but if it's low, more will be hired.

As chronicled in the television series The Deadliest Catch, fishing in Alaska used to be a very dangerous job. However, changes in governmental fishing policies have made it much safer in recent years. As a result, we would expect the wages for fishermen in Alaska to have

decreased, due to supply-side effects. supply side effect, supply or workers increase

If more people are willing to work as farm laborers in Mexico than in the US, then

the supply of farm laborers is higher in Mexico than the US.

Labor Unions generally increase wages for

their members, while leading to lower wages for non-members.

Preference-based discrimination

•Employer-based -I prefer to hire group X over group Y. •Employee-based -I prefer to work with group X over group Y. •Customer-based -I prefer services from group X over group Y. •Governmental -Government power used to favor one group over another.

Employers who practice employment-based discrimination are not maximizing profits.

•Employers who do not discriminate will earn higher profits than those who do. In a competitive market, discriminating employers will be displaced by employers who do not discriminate in the long-run. -In this sense, competitive markets tend to erode discrimination.

Labor Market Equilibrium

•Equilibrium in the labor market occurs at *the intersection of the market supply and demand curves for labor.* •A firm will hire workers whenever the marginal product of labor exceeds the market wage (MPL > W). •Thus, at equilibrium in the labor market, the marginal product of labor equals the market wage (MPL = W).

Sometimes banning statistical discrimination can harm the groups who are the intended beneficiaries.

•Example: "Ban the Box" legislation in some cities made it illegal for employers to ask about criminal history on job applications. •Result: Fewer minority hires after the legislation was passed.

2. Human Capital Theory

•Human capital theory treats acquisition of education and training as "investment" decisions by individuals. •Assumes individuals treat these decisions as rational investment decisions and compare benefits (future earnings gains) against costs (opportunity cost of time, tuition, etc.).