labor econ exam 2 dr zoric

Household Time

"Household production time" replaces "leisure time" Household production activities may include: •Doing chores •Relaxing at home - going to the movies or shopping

Labor market signal

Apart from observing certain indicators (age, experience, education and personal characteristics) that are correlated to productivity, employers cannot determine the actual the productivity of any applicant during the interviewing and the hiring process, therefore, they rely on the formal education that workers acquire.

The relationship between Earnings and Educational Level.

Average Earnings and Educational Level ØAverage earnings of more educated full-time workers exceed those of less educated workers, that is, more education is associated/correlated with higher pay. On-the-Job Training and the Concavity of Age/Earnings Profiles Training Declines with Age •The age/earnings profiles typically rise steeply early on, then tend to flatten, that is, workers' investments in OJT tend to be greatest when young and tend to fall gradually as they grow older.

Time-based Pay

Compensates workers for the number of hours worked, and avoids the variability/uncertainty in performance-based pay. The problem: close supervision is costly

The basic model of Human Capital Investments.

Costs of acquiring or adding to human capital fall into three categories: •Out-of-pocket or direct expenses - tuition costs, expenditures on books, and other supplies. •Forgone earnings - salaries/income given up. •Psychic losses - occur because learning is often difficult and tedious for some people.

Economic Immigrants

International migrants who have moved to a country from another to obtain economic gains such as better employment opportunities •Earnings of immigrants rise relatively quickly because of their high rates of investment in human capital, acquisition of job experience, and fluency/proficiency in English after arrival.

Matching Employers and Employees

It is assumed that if employees have two offers at the same wage (W), they will choose the lower risk. If employees receive two offers with the same level of risk (R), they will accept the offer with the higher wage (↑W). Employers are constrained by two forces: •They cannot make outrageously lucrative offers due to competition •They cannot make ridiculously low offers because they will not be able to attract and retain workers. These two forces will compel employers to operate on the zero-profit isoprofit curves.

Life Cycle Aspect of Labor Supply

Market productivity and home productivity vary over one's life cycle - yields the life-cycle earnings profile. •6 - 22/24 years → devoted to schooling to acquire human capital •25 - 50 years → devoted to labor market work •Over 50 years → continue labor market work or early retirement

Personal characteristics of movers

Personal Characteristics of Movers Ø Migration is a highly selective activity that not all people can engage in, but it tends to be common among the young and highly educated workers. Age This is one of the important factors in determining who migrates. •For the young workers, the longer the T over which benefits from investments can be obtained, the larger the PV of these benefits. •A large part of the costs of migration is psychic - losses associated with giving up friends, community ties, etc; and this may be minimal for younger workers who have no strong friends/community ties. Education •While age is the best predictor of who will move, education is the best single indicator of who will move within an age group. •Those with college degrees are much more likely to make an out-of- state move, more so if job is more national than localized.

Predictions of the theory

Present-Orientedness - Present-oriented people are less likely to go to college than forward-looking people (other things equal). - present-oriented people tend to have higher rates of discount (r) and they impute smaller benefits to college education in comparison to future- looking people Age - Most college students will be young. - Young people have larger PV of total benefits than older workers because the younger workers would have longer labor market experience, therefore, T is greater for younger people than for older ones Costs - College attendance will decrease if costs of college rise. - Human-capital investments are more likely when costs are lower Earnings Differentials - College attendance will increase if the gap widens between the earnings of college and HS graduates. - The demand for education is positively related to the increases in expected (but uncertain) lifetime earnings/benefits that a college education allows

Wage and Benefit tradeoff

The choice between cash and employee benefits differs across workers Some workers are more future-oriented and will prefer deferred compensation, therefore they would be attracted to employers who offer (generous) employee benefits. Other workers are more present-oriented and they tend to attach great importance to the availability of currenty spendable cash. Employers tailor their compensation packages to suit the preference of the workers they are trying to attract.

discouraged worker effect

The decline in the measured unemployment rate that results when people who want to work but cannot find work grow discouraged and stop looking, dropping out of the ranks of the unemployed and the labor force.

Offer Curve

The offer curve is a composite of segments of different firms' isoprofit curves that show regions of potentially acceptable job offers to workers.

employee turnover

The rate at which people enter and leave employment in a business during a year.

Cobweb Theory

Theory explaining fluctuations in market price and quantity over time adjustments in certain technical fields will be slow and wages in those markets may over-adjust or under-adjust, therefore, governmental predictions and market interventions should be based on rational expectations.

Added-Worker Effect Discouraged-Worker Effect

This is the entry/addition of the other partner (wife) into the labor force when the husband's market productivity declines or loses his job due to a recession or awaiting to be recalled from a layoff. This is the withdrawal of a worker from the labor market due to the reduced availability of job opportunities in a recession with rising unemployment rate.

pay for performance

This is the most obvious way to motivate workers but has both benefits and costs to employers. • persistent mechanical breakdowns can hinder performance-based pay • problem of picking an output (quantitative and qualitative aspects) measure that coincides with employer's ultimate objective

hidden unemployment

Unemployment that is not accounted for in official unemployment statistics because of such factors as the exclusion of discouraged workers, the practice of considering part-time workers as full-time workers, and others. •The dominance of the discouraged-worker effect creates hidden unemployment - people who would like to work but believe jobs are so scarce that looking for work is of no use.

compensating wage differentials

Wage differences that compensate workers for risk, unpleasant working conditions, and other undesirable nonpecuniary aspects of a job.

isoprofit curve

a function that defines the combinations of outputs produced by all firms that yield a given firm the same level of profits Isoprofit Curves with a Unitary Slope - This shows the trade-offs between cash compensation and employee benefits offered to their workers - that is, employers are indifferent between $X on cash (wage) compensations and $X on employee benefits since both options cost the same (which means the slope = - 1). Isoprofit Curves with a Flatter Slope - This shows that the trade-offs that employers make between cash and employee benefits are not one-for-one since employee benefits have tax or other advantages to the firm. Isoprofit Curves with a Steeper Slope - This shows that employee benefits may be more expensive in other areas than paying in cash - e.g., an increase in insurance benefit may produce an income effect with no corresponding increase in the price of leisure.

nonlabor income

any income received from sources other than working- inheritances, interest, dividends, transfer payments, and so on

joint labor supply

by partners covers different areas of responsibilities such as: • meal planning •shopping •home maintenance •child-rearing One partner's productivity at home is affected by the other partner's labor supply to the market. If the wife decides to increase her hours worked in the labor market, her husband's marginal productivity at home may rise as he takes over chores she once performed. If two partners enjoy each other's company, the value a husband places on his time at home could be reduced if his wife is at home less often - flattening his indifference curves and thus lead to an increase in his hours of paid work.

What kinds of people are most likely to make decisions to invest in education?

future oriented people ØPeople are assumed to maximize their utility, and they will take a lifetime perspective when making choices about education and training - they will compare near-term investment costs (C) with the PV of expected future benefits when making decisions. present-oriented people tend to have higher rates of discount (r) and they impute smaller benefits to college education in comparison to future- looking people

Present Value

the amount of money you would need to deposit now in order to have a desired amount in the future Investment returns or expected future benefits are subject to delays, risks, and uncertainty, therefore investment decisions are made by comparing the present value (PV = B0 = $100) of investment outlays with the expected future values/returns one year, two, three, or T-years later

added worker effect

the idea that when the primary breadwinner in a family loses his or her job, other family members will temporarily enter the labor force in the hope of finding employment to offset the decline in the family's income

budget constraint

the limits imposed on household choices by income, wealth, and product prices

Quit rate

the rate of people quitting jobs. quit rates tend to decline as firm size increases. woman workers have higher quit rates, and shorter job tenures than men. ØQuit rates tend to decline as firm size increases because they offer more opportunities for transfers and promotions. ØWomen workers have higher quit rates, and shorter job tenures than men. ØIndustries with high concentrations of employment in urban areas appear to have higher turnover/quit rates because workers do not incur additional costs that a change of residence would require. •Those who quit voluntarily and migrated for economic reasons without a prior job search earned 6 percent to 9 percent more than if they had stayed put.

human capital

the skills and knowledge gained by a worker through education and experience

Personal Discount Rate

your rate at which you discount future rates or benefits

The determinants of worker mobility

Ø The human-capital model/theory views mobility as an investment with initial costs outlay with the expectations of returns in the future. Ø The assumption is that if the PV of the benefits associated with mobility exceeds the monetary and psychic costs, people/workers will decide to change jobs, or move, or both. Ø The decision to move (or change jobs) depends on the PV of the net benefits, and this can be expressed algebraically as: Bt = the increased utility in year t derived from changing jobs ØStudies of migratory flows support human capital theory which predicts that migration will flow from areas of relatively poor earnings (push of poor opportunities) to places where opportunities are better (pull of good/better opportunities). ØPV of the net benefits of mobility will be larger if the: • utility derived from the new job (if less happy at the former job) is greater, • immediate costs (C) associated with the job changes are smaller, and • worker stays longer (the greater T is) on the new job or lives in the new area.

efficiency wages

ØEfficiency wage is the above-market pay at which the marginal revenues to the employer from a further pay increase equal the marginal costs, and this is the level that maximizes profits.

Explain the Compensation-Sequencing model and show how it can increase productivity.

ØIt may be beneficial to both employers and employees to arrange workers' pay over time so that employees are "underpaid" early in their careers and "overpaid" later on. Ø Pay sequencing will increase worker productivity and enable firms to pay higher PV of compensation than otherwise, for reasons both related to worker sorting and to work incentives. Worker Sorting - Pay plans that delay at least a part of employees' compensation to a time later in their careers have a significant signaling or sorting component. Worker Incentives - A company that pays poorly at the start but pays well later on increases the incentives of its employees to work diligently/industriously so as to qualify for the later overpayment. Constraints - There are two constraints with the pay sequencing of W < VMPL/MRPL in a worker's early career and W > VMPL later: •PV of the earnings streams offered to employees must be at least equal to alternative streams offered to employees in the labor market. •the scheme must also satisfy the equilibrium conditions that the firm maximizes profits and does not earn supernormal profits.

how people go about making decisions about how much to invest in education.

ØPeople are assumed to maximize their utility, and they will take a lifetime perspective when making choices about education and training - they will compare near-term investment costs (C) with the PV of expected future benefits when making decisions. Ø ØAdditional year of schooling is attractive or beneficial if PV > C ØUtility maximization requires that people continue to make additional human-capital investments until the benefits of additional investment (MB) are equal to (or less than) the additional costs (MC) - that is, MB = MC.

Investments in Human Capital—How are they Made?

•Early childhood human capital where such decisions are made by others - parents. •Acquisition of knowledge and skills as full-time student in high school, college, or vocational training program. •On-the-job training when in the labor force.

political immigrant

•Political refugees (who must meet certain criteria relating to persecution in their home countries) are admitted without numerical limit.

indifference curve

•Steep indifference curve will mean preference for household production over labor market work (H↑ and M↓). •Flat indifference curve will mean preference for less household production and more labor market (H↓ and M↑).

Government Safety Regulations

•The Occupational Safety and Health Act (OSHA) of 1970 directed the US Department of Labor to issue and enforce safety and health standards for all private employers in order to reduce the risk of traumatic injury in the workplace. •The ideal that employees should face the minimum possible risk in the workplace as a social policy is not necessarily in the best interest of workers. §Reducing R in some cases can lower the workers' utility levels (Figure 8.7). §Mandated/decreed standards can reduce the wage and utility of workers and the profits of firms. •Safety regulations can improve workers' welfare when workers consistently underestimate the true risks.

Our immigration laws greatly restrict immigration. How should they be revised?

•The U.S. Congress adopted the Quota Law in 1921 - which sets annual quotas on immigration based on nationality. •Other laws in 1924 and 1929 further restricted immigration from Eastern and Southeast Europe because of the adverse effect of unskilled workers from these regions on native employment. •The passage of the Immigration and Nationality Act of 1965 abolished the quota system based on national origin that so heavily favored northern and western Europeans. •The 1965 Act, which was also amended in 1990, formally restricted overall immigration with most spots reserved for: • Family-reunification purposes and they are relatively few (roughly about 20 percent). • Immigrants with special skills who are admitted for employment purposes. • Political refugees (who must meet certain criteria relating to persecution in their home countries) are admitted without numerical limit.