Chapter 5: Frictions In the Labor Market

The Training Decision by Employers

- Employers incur explicit and implicit training costs if the decision is to train a worker after hiring. - During training, Coststraining > MRPL, therefore, training will be undertaken if the employer believes it can collect returns after training: 1. increased worker productivity (↑MRPL more than W), 2. Reduced turn-over - employee stays longer with the firm.

Profit Maximization under Monopsonistic Conditions

- Firms will stop hiring when MRPL = MEL - when firms face upward sloping supply curves, the MEL exceeds the wage.

How Can the Employer Recoup Its Hiring Investments?

- Firms/Employers can recoup their hiring investments by hiring only those employees whose productivity would be higher than the average productivity. - Firms can recoup their hiring investments by paying a wage that is higher than the average wage but still less than the workers' marginal productivity: MRPL after training > W > Waverage Paying W > W average, high mobility costs, and the factinformation obtained about a worker by a particular employer may not be relevant across employers, the employee is more likely to remain longer with its employer

Labor Investment

1. Costs of hiring replacements such as advertising the position, screening, interviewing, "wine and dine", and terminating - severance pay 2. Costs of formal or informal training - firms incur explicit and implicit costs of training employees.

Effects of a Mandated Wage

A mandated wage (Wm) prevents a firm from paying a wage less than Wm - this creates a perfectly elastic labor supply curve facing the firm, thus altering its MEL curve. A profit-maximizing firm will hire labor where the MRPL insects the perfectly elastic labor supply curve (MEL curve) created by Wm - see employment at Em in Figure 5.5. For a monopsonistic firm, Wm can simultaneously increase 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.

Mobility is not costless

Costs of job search include: (a) application - printing résumés and postage (b) interview - buying expensive clothes for interview and roundtrip fares (c) travel - hiring movers if employed (d) psychological costs - missing friends and family members (e) impediments such as children in school, spouse employment, sale of home

Monopsonistic Labor Markets

Definition: A labor market monopsonist is the only buyer/employer of labor in its labor market. The employer faces an upward labor supply curve but its MEL (or MCL) is much higher than the wage rate.

Shifts in Labor Supply Curve That Increase MEL

If fewer workers are willing to work and the labor supply shifts to the left, the short-run effects are: employment level (E) will fall to E' and the market wage (W) will increase to W' MEL will also shift to a higher level (ME'L).

Equation of using the profit maximizing level of employment

In the folder

Effects in the Long run

In the long run, the monopsonistic firm's cost minimizing mix of capital (K) and labor (L) would require: Look at picture:

Job Search Costs, Unemployment and the Competitive Model

Job search costs can help to explain the existence (and level) of unemployment - the longer it takes for a worker to receive an acceptable offer, the longer the unemployed worker will remain unemployed. The competitive model may offer predictions that are at least partially contradicted by evidence but it does not mean that it is irrelevant, especially in the long run. The major difference between the competitive and monopsonistic models is the assumption about employee mobility costs.

Monopsonistic Conditions and the Employment Response to Minimum Wage Legislation

Legislated increases in Wmin raise wages. Modest increase 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 force some firms/employers to close or move.

Employers will invest in OJT of its workers as long as:

MRPL after training > W |after training. - If due to a recession MRPL after training is barley greater than W after training, the employer will not not layoff its trained employees, particularly, those workers with specific training and the longest job tenure. - Employers cannot recoup training costs from laid-off workers/employees who obtained specific training. - If MRPL after training is less then W after training and a recession is prolonged,employers may have no choice but to layoff workers because it is profitable to do so.

The Employment/Hours Trade-Off

The fact that certain labor costs (quasi-fixed costs) are not hours-related, while others are, will lead employers to think of "workers" and "hours-per-worker" as two substitutable inputs in the production process, therefore, L is divided into: a. Number of "workers" hired - denoted as M b. "Hours-per-worker" on the average - denoted as H. MPM = ∆Q/∆M|K and H constant → added output associated with each added worker. MPM = ∆Q/∆M|K and H constant → added output associated with each added worker. MPH = ∆Q/∆H|K and M constant → added output generated by increasing average hours per worker.

The Quasi Fixed Cost

The frictions on the employer side of the market cause firms to bear "quasi-fixed costs" that are difficult to cut in the short run. Quasi-fixed costs fall into two categories: 1. investments in their workforce 2. certain employee benefits.

How Do Monopsonistic Firms Respond to Shifts in the Supply Curve?

The labor market monopsonistic firm does not really have a labor demand curve - it has MRPL curve. The monopsonistic firm is not a wage taker and its MRPL curve shows various levels of employment of which there is only one profit-maximizing level of employment and only one associated wage rate.

The firm's Choice of wage and employment levels

The monopsonist hire workers up to the point where: MRPL = MEL The labor market effects caused by MEL > W : - A labor market monopsonist hires less workers in comparison to the competitive employer(s). - A labor market monopsonist pays a wage that is less than the competitive wage - exploits workers.

Why the Marginal Expense of Labor Exceeds the Wage Rate

This happened 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.

Employee Benefits

Workers also receive other fringe benefits in addition to their wage and salary earnings. These other benefits fall under the following categories: 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 5. Others

The Law of One Price

Workers who are of equal skills within occupations will receive the same wage - there will be no wage differentials. Assumptions underlying the Law of One Price: - Every employee has information about available jobs - information is costless. - Mobility or job search across employers is costless. - Labor supply curve is horizontal.