Econ 380 final exam - labor economics - Mcgann - ch 1-11,14,16-18
determinants of migration: unemployment
(1) Families headed by unemployed people are more likely to migrate than others, and (2) the rate of unemployment at the origin positively affects out-migration.
why do wage differentials occur
(1) jobs are heterogeneous, (2) workers are heterogeneous, and (3) labor markets are imperfect.
what three factors lead to cyclical changes in productivity
(1) changes in the utilization of labor, (2) changes in the utilization of plant and capital equipment, and (3) changes in the composition of aggregate output.
1. A firm that operates in a competitive labor market but an imperfectly competitive product market will hire less more or the same amount of workers compared to a firm that operates in a competitive labor and product market.
less
consequence of spillover, threat, product market, and superior worker effects
lowers nonunion wages increases nonunion wages increases nonunion wages measured wage advantage overstates pure wage advantage
short run labor demand for a perfectly competitive firm (Perfectly competitive product market: Firm can sell all units of its product at $200. for example)
marginal product (MP) = ∆total product/∆total labor Marginal revenue = ∆total revenue/∆total product marginal revenue product (MRP) = MR*MP - The value the firm sees from hiring an additional worker. - Maximum willingness to pay for labor. - MRP → SR labor demand curve; slopes downward due to diminishing MP. Value of Marginal Product(VMP) = price*MP - The value society sees from hiring an additional worker. • Perfectly competitive firms → Price = MR so MRP = VMP • Firms hire workers if the MRP ≥ MWC (Marginal Wage Cost).
what is frictional unemployment
not all active job searchers will have yet found or accepted employment, and not all employers will have yet filled their job vacancies.
what is employment discrimination
occurs when, other things being equal, african americans and women bear a disproportionate share of the burden of unemployment
statistical discrimination
occurs whenever an individual is judged on the basis of the average characteristics of the group, or groups, to which he or she belongs rather than upon his or her own personal characteristics. The judgments are correct, factual, and objective in the sense that the group actually has the characteristics that are ascribed to it, but the judgments are incorrect with respect to many individuals within the group.
what is tournament pay
pay schemes that base compensation on relative performance. Some observers speculate that the multimillion-dollar salaries paid to chief executive officers of large corporations may be equivalent to first-place prizes in a tournament. Indeed, compensation received by CEOs may exceed their personal marginal revenue products. The "excessive" pay may be efficient because it increases the MRPs of younger corporate managers, who aspire to one day become the CEO.
what constitutes an unemployed person
people who, during the survey week, they were 16 years of age or older, were not institutionalized, and did not work, but were available for work and (1) had engaged in some specific job-seeking activity during the past four weeks, (2) were waiting to be called back to a job from which they were temporarily laid off, (3) would have been looking for a job but were temporarily ill, or (4) were waiting to report to a new job within 30 days.
potential labor force (age eligible)
persons 16 years of age and older who are non-institutionalized
Workers that have a high discount rate are considered Present/Future oriented and will likely earn a Higher/Lower wage than workers with a low discount rate.
present higher ???
Of what practical significance are such estimates of labor demand elasticity?
private and public policies might be greatly affected by the size of the wage rate-employment trade-off suggested by the elasticity estimates. In the private sphere, a union's bargaining strategy might be influenced by the elasticity of labor demand for its workers. We might expect a union of higher-skilled engineers in the aerospace industry (where the demand for labor is inelastic) to bargain more aggressively for higher wages than a union of restaurant workers (where the demand for labor is elastic). The effectiveness and impact of government policies often depend on the elasticity of labor demand. The employment consequences of a rise in the minimum wage rate, for example, will depend on the elasticity of demand for workers affected by the change.
other factors that make a firm's long run labor demand curve more elastic than its short run: product demand
product demand is more elastic in the long run than in the short run, making the demand for labor more elastic over longer periods. Other things being equal, the greater the consumer response to a product price change, the greater the firm's employment response to a wage rate change.
income maintenance programs
programs whose purpose is to provide some minimum level of income to all families and individuals. These programs include Supplemental Security Income, Temporary Assistance for Needy Families, food stamps, and Medicaid.
what are fringe benefits
public (legally mandated) programs such as Social Security, unemployment compensation, and workers' compensation. They also include many private nonmandatory programs such as private pensions, medical and dental insurance, paid vacations, and sick leave.
human capital model controversies: ability problem
- College is correlated, not necessarily causal, with increased earnings. - Self discipline, motivation, intelligence, desire to learn, etc. correlate with college and higher earnings. - Significant implications for policy prescriptions to educate low-earning individuals.
world of work: labor supply of Florida lobster fisherman
-One would expect that lobster fishermen would increase their labor supply when the hourly wage rate is higher. Stafford finds support for that conjecture. Lobster fishermen are more likely to work at the beginning of the season when lobsters are more plentiful and thus earnings are higher. They are also more likely to work near new moons when it is easier to catch lobsters. -Most of the responsiveness of labor supply of lobster fishermen comes from the decision to participate rather than hours of work per day. Stafford finds a 10 percent higher hourly wage rate increases the probability of participating by 13 percent to 14 percent. However, the same 10 percent rise in the hourly wage rate increases hours of work by only 0.7 percent.
how does the government help with structural unemployment
1. Educational subsidies 2. Equal employment opportunity laws 3. Job training and retraining 4. Public service employment 5. Directed wage subsidies or employment tax credits 6. layoff warning
how does the government help with demand-deficient unemployment
1. fiscal policy 2. monetary policy 3. supply-side policies (deliberate actions taken by the government to increase labor supply 4. public service employment 5. wage subsidies or employment tax credits
what is the current and average union wage advantage
16 and 19 percent
what are the relative importance of increased efficiency, improved labor quality, and quantity of capital in the increase in productivity
35%, 12%,53% respectively
what is the hedonic theory of wages
A model of equilibrium wage differentials that hypothesizes that workers maximize the net utility of their employment by trading changes in wages for changes in nonwage job attributes.
why would you invest in human capital
Higher education positively correlated with income. Profiles are steeper for those with more education.
perfect competition: homogenous workers and jobs
If all jobs and workers are homogeneous and there is perfect mobility and competition, the wage structure—defined as the array of wage rates paid to workers—will evidence no variability. The average wage rate will be the only wage rate in the economy.
efficiency wage theories: nutritional model
In a relatively poor nation, an increase in the real wage might elevate the nutritional and health levels of workers. This will positively affect their physical vigor, mental alertness, and therefore their productivity. Thus, real wage increases could shift labor demand curves rightward, benefiting employers as well as employees.
isoquant curves: convexity to the origin
Isoquants are convex to the origin because capital and labor are not perfect substitutes for one another.
how does the government help with frictional unemployment
Job information and matching: government programs that increase the availability of information concerning job vacancies and skills of those seeking work and help match job applicants and employers. Examples: U.S. Job Service (state employment agencies).
what is the allocatively efficient level of employment
MWC = VMP
the population base
Population and the labor force have both grown significantly in the United States, but rates of growth have varied from one period to another.
what were the executive orders (1965-1968)
Prohibit federal contractors from discriminating among workers on the basis of race, gender, color, religion, or national origin; require affirmative action programs for firms that underuse women and minorities.
Describe the expected effects that college scholarships based on (a) student ability and (b) student need are likely to have on the distribution of earnings.
Scholarships based on ability will likely increase the dispersion of earnings to the extent that ability and schooling are positively correlated. By reducing the dispersion of supply curves, scholarships based on need are likely to reduce the dispersion of earnings.
Suppose Lauren is given two options by her employer. First option: She may choose her own hours of work and will be paid the relatively low wage rate implied by budget line HW1 shown in the accompanying diagram. Second option: She can work exactly HR hours and will be paid the relatively high wage rate implied by budget line HW2. Which option will she choose? Justify your answer.
She will choose the high-wage option. She will feel underemployed, but this option will allow her to reach a higher indifference curve (a higher level of utility.)
In 2014 the United States had a population of 319 million, of which 71 million were either under 16 years of age or institutionalized. Approximately 156 million people were either employed or unemployed but actively seeking work. What was the participation rate in 2014?
The 2014 labor force participation rate was 156 / (319 - 71) = 62.9%.
What has happened to the aggregate labor force participation rate in the postߝWorld War II period? To the participation rates of males and females?
The aggregate labor force participation rate has increased. The participation rate of males has decreased while that of females has increased.
what is the wage-fringe optimum
The optimal combination of wages and fringe benefits is at b, where the isoprofit curve is tangent to the highest attainable indifference curve for wages and fringe benefits
determinants of migration: distance
The probability of migrating varies inversely with the distance a person must move.
world of work: Why Do So Few Women Work in New York and So Many in Minneapolis?
Their results indicate that commuting can explain a large portion of the cross-city variation in the labor supply of married women. They find that each one minute increase in commuting time will lower the labor force participation rate by 0.3 percentage points for high school educated white non-Hispanic married women. Thus, commuting time can explain about one-third of the differences in the labor force participation rates between the longest and shortest commuting distance cities. In addition, they find that cities with the largest increases in commuting time between 1980 and 2000, had the smallest growth in the labor supply of married women.
income maintenance programs: income guarantee or basic benefit
This is the amount of public subsidy an individual or family would be paid if no earned income were received
income maintenance programs: the benefit reduction rate
This refers to the rate at which a family's basic benefit is reduced as earned income increases.
A firm that pays an efficiency wage pays an above equilibrium wage carries a loss on its workforce to incentivize greater productivity? T/F, Explain
True efficiency wages help to reduce turnover and shirking, they boost efficiency by reducing training costs and making sure that their is an incentive to work hard because the worker is being paid above the market wage making it more costly to lose the job
what makes workers heterogenous
Wage differentials also arise because workers are heterogeneous; their human capital, time preferences, and tastes for nonwage aspects of jobs differ.
other factors that make a firm's long run labor demand curve more elastic than its short run: technology
When the price of labor falls relative to the price of capital, these efforts get channeled toward technologies that economize on the use of capital and that increase the use of labor. The long-run response to the wage rate decline therefore exceeds the short-run response.
what is productivity
a relationship between real output(the quantity of goods and services produced) and the quantity of input used to produce that output output/input
what are efficiency wages
above-market-clearing wages designed to reduce employee shirking and labor turnover; they are equilibrium wages because, given labor supply and demand, employers have no incentive to change them.
what is search unemployment
an important source of frictional unemployment. This type of unemployment is created by individuals searching for the best job offer and firms searching for workers to fill job openings.
how does the union wage advantage move
counter cyclically, increasing during recession and narrowing during expansions
what is the trend of earnings mobility over a lifetime
earnings typically are low in earlier years, rise in prime working years, and then decline.
actual labor force
employed or unemployed but actively looking for a job
what has been the trend in the U.S. unemployment rate
it has been highly variable over the past 54 years.
look at question 4 chapter 5
look at question 4 chapter 5
not in the labor force
not actively looking for a job
what is an efficiency wage
one that minimizes an employer's wage cost per effective unit of labor service employed.
spillover effect
the decline in nonunion wages that results from displaced union workers supplying their services in nonunion labor markets
what is the distribution of personal earnings
the national pattern of the shares of individual wage earnings
what is MRP and how does it relate to general training
• Marginal Revenue Product: change in total revenue from adding an additional unit of labor. • In training, workers receive a lower wage (Wt < Wu) equal to their diminished productivity (MRPt < MRPu) • Post training, workers receive a higher wage (Wp< Wu) equal to their new higher level of productivity (MRPp > MRPu) • Workers incur the entire cost and receive the entire benefit of training
what is the net effect of the added-worker and discouraged-worker effects
- Added-worker effect only impacts HHs where a primary earner becomes unemployed. - Discouraged-worker effect impacts all HHs. - Therefore, the Discouraged-worker effect > Added-worker effect - Result: Labor force participation decreases during a recession and increases during an expansion. - Marginally attached workers compound these effect (e.g. married women).
human capital model controversies: education consumption value
- Education has consumption, not just investment value
what investment in human capital can be done to improve quality of labor?
- Formal education - On-the-job training - Experience - Physical & mental health
human capital model controversies: screening (signaling) hypothesis
- Related to the ability problem. - Suggests education itself has minimal productivity enhancing benefits but signals employers of higher quality workers.
determinants of elasticity of the market demand for labor: ratio of labor costs to total costs
- The larger the share of labor to total costs, the greater the elasticity of labor demand. • A 10% wage rise if labor accounts for 10% of total costs, will raise total costs by 1%. • A 10% wage rise if labor accounts for 50% of total costs, will raise total costs by 5%.
economic perspective: purposeful behavior
-assumes people compare costs with expected benefits -Workers will compare the extra utility (income) gained from an added hour of work with the value of the lost leisure -a firm will compare the added revenue from hiring a worker with the extra wage cost etc -relative scarcity necessitates that choice be made; the economic perspective assumes that these choices will be made purposefully rather than randomly
why have men traditionally had a comparative advantage in the labor market and women in the household?
-socialization -types of jobs available -biology -labor market discrimination
what are the 5 caveats to gains from migration
1 Uncertainty and Imperfect Information 2 Timing of Earnings Gains 3 Earnings Disparities 4 Earnings of Spouses 5 Wage Reductions from Job Losses
what are the characteristics of a perfectly competitive labor market
1) a large number of firms competing with one another to hire a specific type of labor to fill identical jobs 2) numerous qualified people who have identical skills and independently supply their labor services 3) "wage-taking" behavior—that is, neither workers nor firms exert control over the market wage 4) perfect, costless information and labor mobility.
what percent of total compensation do fringe benefits make up
31%
how do high school grades affect future educational attainment and earnings
A one-point increase in high school grade point average (GPA) doubles the probability of completing college, from 21 percent to 42 percent, for both men and women. These estimates control for other factors that may affect future educational attainment, such as family size, school characteristics, innate ability, motivation, and parents' education. Those with higher high school GPAs were also more likely to complete graduate degrees. Similarly, a one-point rise in high school GPA raises annual earnings by 12 percent for males and 14 percent for females.
work-leisure model: undermployment
A situation in which the worker could increase utility by taking less leisure and more income; a level of work wherein the wage rate exceeds the marginal rate of substitution of leisure for income. This term may also refer to a situation in which the worker is employed in a position for which he or she is overqualified
work-leisure model: overemployment
A situation in which the worker could increase utility by taking more leisure and less income; a level of work where the marginal rate of substitution of leisure for income exceeds the wage rate
Suppose marginal productivity tripled while product price fell by half in Table 5.2. What would be the net impact on the location of the short-run labor demand curve in Figure 5.2?
A tripling of productivity coupled with a halving of product price would increase marginal revenue product. The short-run demand for labor would increase.
who gains the most from being a union member
African american males
determinants of migration: age
All else being equal, the older that a person is, the less likely he or she is to migrate.
what is the wage rate adjustment path
An increase in labor demand initially may cause a substantial wage increase to, say, W0 in occupations that require long training periods. But the supply response to the higher wage may create a surplus of labor to the occupation in the subsequent period, driving the wage rate lower, say, to W1. For a time the wage rate may oscillate above and below the long-run equilibrium wage rate We before equilibrium in the market is finally restored. During the transition periods, wage differentials between this occupation and others paying We will be observed.
what is the effect of Interregional and international trade on wage differences and labor mobility.
Assuming that competition forces product Page 284prices down to marginal costs in both nations, U.S. consumers would reallocate their expenditures toward the lower-priced Korean goods. This would increase the total demand for these imports and eventually raise the derived demand for Korean labor., this would increase the Korean wage rate. The opposite chain of events would occur in the United States, where reduced product demand would shift the derived demand for U.S. labor leftward from D to D1 and reduce the wage to We. This wage narrowing via product flows diminishes the extent of labor migration
how do product market monopolist's affect labor allocation efficiency
Because a product market monopolist's MRP (= MP × MR) curve lies below the VMP (= MP × P) curve, employment is less in the monopolized industry than it would be if the industry were competitive. So an efficiency loss occurs. Monopoly in the product market causes marginal revenue to fall faster than product price as more workers are hired and output is expanded. Because product price P exceeds marginal revenue MR, it follows that MRP (= MP × MR) is less than VMP (= MP × P). The result is less employment and an underallocation of labor resources relative to the case of perfect competition in the product market.
what implication do efficiency wages carry
Because they are set higher than market-clearing wages, efficiency wages may contribute to permanent unemployment.
how do bonuses act as a solution to the salary problem
Bonuses are payments beyond the annual salary based on some factor such as personal or firm performance. Their advantage to the firm is that they may elicit extra work effort. Another advantage is that they do not permanently raise base salaries or hourly wages, as do raises, promotions, or other forms of merit pay.
least-cost combination of capital and labor
By overlaying the isocost curve onto the isoquant map, we can determine the firm's cost-minimizing combination of K and L for a given quantity of total output. Stated somewhat differently, this allows us to determine the lowest cost per unit of output. This least-cost combination of resources occurs at the tangency point of the isoquant curve Q and the isocost curve I
what reason other than diminishing rates of return does the internal rate of return decline as additional education is acquired?
Costs tend to rise and benefits tend to fall for successive years of schooling. In addition to having essentially fixed mental and physical characteristics, the individual also possesses a fixed amount of time; that is, a finite work life. It follows that the more years one invests in education, the fewer one has during which to realize the benefits of incremental income from that investment, hence the lower rate of return. The rate of return also declines because the costs of successive years of schooling tend to rise.
In what way does discrimination redistribute national income? How does it reduce national income?
Discrimination redistributes national income by keeping women and minorities out of relatively high-wage jobs. National income is reduced because a) women and minorities are prevented from making their maximum contribution to national income and b) occupational crowding results in a misallocation of labor, causing the values of marginal products to differ across occupations.
causes of fringe benefit growth: efficiency considerations
Employers are interested in protecting their training investments and reducing their recruiting and training costs. They may see fringe benefits as a way to tie workers to jobs and hence to reduce quits. Pension benefits in particular are effective in reducing employee turnover.6 Lower turnover means that a higher proportion of the firm's workers are experienced workers who are well past the training stage. Consequently, the average productivity of a firm's workforce rises.
what is the shape of market supply of labor curves
Even though specific individuals normally have backward-bending labor supply curves, labor supply curves generally are positively sloped over realistic wage ranges. Higher relative wages attract workers away from household production, leisure, or their previous jobs.
A CEO that is paid more than her MRP will likely be terminated. T/F, Explain
False CEOs are paid efficiency wages not necessarily the wages that are labor market efficient, this form of tournament pay is speculated to boost the mrps of people aiming for the ceo spot
chapter 3. question 13 The accompanying diagram restates the basic work-leisure choice model presented in Chapter 2. Use this diagram to explain the declining workweek occurring in the pre-World War II period, making explicit the assumptions underlying your analysis. We noted in the present chapter that the stability of the workweek in the post-World War II era has been attributed by various scholars to such considerations as (a) higher taxes on earnings, (b) acquisition of more education, and (c) advertising. Make alterations in the indifference curves or budget line of the diagram to indicate how each of these three factors might contribute to a relatively stable workweek despite rising before-tax real wages.
Higher taxes decrease the slope of the budget line. Increased education, while resulting in higher wages that increase the slope of the budget line, may also reflect changed preferences with regard to market work. This higher commitment to work would make the indifference curves flatter. Advertising may have changed preferences in favor of work so that more goods can be acquired.
Floyd is now working in a job that pays $18,000 per year. He is contemplating a one-year automobile mechanics course that costs $1,000 for books and tuition. Floyd estimates that the course will increase his income to $23,000 in each of the three years following completion of the course. At the end of those three years, Floyd plans to retire to a commune in Boulder, Colorado. The current interest rate is 10 percent. Is it economically rational for Floyd to enroll in the course?
It is economically rational to enroll in the course. The net present value is -(8000 + 1000) + 5000/1.1 + 5000/(1.1)^2 + 5000/(1.1)^3 = $3,434.26.
indifference curves: different work-leisure preferences
Just as the tastes of consumers for specific goods and services vary greatly, so do individual preferences for work and leisure. Different preferences for the relative desirability of work and leisure are reflected in the shape of one's indifference curves. leisure lover: -steep curve workaholic: shallow curve
what are the trends of legal immigration to the united states
Legal immigration increased gradually during the 1970s and 1980s until 1988. The number of legal immigrants rose dramatically from 1989 to 1991 as many former illegal immigrants were permitted to become legal immigrants by the Immigration Reform and Control Act of 1986. Since the 1990s, legal immigration has remained relatively high. Currently, about 1 million people become legal immigrants each year.
what is the profit maximizing level of employment
MWC=MRP when MWC(the added cost in wages that need to be payed of hiring an additional worker) is equal to the MRP(the increase (change) in total revenue resulting from employment of each additional labor unit)
what is the equal pay act of 1963
Mandates equal pay for women and men who perform the same, or highly similar, jobs.
human capital model controversies: non-wage compensation
Non pecuniary fringe benefits and a more pleasant work environment.
what is the productivity index
Productivity index(base year) = [productivity(year 1)/productivity(base year)] *100%
how does perfect competition relate to the efficient allocation labor (figure 6.5)
Representative firms producing goods such as x, y, and n maximize profits by employing type A labor where the marginal revenue product of labor (MRP) equals the marginal wage cost (MWC). Perfect competition in the product market ensures that MRP equals the value of marginal product (VMP), and perfect competition in the labor market means that MWC equals the price of labor (PL)
what is the civil rights act of 1964, Title VII
Seeks to eliminate discrimination based on race, gender, color, religion, or national origin in hiring, promoting, firing, and compensating workers.
empirical data on human capital: rate-of-return studies
Speaking very generally, most rate-of-return studies have estimated such rates to be on the order of 10-15 percent. The social rate of return for the corresponding period was estimated to range from 7.5 to 11.1 percent.
short run production function: stages of production (stage 1)
Stage IA: Specialization of labor causes increasing MP which causes TP to increase at an increasing rate. MP > AP so AP rises. Stage IB: Diminishing returns to labor cause decreasing MP which causes TP to increase at a decreasing rate. MP > AP so AP rises. Stage IA & IB show that increases in L improve the efficiency of L & K. • AP of L & K increase • Firm will add labor and progress to Stage II.
what is structural unemployment
Structural unemployment is caused by changes in the composition of labor supply and demand
world of work: power of the pill
The first birth control pill was released to the public in 1960. The first birth control pill was released to the public in 1960. Bailey also utilized interstate differences in timing of legal access to the pill to examine the effects of the pill on female labor supply. Her results show that early access to the pill can account for 3 of the 20 percentage points of increase in labor force participation rates between 1970 and 1990. It can also account for 67 of the 450 additional annual hours worked on average by women aged 16-30 over that period.
what is the hedonic indifference map
The hedonic indifference map is composed of a number of indifference curves. Each individual curve shows the various combinations of wage rates and a particular nonwage amenity (for example, job safety)
determinants of migration: education
The higher one's educational attainment, all else being equal, the more likely it is that one will migrate
the work-leisure decision: utility maximization
The individual's optimal or utility-maximizing position can be determined by bringing together the subjective preferences embodied in the indifference curves and the objective market information contained in each budget line.
what are the efficiency gains associated with migration
The migration of labor from low-wage Mexico (b) to high-wage United States (a) will increase the domestic output and reduce the average wage rate in the United States and produce the opposite effects in Mexico.
the work-leisure decision: net effect
The overall effect of an increase in the wage rate on the number of hours an individual wants to work depends on the relative magnitudes of these two effects. -If the substitution effect dominates the income effect, the individual will choose to work more hours when the wage rate rises. -if the income effect is larger than the substitution effect, a wage increase will prompt the individual to work fewer hours.
index of segregation
The percentage of women (minorities) who would have to change occupations in order for them to be distributed across occupations in the same proportion as men (whites).
effects of illegal immigration: wage effects
The safest conclusion—given real-world complexities—is that large-scale illegal immigration does reduce the wage rate for substitutable low-skilled domestic workers. But illegal immigration probably has little net impact on the average level of wages in the United States.
stagflation
The simultaneous occurrence of substantial unemployment and inflation.
"It would be incorrect to say that an industry's labor demand curve is simply the horizontal sum of the demand curves of the individual firms." Do you agree? Explain.
The statement is true. As labor (and output) increase in the industry, it is no longer the case that the price of the product remains constant as is assumed in constructing the individual firm's labor demand curve.
A firm will always engage in tactics to counteract Shirking? T/F, Explain
True, shirking happens in all industries where humans act as agents because if they can maximize their utility while doing less work they will
the work-leisure decision: empirical evidence
What do empirical studies reveal about labor supply curves? The evidence differs rather sharply between males and females. Specifically, most studies indicate that male labor supply is quite insensitive to changes in wage rates, whereas female labor supply is more responsive to changes in wage rates.
real world applications of labor demand and the elasticity of labor demand: contingent workers
Why has the demand for contingent workers increased so rapidly? Several factors have been at work. These workers are usually paid less than permanent workers. Also, increasingly expensive fringe benefits are minimal or nonexistent for many contingent workers. A second and closely related reason for the growing demand for contingent workers is that these workers give firms more flexibility in responding to changing economic conditions. As product demand shifts, firms can readily increase or decrease the sizes of their workforces through altering their temporary, on-call, and subcontracted employment. This flexibility enhances the competitive positions of firms and improves their ability to succeed in international markets.
Why must the concepts of supply and demand as they pertain to product markets be modified when applied to labor markets?
With respect to labor supply, it is impossible to separate the labor services provided from the worker: the worker cares not only about the price, but all of the non-wage characteristics of the job as well. On the demand side, labor is demanded because of its productivity in creating goods and services, not for its own sake.
after sorting out nondiscriminatory sources what have empirical studies typically found relating to pay differences
a large, unexplained residual difference in pay by gender and race; many researchers attribute most of this residual to discrimination.
what is equity compensation
a pay scheme where part of the worker's compensation is given or invested in the firm's stock. An increasingly popular form of equity compensation is stock options, which give an employee the right to purchase a fixed number of shares of stock at a set price for a given time period. suffers from free-rider problem
what is profit sharing and what problems does it face
a pay system that allocates a specified portion of a firm's profits to employees. This form of pay increased during the 1980s when workers in basic industries such as autos and primary metals accepted profit sharing in lieu of wage increases. But in reality, the theoretical link between profit sharing and improved efficiency is not so clear-cut. The main reason is that profit sharing is tied to group performance. This tie creates the free-rider problem that we identified in our discussion of bonuses. The larger the organization, the greater the possibility that the free-rider problem will short-circuit the profit sharing-productivity link. The success of a profit-sharing plan depends crucially on how well the free-rider problem is resolved.
Consider Bob, a 26 year old native to Los Angeles who has just graduated from UCLA with an M.A. in Engineering. He has received two job offers, one in N.Y. that pays him $120,000 per year and another in L.A. that will pay him $100,000 per year. He is planning on working in the position, regardless of the location, until he finishes his 30th year of work. His added monetary costs in N.Y. will be $15,000 each year and he expects psychic costs totaling $35,000. He can borrow at the rate of 3.0% (i.e. discount rate). Using the information provided, answer the questions below. You can assume all costs and benefits are incurred/accrued at the end of each year. a) Calculate the Net Present Value of his migration b) Calculate the internal rate of return of his migration c) Based on the NPV and IRR, should he migrate? Why?
a) NPV = 2,023,046.32 b)??? c)???
what does the multi factor approach to earnings distribution use to explain earnings inequality
ability, family background, discrimination, chance, and risk taking, in addition to education and training.
what has been the average productivity growth
between 2 and 3 percent annually since the turn of the century.
who achieves higher wage advantages in a union blue-collar or white-collar workers
blue-collar
what are commissions and royalties and how do they solve the principal-agent problem
commissions and royalties tie pay to the value of sales. Commissions and royalties are efficient where work effort and work hours are difficult to observe. Time rates in these situations would bring forth attendant shirking problems for the firm because observing the worker would be very expensive. By aligning the interests of the firms and the workers, commissions and royalties help overcome the principal-agent problem.
What are piece rates?
compensation paid in proportion to the number of units of personal output. This compensation often is in found situations where workers control the pace of work, and firms find it expensive to monitor worker effort.
list and explain the choice-theoretic approach to labor economics
contemporary labor economics employs theories of choice to analyze and predict the behavior of labor market participants and the economic consequences of labor market activity
what has influenced the labor participation rates of older males
decreases participation: real wage growth • Income effect > substitution effect deteriorating health • Indifference curve becomes steeper pensions (social security & private pensions • More lucrative pensions have led to an income effect. • Benefit reduction rate for social security creates substitution effect. increased labor force participation of spouse • Income effect disability benefits • Income effect • Low wage workers may respond more significantly since benefits represent a larger fraction of their pre-disability income. increases participation: education • Higher wages may cause substitution effect > Income effect. • Indifference curve becomes flatter due to decreased physical demands at work. increased labor force participation of spouse • Men may prefer "shared leisure", inducing more work. • Income effect offset by flatter indifference curve.
derived demand for labor
demand for labor depends on the demand for the product labor produces
world of work: work hours linked to pollution
examine the impact of pollution on work hours by analyzing the effect of the closure of a large oil refinery in Mexico City in March 1991. Pollution, as measured by the levels of sulfur dioxide, fell by 19.7 percent for neighborhoods within a 5-kilometer radius of the oil refinery after the closure. As result, individuals living near the oil refinery increased their average weekly work hours by 1.3 hours (or 3.5 percent) relative to individuals living farther away from the refinery. The distribution of work hours was also affected as well as the level of work hours. Neighborhoods affected by the closure experienced a 6 percentage point increase in the probability of working over 40 hours a week and about a 2.5 percentage point increase in the probability of working more than 10 hours per week.
how much have fringe benefits as a percent of total employee compensation grown from 1929 to 2014
fringe benefits for all workers have expanded from less than 3 percent of total compensation in 1929 to 31 percent of total pay in 2014.
what is the trend in the employment-population ratio
from 1960 it rose until 2000 and has fallen since then.
labor economics as a discipline: socioeconomic issues
labor economics helps us understand causes and outcome of major socioeconomic trends occurring over the past several decades such as: - wage, income, and wealth inequality -gender and racial discrimination -legal and illegal immigration -unionization -globalization and free trade -technology and unemployment
what constitutes an employed person
people who, during the survey week, were 16 years of age or older and (1) were employed by a private firm or government unit; (2) were self-employed; or (3) had jobs but were not working because of illness, bad weather, labor disputes, or vacations.
what is the effect of unionization on static efficiency loss
relatively small
how do unions impair efficiency and productivity
restrictive work rules, strikes, and labor misallocation resulting from the union wage advantage
what is demand deficient or cyclic unemployment
result from deficiencies in aggregate demand that force firms to lay off and discharge workers.
isoquant curves
shows the various possible combinations of two inputs that are capable of producing a specific quantity of physical output. By definition, then, output is the same at all points on a single isoquant.
what portion of total compensation do fringe benefits make up and are they rising or falling
significant portion of total compensation grown rapidly during the past several decades
Attorneys earn more than Paralegals due to Compensating, Skill, or Efficiency differentials.
skill, paralegals act as assistants to attorneys and have less skill to perform the tasks that attorneys do.
pure union wage advantage
the amount by which the union wage exceeds the nonunion wage that would exist without the union A= (Wu-Wn)/Wn *100%
what is labor productivity
the average productivity of labor inputs for the economy as a whole. total product(real GDP) / number of worker-hours
short run production function: total product
the total output produced by each combination of labor and fixed capital. as units of the variable input L are added to fixed K, TP will increase . . . • First at an increasing rate. • Then at a decreasing rate. • Eventually at a negative rate
long run labor demand: subtitution effect (page 8 chapter 5 notes)
• LR only. • Wage rate decreases cause firms to substitute relatively more expensive capital the cheaper labor. • Since capital is fixed in the SR, this is a LR effect only. • A to C
what are the non-wage determinants of labor demand
• Product demand - A change in product demand will shift labor demand in the same direction. • Productivity - A change in labor productivity will shift labor demand in the same direction. • Number of employers - A change in the number of firms will shift labor demand in the same direction. • Prices of other resources - Gross Complements • Demand for one input moves inversely with the price of the other input. - Gross Substitutes • Demand for one input moves directly with the price of the other input.
long run labor demand: output effect (page 8 chapter 5 notes)
• SR & LR. • Wage rate decreases lower the marginal cost (MC1 to MC2) and increase the profit maximizing level of output (40 to 70). • To produce the higher output level, the firm will have to hire more workers. • A to B
short run production function: important relationships
• When MP > AP, AP increases. • When MP < AP, AP decreases. • When TP is highest MP is zero. • The slope of a tangent line at any point on the TP curve is the MP (e.g. Z). • The slope of a line drawn from the origin to any point on the TP curve is the AP over that range (e.g. 0a).
1. A firm that engages in gender and/or racial discrimination in hiring will pay a Higher/Lower wage than a non-discriminatory firm.
higher
superior worker effect
higher wages paid by union firms will cause workers to queue up for the good union jobs
what perspective does the becker model use
household perspective -Household rather than individual decision-making -households produce utility yielding commodities (UYCs) with their time
how do raises and promotions act as one solution to the salary problem
if the firm establishes performance based raises and promotions then. The prospect of future raises and promotions means that the worker's decision about hours of work versus leisure in any given year is not based on that year's salary alone. Rather, the salaried worker chooses the optimal hours with a view toward maximizing lifetime utility.
what is human capital discrimination
in evidence when females (african americans) have less access to productivity-increasing opportunities such as formal schooling or on the job training
what constitutes full employment
4% but it has been as high as 5.5 or even 6 percent in the past
what have craft unions achieved
wage advantages that are much higher than average
short run labor demand for an imperfectly competitive firm (Imperfectly competitive product market: Firm must lower price to sell more units. )
• For an imperfectly competitive firm P ≠ MR so MRP ≠ VMP. • MRP → SR labor demand curve; slopes downward due to diminishing MP and lower product price. • Demand curve is less elastic so fewer workers will be hired at a given wage.
female labor force participation rate trends
• General increase across all age groups. • Approximately 2/3 of increases come from married women.
female labor force participation rate trends white vs african american
• In the 1950s rates among African-American women were12-15 percentage points higher than for white women. • The gap has closed because of a rise in participation among white women
how do minimum wage laws affect general training
• Minimum wage laws limit a firms ability to pass general training expenses onto employee since wages cannot be lowered below the wage floor. • May result in less general training for employees.
what was the trend is weekly hours of work pre and post world war 2
• Pre-WWII, weekly hours fell due to rising real wages. • Income effect > substitution effect • Post-WWII, weekly hours stabilized around 40.
Indicate whether each of the following statements pertains to microeconomics or macroeconomics: (a) The unemployment rate in the United States was 6.2 percent in 2014. (b) Workers at the Sleepy Eye grain elevator are paid $10 per hour. (c) The productivity of American workers as a whole increased by more than 2 percent per year in the last decade. (d) The money or nominal wages of nursing aides increased by 2 percent in 2014. (e) The Alpo dog food plant in Bowser, Indiana, laid off 15 workers last month.
(a) macro (b) micro (c) macro (d) micro (e) micro
what generalizations can we make about the human capital model in relation to length of income stream
- A longer stream of earnings increases the NPV and IRR. - Greater the probability of college investment among: • Younger people • Demographics that exhibit continuity in employment (e.g. men).
what are the two types of on-the-job training
- General training • Transferable training: applicable to all firms. - Specific training • Non-transferable: only applicable to the firm providing the training. - Training is typically a mixture of both.
why did the income effect cease to lower hours after ww2 despite rising incomes?
- Higher education attainment • Preference for intrinsically pleasing and safer careers. • Flatter indifference curves. - Firm resistance • Higher fixed costs for the firm per worker (e.g. training & fringe benefits) cause firms to resist reductions in hours per week (costs per hour rise). • Overtime premiums via the Fair Labor Standards Act of 1938 (FLSA) led to a standardized work-week. - Higher marginal income tax rates • Decreased take-home pay. • Income effect > substitution effect.
what generalizations can we make about the human capital model in relation to earnings differential
- Larger college-high school earnings differential increases NPV & IRR. • College attendance rose in the 1980s as the college-high school premium increased.
what generalizations can we make about the human capital model in relation to costs of attending college
- Lower costs (direct and/or indirect) of attending college increase NPV and IRR. - Greater probability of attendance among: • Younger people • Student's with lower direct costs of borrowing: - Loan guarantees - Government subsidized loans (Sally Mae)
how do you determine if training is a worthwhile investment and what are the costs and benefit
- NPV > 0 and r > i - Costs • Direct costs: classroom instruction, books, trainers. • Indirect costs: opportunity cost of working time lost. - Benefits • Increased productivity.
determinants of elasticity of the market demand for labor: elasticity of product demand
- The greater the elasticity of demand for the product, the greater the elasticity of demand for the labor. - Product elasticity is highest in competitive markets with many substitutes. - Greater elasticity limits the firm's ability to pass on wage increases to consumers in the form of higher prices.
determinants of elasticity of the market demand for labor: supply elasticity of other inputs
- The greater the elasticity of supply of other inputs for labor, the greater will be the elasticity of labor demand.
determinants of elasticity of the market demand for labor: Substitutability of other inputs
- The greater the substitutability of other inputs for labor, the greater the elasticity of labor demand.
income maintenance programs: three basic features
- income guarantee or basic benefit - benefit reduction rate -break-even level of income
economic perspective: adaptability
-Because relative scarcity forces people to make choices, and because choices are made purposefully, labor market participants respond to changes in perceived costs and benefits. -the economic perspective assumes that workers, employers, and other labor market participants adapt, adjust, or alter their behaviors in response to changes in expected costs and expected gains. Contemporary labor economics sorts out these responses, finds predictable patterns, and by so doing, adds to our understanding of the economy.
payoffs: social perspective
-From a societal viewpoint, a knowledge of labor economics should help make you a more informed citizen and more intelligent voter. The issues here are broad in scope and impact. -Although detailed and definitive answers to such questions cannot be guaranteed, an understanding of labor economics will provide valuable insights that should help you formulate opinions on these and similar issues.
world of work: Gary Becker: Nobel Laureate
-Gary becker was named the 1992 Winner of the Nobel Prize in economics -Becker's theories presume that individuals or households make purposeful choices in attempting to maximize their utility and that these choices depend heavily on incentives. -Becker's theory of marriage is illustrative. People allegedly seek marriage partners much as they search for jobs or decide which products to buy. Couples stop far short of obtaining complete information about each other before marriage. At some point the costs of obtaining additional information—the main cost being the benefits of marriage forgone—exceed the extra benefits of more information. After being married for months or years, however, a person learns additional information about his or her spouse's personality and attributes. This new information in some cases places the spouse in a less favorable light, ending the optimality of the original match and causing divorce. -Becker views the household as a little factory, allocating its time between labor market work, household production, and household consumption in producing utility-providing "commodities" (Chapter 3). Households have fewer children—time-intensive 'durable goods"—as the "price" of children rises. A major component of this "price" is the forgone earnings associated with having and caring for children. -Becker's theory of human capital (Chapter 4) holds that decisions to invest in education and training are analogous to decisions by firms to purchase physical capital. Applying his approach to crime, Becker concludes that criminals rationally choose between crime and normal labor market work. Also, they respond to changes in costs and benefits, just as noncriminals do. Becker analyzes labor market discrimination (Chapter 14) as a preference or "taste" for which the discriminator is willing to pay.
how does comparative advantage factor into household choices?
-HH allocates time based on each member's opportunity cost -traditionally, children have had a comparative advantage in household time toward acquiring human capital (i.e. schooling)
household choices: why is allocation of time important
-HH members allocate competing uses of time to maximize household utility -must determine which HH members will produce UYCs with labor, HH, and consumption time
World of Work: Lotto Winners: who quit?
-Of the many reasons people work, monetary compensation usually is the leading incentive. Indeed the word compensation implies that workers require reimbursement or indemnification—in this case, for the loss of utility associated with forgone leisure. -less than 1 million 7% quit -between 1 and 2 million 29% quit -between 2 and 4 million 53% quit -4 million or more 77% quit
world of work: the labor supply impact of the earned income tax credit
-The EITC has two effects on labor supply. First, labor force participation should rise because only employed people may participate in the program. Second, it has an uncertain effect on the hours worked by employed people. Below the plateau level the EITC is the equivalent to a wage increase, and in the phase-out range above the plateau it acts as a wage decrease. Because wage changes have income and substitution effects that work in opposing directions on hours worked, the labor supply effects among those currently working cannot be determined in theory. -There are many studies of the labor supply effects of the EITC. Hotz and Scholz conclude that the EITC has increased the labor force participation rate, particularly for single parents. In fact, another study has found that the EITC could account for nearly two-thirds of the rise in the participation rate of single mothers between 1984 and 1996. Also, though the program appears to slightly reduce the hours of those currently working, the overall impact on hours worked is positive once the EITC's hours-increasing effect on participation is accounted for
payoffs: personal perspective
-at the personal level, the vast majority of readers have already been labor market participants. -Such topics as job search, unemployment, migration, discrimination, unionism, and labor productivity, to enumerate only a few, will take on new meaning and relevance. -The background and analytic perspective provided by an understanding of labor economics should be useful in making rational managerial decisions concerning the hiring, firing, promotion, training, and remuneration of workers.
labor force participation rate trends
-decrease in male participation -increase in female participation -gender convergance
labor economics as a discipline: unique characteristics
-derived demand -rented, not purchased -non-pecuniary elements (pecuniary means relating to or consisting of money) -institutional factors (e.g. licensing, minimum wages, work-hour standards, OSHA, etc)
what four things determine the elasticity of the market demand for labor
-elasticity of product demand -ratio of labor costs to total costs -substitutability of other inputs -supply elasticity of other inputs
why is labor economics justified as a special field of inquiry
-helps us understands causes and outcomes of major socioeconomic trends occurring over the past several decades -quantitatively labor is our most important economic resource -labor is unique in that the complexity of labor markets means that the concepts of supply and demand must be substantially revised and reoriented when applied to labor markets
becker's income effect
-higher wages increase income causing a reallocation of time from the labor market to consumption -more nuanced then the work-leisure model but same result
Becker's substitution effect
-higher wages increase the oppurtunity cost of leisure causing a reallocation of time from household/consumption to the labor market -reallocation from time-intensive to good-intensive commodities
the old and the new
-labor economics has long been recognized as an important area of study but what it studies has changed dramatically the old approach was descriptive • Uses a historical, non-analytical framework to understand labor markets. • e.g. wages and employment opportunities have increased in the past 30 years for individuals that possess a college degree. new approach is analytical • Uses micro and macroeconomic theories to understand labor markets. • Constructs scientific models to predict future outcomes. • e.g. higher education leads to higher wages.
what are the migration externalities
1 Real Negative Externalities: Real negative externalities are effects of private actions spilling over to third parties and creating misallocations of resources (economic inefficiency). 2 Pecuniary Externalities: Income Redistribution Pecuniary externalities may be defined as acts that redistribute income among individuals and groups. 3. gains to owners of capital: The conclusion that businesses gain from migration at the expense of domestic workers must be tempered by the fact that this is a short-run, partial-equilibrium model. The theoretical possibilities become more complicated when a long-run, general-equilibrium approach is used and when various assumptions are relaxed. 4. fiscal impacts: An inflow of immigrants can affect the distribution of disposable income in a destination nation or area through its effect on transfer payments and tax collections.
what are the avenues through which government might attack the problem of discrimination
1) achieve a tight labor market through the use of appropriate monetary policy 2) improve the education and training opportunities of those who have been discriminated against 3) direct governmental intervention
what three factors other than anti discrimination policies may have caused the observed rise in african-american white earnings ratio
1) there was an increase in the quality of education of African-Americans relative to whites during this period. 2) the average level of schooling rose relatively more among African-Americans than whites. 3) there was a large decline in the labor force participation of low-income African-Americans, which caused the earnings ratio of the remaining workers to rise.
what two effects work on the business cycle and participation
1. Added-worker • Primary earner loses their job causing other HH members to look for a job. • Increases labor force participation during recessions. • Income effect: other HH members see a decrease in their non-wage income. 2. Discouraged-worker • Person stops looking for work due to pessimism about the job market. • Decreases labor force participation during recessions. • Substitution effect: perceived lower wages decrease the cost of leisure.
what are the determinants of labor supply
1. Other wage rates An increase (decrease) in the wages paid in other occupations for which workers in a particular labor market are qualified will decrease (increase) labor supply. 2. Nonwage income An increase (decrease) in income other than from employment will decrease (increase) labor supply. 3. Preferences for work versus leisure A net increase (decrease) in people's preferences for work relative to leisure will increase (decrease) labor supply. 4. Nonwage aspects of the job An improvement (worsening) of the nonwage aspects of the job will increase (reduce) labor supply. 5. Number of qualified suppliers An increase (decrease) in the number of qualified suppliers of a specific grade of labor will increase (decrease) labor supply.
what are the determinants of labor demand
1. Product demand Changes in product demand that increase (decrease) the product price will raise (lower) the marginal revenue product (MRP) of labor and therefore increase (decrease) the demand for labor. 2. Productivity Assuming that it does not cause an offsetting decline in product price, an increase (decrease) in productivity will increase (decrease) the demand for labor. 3. Prices of other resources Where resources are gross complements (output effect > substitution effect), an increase (decrease) in the price of a substitute in production will decrease (increase) the demand for labor; where resources are gross substitutes (substitution effect > output effect), an increase (decrease) in the price of a substitute in production will increase (decrease) the demand for labor. An increase (decrease) in the price of a pure complement in production will decrease (increase) labor demand (no substitution effect; therefore a gross complement). 4. Number of employers Assuming no change in employment by other firms hiring a specific grade of labor, an increase (decrease) in the number of employers will increase (decrease) the demand for labor.
for what reasons is labor productivity important
1. Productivity growth is the basic source of improvements in real wages and living standards. 2. Productivity growth is an anti-inflationary force in that it offsets or absorbs increases in nominal wages.
empirical data on human capital: college-high school wage premium
1970s decline • Baby Boomers: labor supply increased relative to demand. 1980s rise • Demand > Supply for college-educated workers to compliment growth of high-tech industries. • Demand < Supply for high school grads as companies began hiring college grads to fill jobs not historically requiring a degree. Future college premiums? • What does past data suggest? • Will there be structural changes in the economy shifting demand/supply for educated workers? • Will the perceived value of a "Degree" increase or decrease?
How is the pure union wage advantage defined? If in a given labor market the wage rate would be $16 without a union and $20 with a union, then what is the pure union wage advantage? Explain how, and in what direction, each of the following might cause the measured union wage advantage to vary from the pure advantage: (a) the spillover effect, (b) the threat effect, (c) the product market effect, and (d) the superior worker effect.
20-16/16 *100% = 25% spillover: lowers nonunion wages, overstate threat: increases nonunion wages, understate product market: increases nonunion wages, understate superior worker: more productive in union firms, overstate
Assume an imperfectly competitive firm that can sell 10 widgets for $10 but must lower the price to $9 if it wants to increase sales from 10 to 18 widgets. A further decrease of the price to $8 will increase sales by 5 widgets. It takes one worker to produce 10 widgets, a second worker to produce 18 widgets, and a third worker to produce the last 5 widgets. The firm purchases labor in a competitive labor market and the current wage is $35. How many workers will the firm hire?
???
what are the impacts of capital mobility and interregional or international trade on wage differentials and therefore on labor migration
A high wage rate in the United States Wu and a low wage rate in South Korea Wk may cause either (1) flows of capital from the United States toward South Korea or (2) a price advantage for Korean-produced goods. In either case, the demand for labor is likely to increase in South Korea and decline in the United States. Thus, the wage rate differential will narrow, and consequently no labor migration will occur.
the work-leisure decision: budget constraint
A line plotted on a graph that shows all the combinations of market goods (real income) and leisure that the consumer can obtain at any given wage rate
how do monopsonists affect labor market efficiency (figure 6.7)
A monopsonist pays a lower wage rate and employs fewer workers than firms hiring in a competitive labor market; this outcome is allocatively inefficient. Under monopsony MWC > SL (or PL) because the employer must bid up wages to attract a greater quantity of labor and pay the higher wage to all workers. Consequently, it will employ fewer workers than under competitive conditions and pay a wage rate below the MRP of labor. This underallocation of labor resources (VMP > PL) reduces the total value of output in the economy.
body of work: the Carnegie conjecture
Although inheritances reduce labor force participation, they permit the children to attain higher indifference curves—to achieve greater total utility. Moreover, those taking extra "leisure" may use it for socially beneficial activities such as volunteer work and educational pursuits. The point is simply that nonlabor income—be it from lottery winnings, pensions, intra-household transfers, or inheritance—is an important factor in understanding labor supply behavior.
One way of aiding low-income families is to increase the minimum wage. An alternative is to provide a direct grant of nonlabor income. Compare the impact of these two options on work incentives.
An increase in the minimum wage may either increase or decrease desired work hours for those already in the labor market depending on the relative strengths of the substitution and income effects. The substitution effect of the higher wage will increase desired hours of work while the income effect will decrease desired hours of work. For those not in the labor force, there is only an income effect, encouraging participation. A direct grant of nonlabor income has only an income effect, reducing desired hours of work.
isocost curves
An isocost (equal expenditure) curve shows the various combinations of two inputs—in this case, capital and labor—that can be purchased with a specific dollar outlay, given the prices of the two inputs. The slope of an isocost line measures the price of one input divided by the price of the other.
what is the employer's isoprofit curve
An isoprofit curve portrays the various combinations of wages and fringe benefits that yield a specific level of profits. We assume that competition will result in a normal profit. Thus, WF shows the various combinations of wages and fringes the firm can afford to provide, given the "prices" of the alternative forms of compensation. negative sloping straight line
The work-leisure decision: indifference curves
As applied to the work-leisure decision, an indifference curve shows the various combinations of real income and leisure time that will yield some specific level of utility or satisfaction to the individual.
how do changes in the utilization of labor contribute to a cylic change in productivity
As the economy moves into a downturn or recession, a firm's sales and output will decline more rapidly than its inputs of labor: Specifically, during cyclical contractions, employers normally are loath to fire workers—preferring instead to shunt labor into maintenance and other less essential tasks rather than the production of goods—until they are convinced that the downturn is not a temporary aberration. As a consequence, measured productivity (the ratio of output to employed labor) declines. Analogously, once a recovery starts, employers put these underutilized labor resources back on the production line. So output can expand briskly with little need for new hiring, and measured productivity registers dramatic gains.
why does human capital investment suffer from diminishing rates of return
As with any other situation where a variable input is added to some fixed input, the resulting increases in the amount of human capital produced—the new knowledge and skills acquired by the individual—will ultimately decline. And diminishing returns mean that the rate of return on successive human capital investments will also diminish.
isoquant curves: downward slope
Assuming that capital and labor are substitutes in production, if a firm employs less capital (K), then to maintain a specific level of output, it must employ more labor (L). Conversely, to hold total output constant, using less of L will require it to employ more of K. There is thus an inverse relationship between K and L at each output level, implying a downward-sloping isoquant curve.
changes in the composition of aggregate output. contribute to a cylic change in productivity
Because the level of productivity in manufacturing is among the highest of all sectors of the economy, it follows that the relative decline in manufacturing during a recession will reduce overall labor productivity. Conversely, the relative expansion of manufacturing as a proportion of total output during recovery causes average labor productivity to rise. Note that this effect is independent of other cyclic influences on productivity.
caveats to empirical data on human capital
But all such empirical data must be interpreted with some care. First, we have no way of accurately predicting the future. Economists cannot accurately estimate the future earnings of a new college graduate. Data used in research studies to calculate rates of return on human capital investments or the college wage premium are historical data. Also, while incremental earnings affect the decision to invest in a college education, the decision to invest in a college education affects incremental earnings. Second, the historical data used in human capital studies are in the form of average (median) earnings, and the distribution of earnings by educational level around the average is wide. Although a given study may calculate that the average rate of return on a college education is 10 percent, some individuals may earn 30 or 50 percent, whereas the return may be negative for others.
changes in the utilization of plant and capital equipment contribute to a cylic change in productivity
Competition forces firms to design their plants so that they operate with maximum efficiency during normal times. This means that during a recession, falling output causes the plant and equipment to be used at less than the optimal level, and productivity consequently falls. Conversely, during recovery, plant utilization moves back in the direction of the most efficient level of output, and productivity tends to rise.
real world applications of labor demand and the elasticity of labor demand: minimum wage
Critics contend that an above-equilibrium minimum wage moves employers upward along their downward-sloping labor demand curves and causes unemployment, particularly among teenage workers. Workers who remain employed at the minimum wage will receive higher incomes than otherwise. The amount of income lost by job losers and the income gained by those who keep their jobs will depend on the elasticity of demand for minimum-wage labor. Studies have generally found that a 10 percent increase in the minimum wage reduces employment from 1 to 3 percent, meaning that demand is inelastic. Thus, the minimum wage increases the wage income to minimum-wage workers as a group (increases the wage bill). The case made by critics of the minimum wage would be stronger if the demand for low-wage labor were elastic.
what are the criticisms of efficiency wage theories
Detractors of efficiency wage theories question whether these models add greatly to our understanding of labor markets in advanced economies. Critics of the shirking model, in particular, point out that several of the pay-for-performance plans discussed earlier in this chapter could serve as alternatives to efficiency wages as ways to guard against poor worker performance. As examples, where monitoring workers is costly, the firm can pay on a piece rate or a commission basis. Where individual performance is difficult to measure, bonus pay based on team performance can be implemented. Second, critics point out that a firm could require employees to post a bond that they would forfeit if they were found to have been negligent in performing their job duties. Finally, detractors of the efficiency wage theory note that firms can reduce shirking by establishing pay plans in which part of the workers' pay is deferred until later years or until employees qualify for pensions. Encouraged by the deferred income, workers will work hard to maintain employment within the firm. Each of these devices, argue the critics, can reduce the principal-agent problem at less expense than paying above-market-clearing wages.32
short run production function: stages of production: stage 3
Diminishing returns to labor cause negative MP which cause TP to decrease. MP < AP so AP decreases. Stage III shows that increases in L compromise the efficiency of L & K. • AP of L & K decrease • Firm will subtract labor and progress to stage II.
isoquant curves: higher output to the northeast
Each isoquant farther to the northeast reflects combinations of K and L that produce a greater level of total output than the previous curve.
empirical evidence on the effect of migration of lifetime earnings
Empirical studies confirm that migration increases the lifetime earnings of the average mover. The estimated rate of return is similar to that on other forms of investment in human capital, meaning it generally lies in the 10 to 15 percent range
efficiency wage theories: labor turnover model
Employers may increase wages to reduce costly labor turnover, the rate at which workers quit their jobs, necessitating their replacement by new workers. An above-market-clearing wage raises the workers' costs of quitting their jobs and thus lowers the likelihood that they will quit. Lower labor turnover, in turn, increases worker productivity on the average because it increases the proportion of experienced workers relative to those being trained and still "learning by doing." The result is that the higher wage rate shifts the labor demand curve rightward.
If at the current level of fringe benefits the slope of the isoprofit curve > MRS, the worker and firm will negotiate a higher level of fringe benefits. T/F, Explain
False if the slope of the isoprofit is greater than the MRS of the indifference curve that means fringe benefits must be traded off for non fringe benefits
An implicit deferred wage contract incentivizes older workers to leave the firm so younger workers have opportunities. T/F, Explain
False it incentivizes to stay
what are the labor market implications of the hedonic wage model
First, the labor market will generate wage differentials among people who possess identical amounts of human capital. Other things being equal, higher wages will tend to be associated with fewer nonwage amenities. Second, laws that set a minimum standard for nonwage job amenities may actually reduce the utility of some workers. Third, part of the observed male-female earnings differential may reflect differing tastes for positive job amenities such as pleasant working conditions, a short commuting distance, and a low probability of job injury. Finally, the hedonic model extends our earlier discussion of optimal fringe benefits both in terms of worker indifference maps and employer isoprofit curves. Indifference maps of the utility trade-off between wages and fringe benefits vary from worker to worker. Workers who place a high marginal valuation on fringe benefits—that is, have relatively steep indifference curves—will therefore match up with firms offering pay packages containing significant fringe benefits. Conversely, workers whose valuations of cash wages are higher at the margin than valuations of fringe benefits are more likely to opt to work for firms with relatively fewer fringe benefits but higher cash wages.
causes of fringe benefit growth: tax advantage to the employer
For workers earning less than this amount, the firm reduces its payroll tax burden by tilting the pay package away from wage earnings and toward fringe benefits. Suppose a worker earns $30,000 a year. At the 2015 payroll tax rate of 7.65 percent, the employer would have to pay $2,295 of tax. But if the employer instead pays the worker $20,000 in earnings and $10,000 of fringe benefits, the tax burden for the firm falls to $1,530 (= $20,000 × .0765). Multiplied by thousands of workers, the tax savings to a large firm can be considerable. The upshot is that the firm can offer fringe benefits worth more than a dollar for a dollar reduction in direct pay. In Figure 7.6, the normal-profit isoprofit line fans outward as indicated by the shift from WF to WF′. Because the Social Security tax base and rate have both increased historically, the optimal level of fringe benefits has risen.
male labor participation rates trends
General decrease across all age groups. • Most significant for older males • Males over 65 since 1950. • Males 55-64 since 1970.
world of work: the changing face of america
If the Census Bureau's predictions are accurate, they have several important implications for the labor force. First, the projected slowdown in labor force growth raises the potential for labor shortages. Second, the lower immigration and smaller fertility rates will accelerate the present aging of the American population. This means, for example, that the ratio of receivers of Social Security benefits to the number of people paying into the system will rise faster than once expected. Third, a renewed emphasis on education and training will be necessary to prepare the growing number of racially diverse youth for high-quality jobs. Finally, workplaces will be transformed, with owners, managers, and workers increasingly being nonwhite. Greater tolerance for racial and ethnic differences will be an absolute necessity if the United States is to retain its high labor productivity and standard of living.
The work-leisure decision: basic model
Imagine an individual with a certain amount of education and labor force experience and, therefore, a given level of skills. That individual, having a fixed amount of time available, must decide how that time should be allocated between work (labor market activity) and leisure (non-labor market activity).
the end of welfare as an entitlement
In August 1996, President Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), which fundamentally changed the welfare system in the United States. A major goal of the law is to make receiving welfare a transition period before returning to work. The law replaced the existing Aid to Families with Dependent Children (AFDC) program with the Temporary Assistance for Needy Families (TANF) program. In contrast to AFDC, TANF requires welfare recipients to work after two years of receiving assistance with few exceptions. Welfare recipients may meet the work provision by being employed, attending vocational training, or performing community service. The Act also mandates a five-year lifetime limit on the receipt of cash welfare payments. It also provides child care and health insurance for families entering the job market. Finally, most forms of public assistance are denied to legal immigrants for five years or until they become citizens
real world applications of labor demand and the elasticity of labor demand: fast-food workers
In Becker's terms, people have substituted goods (restaurant meals) for time (home-prepared meals). The growing demand for restaurant meals has increased the demand for fast-food workers. Because the labor supply of traditional fast-food workers—teenagers—has not kept pace, many restaurants are now recruiting homemakers and semire-tired workers.
how do the hiring decisions by an individual firm differ from the market as a whole
In a perfectly competitive labor market, the equilibrium wage rate W0 and quantity of labor Q0 are determined by supply and demand, as shown in (a). The individual firm (b) hiring in this market is a wage taker; its labor supply curve, SL = MWC = AWC, is perfectly elastic at W0. The firm maximizes its profits by hiring Q0 units of labor (MRP = MWC). Assuming competition in the product market, this employment level constitutes an efficient allocation of resources (VMP = PL).
"Only that portion of the MP curve that lies below AP constitutes the basis for the firm's short-run demand curve for labor." Explain.
In competitive markets, MP > AP implies that labor costs exceed total revenue; the firm should shut down in the short run. In stage I of the production relationship, increasing labor will increase the efficiency of both capital and labor: the firm will not want to operate in Stage I.
What are the major features or assumptions of the economic perspective?
The primary assumptions are a) the scarcity of resources relative to wants and desires; b) purposeful behavior, comparing expected costs and benefits; c) changes in behavior in response to changes in expected costs and benefits
real world applications of labor demand and the elasticity of labor demand: personal computers
In some offices, personal computers have been gross substitutes for labor, thus reducing the demand for labor and allowing these firms to use fewer workers to produce their outputs. But in other instances, computers and labor have proven to be gross complements. The decline in computer prices has reduced production costs to the extent that product prices have dropped, product sales have increased, and the derived demand for workers has risen. Also, keyboard personnel and computers are pure complements. Thus, there is no substitution effect; a keyboard worker is needed for each computer.
how does the cobweb model work (figure 6.8)
In the cobweb model, the equilibrium wage rate is achieved only after a period of oscillating wage rate changes caused by recurring labor shortages and surpluses. The cycle just described repeats itself. The quantity of labor demanded in each period depends on the wage rate at that time; the quantity of labor supplied in each period results from the wage rate during the previous period when education and career decisions were originally made. In this instance, equilibrium eventually is achieved at the intersection of the long-run labor supply curve S and demand curve D1. You are urged to carry the analysis forward through another cycle to test your understanding of this unusual model. The adjustment path toward equilibrium at g results in a cobweb pattern
what topics in labor economics are mainly macroeconomic
Macroeconomics stresses the aggregative aspects of labor markets and, in particular, the distribution of earnings, labor productivity, and the overall level of employment.
what topics in labor economics are mainly microeconomic
Microeconomics focuses on the determinants of labor supply and demand and how supply and demand interact to determine wage rates and employment in various labor markets. In these labor markets, the types and composition of pay are determined, as is the wage structure. Some wage differences persist; others are eroded by mobility and migration. Labor unions, government, and discrimination all affect labor markets through either supply or demand.
what are the four types of labor mobility
Mobility can take several forms, four of which are summarized by boxes I through IV. Specifically, it can involve a job change, but no change in occupation or residence ; an occupational change, but no change in residence ; a geographic move to a job in the same occupation ; or geographic migration accompanied by a change in occupation .
human capital model controversies: recapitulation
Most economists reject the various criticisms of human capital theory, believing that education and training directly increase productivity and earnings. But they also recognize that not all investments in education and training have a positive net present value; some investments are poor ones, and others have sharply diminishing returns. Thus, human capital theory cannot be used uncritically as a basis for public policy.
A worker that is currently earning $12 per hour would like to improve his wage, which of the following methods would help achieve this result. a) Collect Information about the wage distribution in his occupation and confront his employer if he is in the right tail of the distribution. b) Negotiate for more job safety. c) Negotiate for less health care benefits. d) If he believes the current wage is greater than equilibrium in the market, he should give it some time before renegotiating with his employer.
Negotiate for less health care benefits.
"Empirical evidence for the United States suggests that labor force participation varies directly with unemployment." Do you agree? Explain in terms of the discouraged-worker and added-worker effects.
No. The discouraged-worker effect reduces labor force participation as the unemployment rate increases while the added-worker effect increases it. Empirical evidence generally suggests the discouraged-worker effect is dominant so that the labor force participation rate varies inversely with the unemployment rate.
what are wage rate distributions
Once we introduce costly information, job searches, and heterogeneous workers and employers into our analysis, the likelihood there will be a single equilibrium wage for each type of labor greatly diminishes. Rather, we can expect to find a range of equilibrium wages for each type of labor. This range may be very narrow or quite broad, depending on the individual circumstances within each occupational labor market.
differing human capital:noncompeting groups
People are not homogeneous. Of particular significance to our discussion of the wage structure is the fact that people possess differing stocks of human capital. At any point in time, the labor force consists of numerous noncompeting groups, each of which represents one or several occupations for which the members of the group qualify.
why has the distribution of earnings in the united states become more unequal over the past 30 years
Potential causes that have been cited include (a) deindustrialization, (b) import competition and the decline of unionism, (c) increased demand for skilled workers, and (d) demographic changes. None of these factors alone can explain the increase in wage and salary inequality. It would appear that demand-side, supply-side, and institutional factors all are involved.
work-leisure model: premium pay vs straight time
Premium wage rates for overtime work will be more conducive to more hours of work than a straight-time wage rate that would yield an equivalent daily income
empirical data: private vs social perspective
Private Perspective • Considers private costs & benefits only. Social Perspective • Considers private and external costs & benefits. - Lower unemployment rates. - Decreased crime. - Reduced dependency on others. - Improved quality of political participation. - Superior home environment for - Differences between social and private IRR can cause inefficient allocation: • Efficiency occurs when the social IRR = private IRR • Resources will be under allocated if social IRR > private IRR • Resources will be over allocated if social IRR < private IRR • Example: too much or too little education?
the work-leisure decision: graphic portrayal of income and substitution effects
Remember that the substitution effect reflects the change in desired hours of work arising solely because an increase in the wage rate alters the relative prices of income and leisure. Therefore, to isolate the substitution effect, we must control for the increase in income created by the increase in the wage rate. Recall, too, that the income effect indicates the change in the hours of work occurring solely because the higher wage rate means a larger total income from any number of hours of work. In portraying the income effect, we must hold constant the relative prices of income and leisure—in other words, the wage rate.
Use a work-leisure diagram to demonstrate that (a) if African-Americans have labor market opportunities that are inferior to those of whites and (b) nonlabor income is available in the form of, say, disability benefits, African-Americans will have lower participation rates even though the work-leisure preferences (indifference curves) of African-Americans and whites are identical.
See the diagram at right. An African-American with these preferences and the bold budget line would choose not to enter the labor force. A white person with the same preferences but facing the lighter budget line would enter the labor force. (chapter 3 study guide)
causes of fringe benefit growth: economies of scale
Significant economies of scale usually exist in the collective purchase of fringe benefits that lower their prices to buyers. In particular, the average administrative costs and agent fees are much less in purchasing medical, life, disability, or dental insurance for a group than for an individual.5 In addition, group policies eliminate the adverse selection problem—the tendency for individuals who are most likely to draw large benefits to sign up for insurance. As with tax advantages, the "discount prices" on insurance reduce the per-unit cost of fringes and rotate the normal-profit isoprofit line outward, as in Figure 7.6. The result is that a worker is enticed to accept more fringe benefits than previously. To the extent that cost savings have increased historically as the size of firms has grown, the optimal amount of fringe benefits has also grown.
the market demand for labor
Specifically, a lower product price will reduce MRP and shift the labor demand curve of each firm to the left. This implies that the market demand for labor is in fact less elastic than that yielded by a simple summation of each firm's labor demand curve.
world of work: time stress
Surveys show that many workers face time stress: a lack of time to do their desired activities. Some interesting patterns related to household production also appeared in these data. Household production work appears to generate less time stress than an equivalent amount of market work. Increased efficiency in household production should reduce the amount of time stress. Consistent with that conjecture, an improvement in health status from fair or poor to at least good reduced time stress by the equivalent of at least 10 hours of market work per week.
what is the internal rate of return (IRR) method
The Internal Rate of Return is the discount rate (r) at which NPV = 0 Implies that the PV of costs = PV of earnings Represents the maximum interest rate one would be willing to pay or forgo for the investment. NPV = 0 = (FV0)/(1+r)^0 + Fv1/(1+r)^1 .... Method Set NPV = 0 Solve for r Better yet, use Excel or a Calculator's IRR function If IRR is: > i investment is efficient < i investment is inefficient = i investment is neutral
how does unionization affect profitability and productivity
decreases and there is no consensus
world of work: why has the labor force participation rate fallen
The aging of the population and the retirement of the baby boom generation certainly contributed to the fall in participation. However, the Great Recession of 2007-2009 also likely played a role by causing individuals to drop out of the labor force due to their diminished job prospects. If most of the decline in the participation rate is due to cyclical factors, then policymakers may want to take actions to tighten the labor market and thus encourage individuals to reenter the labor market. If the decline in participation is mostly due to structural factors such as population aging or higher school enrollment rates, then such counter-cyclical measures would not be so desirable.
income maintenance programs: break-even level of income
The basic benefit and the benefit reduction rate permit the calculation of the break-even income. This is the level of earned income at which the actual subsidy payment received by an individual or family becomes zero.
what is marginal wage cost
The change in the firm's total wage cost that results from changing labor input by one unit. It is equal to the wage rate in competitive labor markets.
What is the college wage premium? Can you explain why the premium (a) declined in the 1970s and (b) increased since the 1980s?
The college wage premium is the ratio of earnings for college graduates to the earnings of high school graduates. In the 1970s there was a large flow of new college graduates into the labor force that depressed the college wage premium. Since the 1980s, the demand for college-trained workers increased and the college wage premium increased.
indifference curves: convex to origin
The convexity of an indifference curve reflects the idea that an individual becomes increasingly reluctant to give up any good (in this case income) as it becomes increasingly scarce.
what is the skill differential
The difference in pay between skilled and unskilled workers
do recessions increase or decrease the number of college students?
The empirical evidence indicates that the decreased opportunity cost of college in recessions dominates the reduced ability to pay because college enrollment rates tend to rise significantly during recessions. Dellas and Sakellaris find that a 1 percent increase in the unemployment rate increases the college enrollment rate of 18- to 22-year-olds by .8 percentage points. Their models indicate that some recessions may have added more than 400,000 college students. Men and women do not appear to respond differently to recessions. However, the college enrollment rate of nonwhites is less sensitive than that of whites to business downturns.
what is the employer's isoprofit curve
The employer's isoprofit curve portrays the various combinations of wage rates and job amenities (for example, job safety) that yield a given level of profit. Competition among firms will result in only normal profits (zero economic profit) in the long run; therefore, firms will be forced to make their "wage rate-job amenity" decisions along a curve such as P.
world of work: more college students are employed
The large decline in labor supply in 2009 appears to have been caused by the poor economic conditions during that year. Thus, college students are likely to increase their hours of work as the unemployment rate drops. Credit constraints were a significant factor in explaining recent changes in employment rates. As a result, whether student aid continues to rise at a faster rate than tuition will likely play an important role in the labor supply of college students in the future.
Use a work-leisure diagram that includes nonlabor income to portray an individual who is maximizing utility by working, say, eight hours per day. Now compare the labor supply effects of imposing (a) a lump-sum tax (a tax that is the same absolute amount at all levels of earned income) and (b) a proportional tax of, say, 30 percent on earned income. Do hours of work rise or fall in each case? Can you generalize these outcomes to all individuals in the economy? Explain.
The lump-sum tax increases work effort through a pure income effect; the proportional tax may either increase or reduce work effort depending on the relative strengths of the opposing income and substitution effects.
world of work: what is a GED worth?
The main avenue for economic benefits from the GED is through greater access to postsecondary education. However, relatively few GED recipients pursue postsecondary education: Only 40 percent attend college at all. Furthermore, only 3 percent of GED recipients complete a four-year college degree, and 5 percent complete an associate degree at a two-year college.
The "supply-side" economics of the Reagan administration (1981-1988) presumed that income tax cuts would stimulate incentives to work and thereby increase economic growth. Demonstrate this outcome with a work-leisure diagram. What does this outcome assume about the relative sizes of the income and substitution effects? Explain: "The predicted increase in work incentives associated with supply-side tax cuts might in fact be more relevant for women than for men."
The outcome assumes the substitution effect is stronger than the income effect. The statement reflects empirical evidence that the substitution effect strongly dominates the income effect for females, but they roughly offset each other for males.
benefits that derive from understanding labor economics
The payoffs from a basic understanding of the field may be both personal and social. Labor economics yields information and develops analytic tools that may be useful in making personal and managerial decisions relevant to labor markets. Also, a grasp of the field puts you in a better position as a citizen and voter to develop informed positions on labor market issues and policies.
determinants of migration: family circumstances
The potential costs of migrating multiply as family size increases; therefore, we would expect married workers to have less tendency to migrate than single people, other factors such as age and education being constant.
effects of illegal immigration: employment effects
The presence of undocumented persons in this low-wage labor market shifts the labor supply curve to St and reduces the market wage from Wd to Wt. At Wt, all workers hired are undocumented persons. If the undocumented persons were deported, however, Qd domestic workers would be employed; thus, it is misleading to conclude that undocumented persons accept jobs that domestic workers will not take. It is also misleading to conclude that the deportation of undocumented persons would create employment for native workers on a one-for-one basis.
world of work: making the right choices does it matter which college or university one attends?
The study's results indicate that it does not pay to attend a more selective college as measured by the average SAT score of entering freshmen. For example, a student who attended a highly selective school such as Princeton University did not earn more than one who attended a less selective school such as the Pennsylvania State University. An exception to this finding is that minorities and students with poorly educated parents do tend to benefit from attending a highly selective school. This may be the result of these students getting connections they would not be otherwise able to obtain.
If an income maintenance program entails a $3,000 basic benefit and a benefit reduction rate of .30, what will be the size of the subsidy received by a family that earns $2,000 per year? What will be the family's total income? What break-even level of income does this program imply?
The subsidy is $2400 ($3000 - .3 x $2000). The total income is $4400 ($2000 + the $2400 subsidy.) The break-even level of income is $10,000 ($3000 / .30).
Speculate about how successful attempts by government to tighten the distribution of family income through transfers might inadvertently make the distribution of annual earnings more unequal.
The transfers may reduce work hours of low-earnings workers, thereby aggravating the inequality of annual earnings
income maintenance programs: controversy
The various income maintenance programs have long been surrounded by controversy. This stems in part from fundamental ideological differences among policy makers. But it also reflects the fact that the accepted goals of income maintenance programs are in conflict with one another and that it is easy to disagree over the proper or optimal trade-offs. In particular, it is generally agreed that income maintenance programs should (1) effectively get poor people out of poverty, (2) maintain incentives to work, and (3) achieve goals 1 and 2 at a reasonable cost.
causes of fringe benefit growth: other factors
There are several other reasons why fringe benefits have increased historically. Certain fringe benefits are quite income elastic. They involve pension coverage and such services as medical and dental care, purchases of which are quite sensitive to increases in income. Thus, as worker incomes have grown historically, it is not surprising that the "purchase" of such fringes has also expanded.8 Also, the federal government has raised mandated fringe benefits such as Social Security and unemployment compensation. Finally, we will find in Chapter 11 that unionization historically has been a factor in the rise in fringe benefits. On average, union workers receive more generous fringe benefits than nonunion workers. Also, nonunion firms often emulate union contracts as a way to deter unionism.
the work-leisure decision: elasticity versus changes in labor supply
To this point, we have been discussing the direction in which wage changes cause an individual to alter the hours of work supplied. Implicitly, our discussion has focused on the wage elasticity of individual labor supply. More precisely, wage elasticity of labor supply is defined in the picture Over specific ranges of an individual's labor supply curve, the elasticity coefficient given in the wage elasticity of labor supply may be zero (perfectly inelastic), infinite (perfectly elastic), less than 1 (relatively inelastic), greater than 1 (relatively elastic), or negative (backward-bending). The elasticity will depend on the relative strengths of the income and substitution effects generated by a wage rate change.
Use the total wage bill rules and the labor demand schedule in Question 4 to determine whether demand is elastic or inelastic over the $6 to $11 wage rate range. Compute the elasticity coefficient using Equation (5.4).
Total wage bill: at a $6 wage, the total wage bill is $18; at an $11 wage, the total wage bill is $22. Demand is inelastic, Ed = .68.
the work-leisure decision: rationale for backward-bending supply curve
What is the rationale for this reversal? The answer is that points u1 and u2 are at positions on indifference curves where the amount of leisure is large relative to the amount of income (goods). That is, u1 and u2 are located on relatively flat portions of indifference curves, where MRS L, Y is small because the individual is willing to give up substantial amounts of leisure for an additional unit of income or goods. This means that the substitution effect is large—so large that it dominates the income effect. The individual's labor supply curve is forward-rising: Higher wage rates induce more hours of work. But points u3, u4, and u5 are reached only after much leisure has been exchanged in the labor market for income. At these points, the individual has a relatively large amount of income and relatively little leisure. This is reflected in the relative steepness of the indifference curves. In other words, MRS L, Y is large, indicating that the individual is willing to give up only a small amount of leisure for an additional unit of income. This means that the substitution effect is small and in this case is dominated by the income effect. Consequently, the labor supply curve of the individual becomes backward-bending: Rising wage rates are associated with fewer hours of work.
deriving the long-run labor demand curve
When the price of labor rises from $4 to $12, the substitution effect causes the firm to use more capital and less labor, while the output effect reduces the use of both. The labor demand curve is determined in (b) by plotting the quantity of labor demanded before and after the increase in the wage rate from $4 to $12.
Indicate in each of the following instances whether the specified circumstances will cause a worker to want to work more or fewer hours: a) The wage rate increases and the substitution effect is greater than the income effect. b) The wage rate decreases and the income effect is greater than the substitution effect. c) The wage rate decreases and the substitution effect is greater than the income effect. d) The wage rate increases and the income effect is greater than the substitution effect.
Work more hours in (a) and (b); fewer hours in (c) and (d).
"The added-worker effect can be explained in terms of the income effect, while the discouraged-worker effect is based on the substitution effect." Do you agree?
Yes. The added-worker effect is based on a reduction in the partner's non-wage income. The discouraged-worker effect can be explained by a reduction in the expected wage rate (the potential wage adjusted for the reduced probability of finding a job.)
what are the conditions most conducive to employment growth in an industry experiencing rapid productivity growth
a price- and income-elastic product demand curve and fortuitous circumstances that increase product demand.
what is the BLS productivity index and what trend does it show
a productivity that uses 2009 as the base year and shows the course since 1960 Labor productivity has more than doubled over the past 54 years.
indifference curves: indifference map
a whole family or field of indifference curves -Every possible combination of income and leisure will lie on some indifference curve. Curves farther from the origin indicate higher levels of utility.
Explain how each of the following would affect the demand schedule you derived in Question 4: (a) an increase in the price of a gross substitute for labor, (b) a decrease in the price of a pure complement in production with labor, (c) a decrease in the demand for the product that the labor helps produce.
a. Demand will shift to the right. b. Demand will shift to the right. c. Demand will shift to the left.
Indicate the implications of each of the following for estimates of the rate of return on a college education: (a) the screening hypothesis, (b) the possibility that a portion of one's expenditures on college should be considered as consumption rather than investment, (c) the fact that people who go to college are generally more able than those who do not, and (d) the fact that jobs acquired by college graduates generally entail larger fringe benefits than the jobs of high school graduates. What implications do the ability problem and the screening hypothesis have for public policy toward education?
a. The private rate of return will be unbiased, but the social rate of return will be overstated b. The estimate will understate the rate of return c. The estimate will overstate the rate of return d. The estimate will understate the rate of return
Evidence suggests that firms that sell their products in less competitive product markets are more likely to be unionized than firms selling in highly competitive markets. Recalling from Chapter 5 that the elasticity of product demand is an important determinant of the elasticity of labor demand, how might this affect (a) the elasticities of the union and nonunion demand curves in Figure 11.6 and (b) the net loss of output due to the union wage advantage?
a. Union demand curves will be less elastic, nonunion demand curves more elastic. b. Holding the wage gain constant, the efficiency loss will be smaller.
how does the shirking model tie into wage differentials
above-market wage raises the cost of job loss to workers, which elicits conscientious efforts and reduces the employer's cost per effective unit of labor. On the other hand, where monitoring workers is inexpensive or where the cost of malfeasance by individual workers is low, the cost per effective unit of labor will be minimized at the lower market-clearing wage. These differing circumstances will create wage differentials that are unrelated to skill differentials or to differences in nonwage amenities.
what has been the trend in productivity growth
accelerated dramatically starting in the second half of the 1990s. Possible structural factors in the rise include (a) increased use of capital relating to information technology and (b) increased technological progress and efficiency. Recently, the rate of productivity growth has slowed possibly due to decreased technical progress in information technology industries.
Labor force participation rate
actual labor force/ potential labor force
what is the human capital model (study slides page 3)
age on x-axis annual earning on y • The HH curve is the age-earnings profile if a person does not attend college. • The CC curve is the cost-earnings profile if one attends college. • The total cost of attending college is the sum of the direct costs (area 1) plus indirect costs (area 2). • The benefit of attending college is the increase in earnings due to the college degree (area 3). • Whether it is rational to attend college depends on whether the value of the benefits exceeds the value of the costs. • How method can we use to determine "value"?
what are the determinants of migration
age, family circumstances, education, distance, and unemployment
effects of illegal immigration: fiscal effects
although illegal immigrants do use many local public services such as schools, roads, and parks, most also pay Social Security taxes, user fees, and sales taxes. Most scholars of illegal immigration conclude that these immigrants remain net taxpayers.
product market effect
an increase in nonunion wages caused by consumer demand shifting away from relatively high-priced union-produced goods and toward relatively low-priced goods produced by nonunion workers
threat effect
an increase in nonunion wages that a nonunion employer offers as a response to the threat of unionization
work-leisure model: nonparticipants
an individual who decides not to be in the labor force -A high subjective evaluation of nonwork time (reflected in steep indifference curves), the availability of nonlabor income (HN), and low earning ability (NW is relatively flat) are all factors conducive to not participating in the labor force.
real world applications of labor demand and the elasticity of labor demand: textile and apparel industries
another factor has been the spread of automation in textile and apparel manufacturing. Industrial robots and assembly-line labor are gross substitutes, meaning that lower prices for robots have produced substitution effects exceeding output effects. The net effect has been a decline in the demand for textile and apparel workers. Coupled with the reduced demand for the product, the substitution of robots for workers has sharply reduced employment in these industries.12
what is wait unemployment
another source of frictional unemployment where unemployed workers willingly wait to be recalled from temporary layoffs or willingly wait in job queues to obtain union jobs. In addition, efficiency wages may attract workers into the labor force who are forced to wait for such jobs to open.
What is the Gini coefficient?
area between lorenz curve and diagonal divided by the total area below the diagonal the greater the degree of earnings inequality the greater the coefficient is
short run production: law of diminishing marginal returns
as successive units of a variable resource (labor) are added to a fixed resource (capital), beyond some point the marginal product attributable to each additional unit of the variable resource will decline.
Workers that have a steep indifference curve for job safety are considered risk-________ and will likely seek employment with firms that have a relatively Steep/Flat isoprofit curve since such firms can provide safety at a relatively High/Low Cost.
averse flat low
how has the ratio of hourly earnings of African american to white changed over the past three decades
changed little
what are compensating wage differentials
consist of the extra pay that an employer must provide to compensate a worker for some undesirable job characteristic that does not exist in an alternative employment.
what is the natural rate of unemployment
defined as (1) the unemployment rate at which there is neither excess demand nor excess supply in the overall labor market or (2) the unemployment rate that will occur in the long run if expected and actual rates of inflation are equal
what are labor immobilities
defined simply as impediments to the movement of labor, constitute another major reason that wage differentials occur and sometimes persist. For convenience, we will classify these barriers to labor mobility as geographic, institutional, and sociological.
what does human capital theory point to as the major reasons for earnings inequality?
differences in the amount and quality of education and the extent of on-the-job training
Some workers earn more than others in the same occupation because of differences in all of the following except Experience/Education/Natural Talents/Time Preferences/Job Requirements.
education
what do some economist contend is the reason for the inferior economic position of women
educational decisions, occupational choices, interrupted careers, and other voluntary choices made by women a different group stress discrimination as the root cause
what creates heterogeneity in jobs or employers
employers or jobs differ in such things as (1) union status, (2) tendency to discriminate, and (3) absolute and relative firm size.
what is the evidence and controversy related to the cobweb model
evidence: Cobweb models help explain adjustments in several labor markets having long training periods and highly specialized labor. For example, historical cobweb adjustments have been found in the markets for new engineers, lawyers, and physicists.8 Recent evidence, however, indicates demand shocks are now causing a greater change in employment and a smaller adjustment of wages for information technology workers than in the past due to increased immigration of skilled workers controversy: college students are more likely to look at present value of lifetime earnings streams than starting salaries in making career decisions students are highly attuned to the boom-bust potential and make rational decisions
becker's allocation of time model
extends the work-leisure model
what has been the trend in the index of occupational segregation by gender
fell considerably between 1973 and 2014. (gender)
what has been the trend in the index of racial occupation segregation
fell noticeably for men and women between 1973 and 2014. (race)
what is wage discrimination
female (african-american) workers are paid less than male (white) workers for doing the same work
what is occupational of job discrimination
females (african americans) have been arbitrarily restricted or prohibited from entering certain occupations, even though they are as capable as male (white) workers of performing those jobs
what is labor hoarding
firms find it to be in their long-run profit-maximizing interest to hoard labor during recession and, from a social perspective, use labor less productively than previously. But during the upswing or recovery phase of the cycle, output can be increased substantially by simply correcting this underutilization. Within limits, firms can increase output by taking up the slack in their currently employed labor forces.
how do unions positively contribute to efficiency and productivity
inadvertently accelerating the substitution of capital for labor and hastening the search for cost-reducing technologies and serving as a collective voice mechanism that reduces labor turnover, enhances worker security, and induces managerial efficiency.
what three types of investing can be done and what is meant by investing
increasing productivity of resources toward a future return (i.e. Yield) Physical capital Financial assets Human capital
the work-leisure decision: substitution effect
indicates the change in the desired hours of work resulting from a change in the wage rate, keeping income constant. -when wage rates rise and leisure becomes more expensive, it is sensible to substitute work for leisure. For a wage increase, the substitution effect makes the person want to work more hours.
what is the lorenz curve
indicates the cumulative percentage of all full-time wage and salary earners from left to right on the horizontal axis and the corresponding cumulative percentage of the total earnings accruing to that percentage of earners on the vertical axis. If each full-time worker received the average earnings, the Lorenz curve would be the diagonal (45°) line that bisects the graph.
economic perspective: relative scarcity
individuals face a relative scarcity of time and spendable income -they must choose how much time to devote to jobs, to work in the home, and to leisure -relative scarcity -- of time, personal income, and societal resources is a basic element of the economic perspective
how is fiscal policy used to fight unemployment and what are the complications
it is a major tool used to combat demand-deficient unemployment, but it is fraught with several complications, including (a) time lags, (b) the need to coordinate fiscal and monetary policies to avoid the crowding-out effect, and (c) tendencies to create inflation.
what is becker's taste for discrimination model
it views discrimination as a preference or "taste" for which the discriminator is willing to pay; the greater this preference, the larger is becker's discrimination coefficient
what competes for time in the becker model
labor time -time allocated in labor markets to acquire market goods to generate UYCs household time -time allocated in household to generate UYCs consumption time -time allocated in consumption of UYCs
female labor force participation rate trend influences
real wage growth • Small or zero income effect since it depends on hours already working. changing preferences & attitudes • Feminist, anti-discrimination movement, and cultural acceptance, and educational attainment • Indifference curves becoming flatter rising divorce rates • Increased probability of divorce may incentivize women to stay connected to the labor force. - Indifference curve becomes flatter • Lower non-labor income after divorce (alimony, child support, welfare, etc. ) may induce increased participation. - Income effect > substitution effect rising household productivity • Technology has decreased necessary household time allowing for increased labor time. - Indifference curve becomes flatter declining birth rates • Higher wage rates have increased the opportunity cost of having a child. • Advent of "the pill" (1960). • Indifference curve become flatter expanding job accessibility • Availability of part-time work and job opportunities in female dominated professions. • Indifference curve becomes flatter. stagnant growth in husband wages • Income effect causes women to "pick up the slack".
long run labor demand curve (page 8 chapter 5 notes)
results from both the output and substitution effects and is found by connecting points A and C
how has the ratio of hourly earning of women to men changed over the past three decades
risen substantially
how do unemployment rates of african americans compare to whites
roughly double
lower labor force participation rate for african american male influences
supply side factors (willingness to work): - Non-market income • Lower black wages may make social security and other public assistance programs appealing. • Income effect - Health of older black males • Statistically worse compared to other races. • Steeper indifference curves - High participation rate of black wives • Income effect demand side factors (opportunity for work): - Systemic "Discouraged Worker" effect - Lower education attainment - Discrimination - Geographic location of jobs • Job opportunities have moved from urban to suburban areas. • Decreased transportation for lower income demographics.
what are the determinants of productivity growth
the average quality of the labor force; the amount of capital goods per worker-hour; and the efficiency with which labor, capital, and other inputs are combined. This last category includes technology, economies of scale, improved resource organization, and the legal-human environment.
the work-leisure decision: income effect
the change in the desired hours of work resulting from a change in income, holding the wage rate constant. -when wage rates rise, and leisure is a normal good, the income effect reduces the desired number of hours of work.
short run production function: marginal product
the change in total product associated with the addition of one more unit of labor. initially increases due to specialization, reaches a maximum, then decreases due to diminishing returns
work-leisure model: reservation wage
the highest wage rate at which an individual chooses not to work or, if you prefer, the lowest wage rate at which one would decide to work.
net present value: time preference
the idea that, given the choice, most people prefer the pleasure of indulgence today to the promise of indulgence tomorrow.
indifference curves: negative slope
the indifference curve is downward-sloping because as an individual gets more of one good (leisure), some of the other good (real income) must be surrendered to maintain the same level of utility.
short run production: zone of production
the left boundary of stage II in is where the efficiency of labor—as measured by its average product—is at a maximum. Similarly, the right boundary is where the efficiency of the fixed resource capital is maximized. Notice first that at point Y on TP and y on AP and MP, total product per unit of labor is at its maximum. The generalization here is that if a firm chooses to operate, it will want to produce at a level of output where changes in labor contribute to increasing efficiency of either labor or capital.
other factors that make a firm's long run labor demand curve more elastic than its short run: labor-capital interactions (this one sucks)
the long-run employment response resulting from the wage decrease will be greater than the short-run response.
There is much year-to-year movement of workers across earnings categories, independent of life-cycle aspects of earnings. where however is this mobility at its lowest
the lowest and highest earnings categories.
estimates of wage elasticity
the overall long-run labor demand elasticity in the United States is 1.0.8 This coefficient implies a unitary elastic labor demand curve, Page 154 which means that for every 10 percent change in the wage rate, employment changes in the opposite direction by 10 percent. Hamermesh concludes that about two-thirds of the long-run elasticity response takes the form of the output effect, with the other third consisting of the substitution effect.
optimal work-leisure position
the point on the worker's budget constraint at which the marginal rate of substitution of leisure for income is equal to the wage rate. At this point the budget constraint is tangent to the individual's highest attainable indifference curve.
what is the elasticity coefficient
the responsiveness of labor demand to changes in the wage rate. formula in picture midpoint method: E(D) = ((∆quantity)/((Σquantities)/2))/ ((∆wage)/((Σwages)/2))
short run production function: average product
the total product divided by the number of units of labor. has the same general form as MP except that its maximum point will be at a higher output level.
how does the turnover model tie into wage differentials
the turnover version of the efficiency wage model suggested that firms pay above-market-clearing wages where hiring and training costs are large. The above-market-clearing wage increases the value of the job to the worker, thus reducing the turnover rate (quit rate). Consequently, the average level of job experience and the productivity of the firm's labor both rise. The point is that wages may vary across and within industries depending on the efficiency gains, if any, arising from pay strategies that purposely increase the value of the job from the standpoint of the worker.
what is the shirking model of efficiency wages
theorizes that some enterprises pay more than the market-clearing wage to reduce employee shirking. In some situations, employers have little information about how diligently workers are performing their duties . Moreover, full supervision and monitoring of such workers may be too costly. Under these conditions, the possibility arises that all employees will choose to shirk. To counter this possibility, firms may opt to pay workers more than the market-clearing wage. This higher pay increases the relative value of the job as viewed by each worker. It also raises the cost of being terminated for shirking, should it be detected.
what are heterogeneous jobs
they have differing nonwage attributes, require different types and degrees of skill, or vary in the efficacy of paying efficiency wages to increase productivity. Employers also vary with respect to such things as union status, firm size, and discriminatory attitudes.
what are the two types of UYCs (commodities) and what are they
time-intensive UYCs -uses a large amount of household or consumption time relative to market goods (such as preparing a meal at home) good-intensive UYCs -use a small amount of household or consumption time relative to market goods(such as fast food)
total wage bill and rules
total wage bill = W*Q -wage times quantity - Increase in wages over elastic range → Lower wage bill - Increase in wages over inelastic range → Higher wage bill
what is the distribution of unemployment
uneven over the labor force and changes as demand-deficient unemployment rises and falls.
what is the effect of unionism on the distribution of earnings
unions decrease the degree of wage dispersion
what is the crowding model
uses simply supply and demand concepts to explore the consequences of confining women and african-americans to a limited number of occupations
standard workday
we have implicitly assumed that workers can individually determine the number of hours they work. This is typically not the case. In the United States, a standard workday of 8 hours (40 hours per week) has evolved. This is partly due to federal legislation that obligates employers to pay time and a half for hours worked in excess of 40 per week. Furthermore, industries whose technologies involve the continuous processing of goods or components can divide the workday into three 8-hour shifts.
what is a monopsony and joint monopsony
when a single firm is the sole hirer of a particular type of labor or two or more employers collude to fix a below-competitive wage
labor market efficiency: what is efficient allocation of labor
when workers are being directed to their highest-valued uses. Labor is being allocated efficiently when society obtains the largest amount of domestic output from the given amount of labor available. Stated technically, available labor is efficiently allocated when its value of marginal product or VMP—the dollar value to society of its marginal product—is the same in all alternative employments.
what is the principal agent problem
workers might be thought of as the firms' agents—parties who are hired to advance the interests of others. Alternatively, firms can be conceived of as principals—parties who hire others to help them achieve their objectives. In this case, the firms' or principals' objective is profits. Employees are willing to help firms earn profits in return for payments of wage income. The principal-agent problem occurs when agents (workers) pursue some of their own objectives in conflict with achieving the goals of the principals (firms). Firms desire to maximize profits; workers wish to maximize utility. Profit maximization requires that employees work all agreed-upon hours at agreed-upon levels of effort. Otherwise output will be reduced, and average and marginal costs of production will be higher. But under many employment circumstances, workers can enhance their own utility by engaging in opportunistic behavior that directly conflicts with profit maximization.
are time and good intensive commodities usually substitutable?
yes -can produce with more time and less goods or vice verse -as wages increase, labor time becomes more valuable causing HHs to substitute from time-intensive to good-intensive commodities
short run production function: stages of production: stage 2
zone of production Diminishing returns to labor cause decreasing MP which causes TP to increase at a decreasing rate. MP < AP so AP decreases. • Increases in L improve efficiency of K but not L. • At (Y, y) AP of labor is at a maximum • At (Z, z) AP of K is at a maximum • Over this range: • Increases in L will decrease AP of L. • Increase in L will increase AP of K. • MP Curve over this range determines the firms SR demand curve for L.
labor economics as a discipline: quantitative importance
~65% of national income goes to labor -The primary source of income for the vast majority of households in the United States is from providing labor services. Quantitatively, labor is our most important economic resource.
male labor force participation rate trends white vs african american
• A relatively stable gap of 7 percentage points exists between White and African-American men.
long run labor demand
• Both L & K are variable. • TP for a firm in the long run is: TP = f(K,L) • Like the SR labor demand curve, the long-run curve is downward sloping because a wage decline has two simultaneous effects:
what is the net present value (NPV) method
• Converts the value of future dollars (FV) into present dollars (PV) to determine the efficiency of an investment. Method: 1. Determine a discount rate (r). (return on an alternative investment or cost to borrow funds) 2. Apply the following formula for each future payment. (costs are represented by a negative number) PV = FV/((1+r)^n) for each future value 3. Sum the present value (PV) of all future payments to derive NPV. • If NPV is: > 0 investment is efficient < 0 investment is inefficient = 0 investment is neutral
what determines the return on investment of specific training
• During training, the employer pays a wage greater than the worker's productivity (Wt = Wu > MRPt). • Post training, the employer gets a return on training investment by paying a wage less than the worker's productivity (Wp = Wu < MRPp). • Employers incur the entire cost and receive the entire benefit of training.
