Chapter 5:Frictions in the Labor Market

In long run, monopsonistic firm's cost minimizing mix of capital and labor would require:

(MEl/MPl)/(C/MPk)

costs of job search include

1. Application-printing resumes and postage 2.interview- buying expensive clothes for interview and roundtrip fares 3.travel- hiring movers if employed 4.psychological costs- missing family and friends

Monopsonistic conditions and Firm's wage policies

1. employers decide on wage prices unlike in competitive where firms are wage takers 2.firms must make labor market decisions that allow them to remain competitive in their product markets 3.product and labor market constraints may cause these firms to offer different wages to equivalent workers 4.unlikely that Sl and MRPL curves are same for different firms in labor market, so exactly comparable workers may have different marginal productivities and receive diff wages at diff firms

Employee benefits (aside from wage)

1. legally required payments such as social security, workers' compensation, and unemployment insurance 2. Retirement- defined benefit plans depend on years of service years, and defined contribution plans 3.insurance- medical and life 4.paid vacations,holidays, and sick leave

During training...

Costs of training are greater than MRPl, therefore, training will be undertaken if the employer belives it can collect returns after training: 1.increased worker productivity (increase MRPl more than W) 2.Redued turn-over- employee stays longer with the firm

Firms that invest heavily in specific training use

ILM

Monopsonistic conditions and the employment response to minimum wage legislation

Legislated increases in Wmin raise wages Modest incease in Wmin can reduce MEl Fall in MEl may cause some firms/ employers to experience increases in employment higher total labor costs due to Wmin may cause some firms/employers to close

Labor market monopsonistic firm does not have a labor demand curve, it has

MRPL curve

Employers will invest it OJT of its workers as long as

MRPl after training > Wage after training

The monopsonist hires workers up to the point where:

MRPl=MEl

Profit maximization under monopolistic conditions

Profit-maximizing firms will hire as long as MRPl> MEl hiring stops when MRPl=MEl when firms face upward sloping supply curves , the MEl exceeds the wage

A mandated wage prevents

a firm from paying a wage less than Wm- this creates a perfectly elastic labor supply curve, altering MEl

The labor market effects caused by MEl>W

a labor market monopolist hires less workers in comparison to the competitive employer a labor market monopsonist pays a wage that is less than the competitive wage-exploits workers

L is dividied into

a. number of workers hired (M) b.hours-per-worker- (H)

MPM (# of workers)

added output associated with each added workers (change in Q dividied by changei n M)

MPH (hours per worker)

added output generated by increasing average hours per worker (change in Q dividied by change in h)

Labor investments

costs of hiring replacements such as advertising the position, screening, interviewing, "wine and dine", and terminating- severance pay costs of formal or informal training- firms incur explicit and implicit costs of training employees

Fair labor standards act

employees covered (hourly piad), receive an overtime pay premium of at least 50 percent of their regular hourly wages for each hour worked in excess of 40 hours per week

Increased post-training wage may protect

employer's invstment by reducing the chances that the trained workers will quit

If MRPL after training is less than wage after training and a recession is prolonged,

employers may have no choice but to layoff workers because it is profitable to do so

If fewer workers are willing to work and the labor supply curve shifts to the left, short-run effects are

employment level will fall and wage will increase MEl will also shift to a higher level

Assumptions underlying the LOP

every employee has information about available jobs- information is costless mobility or job search across employers is costless labor supply curve is horizontal

Quasi-fixed costs

frictions on employer side of market that firms bear (they are difficult to cut in the short-run) 2 categories: investments in their workforce and certain employee benefits

Firms can recoup their hiring investments by paying a wage that is

higher than average wage but still less than the workers' marginal prductivity: MRPl after training > Wage> wage average

Even if base wages are not change, it is unlikely that all the reduced overtime hours will be replaced by...

hiring more workers

Firms/employers can recoup their hiring investments by

hiring only those employees whose productivity would be higher than the average productivity

If MEm< MEH:

increased M (use more contingency workers w no benefits) and decreased H

For a monopsonistic firm, Wm can simultaneously

incresae the average cost of labor and reduce MEl- the decrease in marginal expense will induce the firm to expand output and employment in the short run

Best way to provide incentives for On-the-job

is for employees and employers to share the costs and reutnrs of the investment in training

Hiring within the ILM may not be economically efficient and cost effective, but

it fosters workers' attachment to the firms

Employers who regularly schedule overtime do so bc...

it is cheaper than incurring the quasi-fixed costs of employing more workers

Firms use educational standard to screen applicants and such use of credentials to

judge group characteristics can lead to statistical discrimination- with obvious costs

If MEm > MEh:

lead to increased H and decreased M because of quasi-fixed costs incurred in hiring more M

Workers wages improve the...

longer they are active in the labor market

Despite job search costs, some workers' high wage levels may be due to...

luck- they are lucky to be employed by a high-paying/ high productivity employer

Base wages adjust to..

mandated changes

Employee mobility costs can crease, other things equal,

monopsonistic conditions that result in pay differences among workers who have equal productive capabilities -the implication is that a worker's wage depends on luck- some workers wil be lucky to obtain a job offer from higgh-paying emplyoer

Legislatred expansions in overtime coverage have had...

no measurable effect on overtime hours worked

Mobility or job search across employers is....

not costless

Employers can recoup training costs by..

not raising the post-training wage too much-a point confirmed with empirical evidence

A labor market monopsonist

only buyer/employer of labor in its labor market -employer faces an upward labor supply curve but its MEl is much higher than the wagerate

Workers wages tend to increase with both:

overal labor market experience and holding labor market experience constant, the length of time with one's employer

Overtime hours are regularly scheduled with the...

possible mutual agreement between the employees and employers on a "package" of weekly hours and total compensation

If employees bear part of training costs,

post-training wage can be increased more than if employers bear all the training costs

The marginal expense of labor (MEl) exceeds the wage rate because

potential employees find it costly to change jobs, so the firm must be willing to pay higher wages to attract workers from other employers the MEl includes to the wages paid to the extra worker plus the additional cost of raising the wage for all other workers

Bc firms bear the hiring and training costs of workers, it is in their interest to...

reduce costs through effective evaluations when making hiring-placement promotion decisions

Employers could respond to a legislated increase in coverage by

reducing the straight-time salary such that with the new overtime payments considered, total compensation per worker remained unchanged

Paying W that is greater than wage average, high mobility costs, and the fact that information obtained about a worker by a particular employer may not be relevant across employers, the employee is more likely to

remain longer with it employer

Workers who see their jobs as a poor match (due to low pay) have more incentive to...

search for other offers than the lucky ones who have good matches with high wages

Employers cannot recoup training costs from laid-off workers/employees who obtained

speciifc training

Job search

takes time and effort

General training

teaches workers skills that can be used to enhance their productivity with many employers-skills are easily transferable-thus paying for general training can be a risky investment for an employer

Specific training

teaches workers skills that increase their productivity only with the employer providing the training- skills are firm-specific and not transferable- thus employers have stronger incentives to invest in specific training

A profit maximizing firm will hire labor where:

the MRPl insects the perfectly elastic labor supply curve (MEl) created by Wm

Major difference between competitive and monopsonistic models

the assumption about employee mobility costs

If due to a recession, MRPl after training is barely grreater than wage after training,

the employer will not layoff its trained employees, particularly, those workers with specific training and the longest job tenure

The longer it takes for a worker to receive an acceptable offer,

the longer the unemployed worker will remain unemployed

If firms elimate overtime and hir more workers at the same base wage rate,

their labor costs will clearly rise, thus reducing the scale of output and increasing firms' incentive to substitute K for L

Monopsonistic firm is not a wage taker and its MRPL curve shows various levels of employment where..

there is only one profit-maximizing level of employment and only one associated wage rate

Internal labor markets exist or firms create them because

they cannot ascertain workers' personal attributes (dependability, motivation, honesty, and flexibility) based on interviews, employment tests, or even recommendations of former employers

Firms fill job vacancies with employees from within ILM because

they know more about their current employees than those from outside- firms can make better decisions

Firms rely on credentials or signals to determine workers'

trainability (fast learners vs. slow learners) and potential MPl -are collge graduates more productive than high school graduates -if yes, there is no need to waste valuable resources in interviewing and testing all candidates to fidn out their respective MPls

Job search costs explain existence of...

unemployment

Costs of job search make supply curve...

upward sloping and not horizontal as assumed

Job mobility/search costs for workers may explain why:

wages increase or improve over time with workers' labor market experience or activity wages increase with workers' length of time (tenure) with their particular employers

Less incentive to continue searching if...

workers who are fortunate enough to find jobs with high-employers -those who have longer job tenure with employers also tend to have higher wages

The Law of One Price

workers who are of equal skills within occupations will receive the same wage- there will be no wage differentials

The time-and-one-half requirement for overtime protects workers by...

"spreading the work" (creating more job openings) through reduced usage of overtime