Labor Econ Zoric Test 1

Monopsonistic labor market

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

budget constraint,

Budget constraints show the combinations of money income (or attainable consumption goods and services) and the hours of leisure per day that are possible or attainable for the individual.

No, the unskilled workers are more likely to be replaced by skilled workers because firms will not be hiring as many people

Concept: Are minimum wage laws good for unskilled workers?

Finding out how the number of workers employed by a firm or a set of firms is affected by changes in one or more of the following three forces. 1: product demand 2. amount of labor and capital available at a given price 3.choice of technology available to them

Concept: Demand and Supply of Labor

IF monopolies pay higher wages, they take it out on the consumer by pricing things higher. However it has not been proven either way whether or not they pay higher wages.

Concept: Do monopolies pay higher wages?

Estimates of cross wage elasticities are useful to answering public policy questions. it is crucial to know whether two inputs are gross complements or gross substitutes in production.

Concept: Estimates of cross-wage elasticities

Employers who regularly schedule overtime do so because it is cheaper than incurring the quasi-fixed costs of employing more workers. The time-and-one-half requirement for overtime protects workers by "spreading the work" (creating more job openings) through reduced usage of overtime. If firms eliminate overtime and hire more workers at the same base wage rate, their labor costs will clearly rise, thus reducing the scale of output

Concept: Relation between overtime given and the overtime premium.

4 Laws which assert that, all other things equal, the own wage elasticity of demand for a category of labor is generally higher under the following conditions: 1. When the price elasticity of demand for the product being produced is higher then the labor to produce that product is elastic 2. When other factors of production can be more easily substituted for the category of labor then the demand for labor is elastic 3. when the supply of other factors of production is more highly elastic (usage of other factors of production can be increased without substantial increasing their prices) then the demand for labor is elastic 4. When labor costs exceed the cost of production then the demand for labor is elastic

Concept: The Hicks-Marshall laws of derived demand,

The scale effect is the reduction in the sale of production or output because of the reduction in employment. (When consumers respond to higher prices by buying less, employers decrease their level of output and employment. This decline in employment is called a scale effect ( The effect on desired employment of a smaller scale or production) ) Secondly, when wages increase, employers will SUBSTITUTE something (i.e. technology) for workers, resulting in unemployment. This is the substitution effect.

Concept: The Scale and Substitution Effect (Wage rate effects)

Firms will only want to hire workers if the benefit of hiring them is more than the cost of hiring the worker. Profits are maximized when output is such that marginal revenue equals marginal cost

Concept: The profit maximizing level of workers hired

A labor market is only monopsonistic when the labor supply curves facing individuals are upward sloping. For example: if there were one coal mine in an isolated town which wants to expand its labor supply, there are no local mines to compete price wise with, so they will need to make the wage high enough that people would be willing to move to the town or change their occupation

Concept: The workings of a monopsonistic labor market,

Ideally, both employers and employees will share the cost of training. If employees pay part of the cost by taking lower wages, the post training wage can be increased more than if the employers bear all of the costs of training. In addition, the better wages after training will increase a workers incentive to stay with the company

Concept: Who pays for specific and general training?

When employers bear the burden of a payroll tax, they are forced to lower the wages of their employees to pay for the tax Employees bear a burden in the form of lower wage rates and lower employment levels when the government chooses to generate revenues through a payroll tax on employers. If wages do not fall due to an employer payroll-tax increase, employment levels will, and employer labor costs will increase thus reducing the quantity of labor demanded.

Concept: Who pays the payroll tax?

When workers move among employers, there are costs associated. If you work a lower wage job, and you switch to a higher wage job, there are costs. (research, application, interviews, printing resumes, buying interview clothes, flying to interview. basically both monetary and time costs) The higher the mobility costs, the less elastic the labor supply is.

Concepts: Mobility costs and elasticity of supply in moving from job to job

income effect which tends to reduce labor supply as it also causes the wage to effectively drop to zero because every dollar earned is matched by a dollar reduction in welfare benefits. The dollar-for-dollar reduction in benefits induces a huge substitution effect, which causes welfare recipients to reduce their hours of hour to zero at point B - see Figure 6.14.

Concepts: The model of income and substitution effects.

Quasi-fixed costs of hiring workers

Costs associated with the number of workers hired rather than the hours they work. They are difficult or impossible to cut in the short run. These costs fall into two categories, investments in their workforce (training and motivation) and employee benefits.

The demand for labor is determined by the function of Wage Rate, demand for the product, and price of technology. If theres a dramatic change in the price of Capital/technology, either the scale or substitute effect will take place (either the firm will increase its output thus increase labor demand or they will substitute technology for labor and decrease labor demand) The demand for labor can be analyzed in three levels: firm (by a particular firm), industry (in a particular industry), and overall market (to see how wage increases effect the entire labor market). Supply of labor will be positively related to wage rate. So as wages go up, the supply of labor in that field will also go up.

Essay: Show graphically and explain how the supply and demand for labor are determined.

credentials

Firms rely on credentials or signals to determine workers' trainability (fast learners vs. slow learners) and potential MPL. ex: Are college graduates (CG) more productive than high school graduates ? If yes, there is no need to waste valuable resources in interviewing and testing all candidates (CG and HSG) to find out their respective MPLs.

Income effect

If income increases (independent of the hours you work), the number of leisure hours demanded will rise. (If income increases, holding wages constant, desired hours of work will go down)

Substitution effect

If income is held constant, and an increase in hourly wage rate is implemented, the "price" of leisure goes up and thus reduce the demand for leisure, thereby increasing work hours.

Gross Substitutes

If the increase in the price of one input shifts the demand for the other input to the right as indicated in panel then the substitution effect dominates and inputs are gross substitutes.

Gross Complements

If two inputs are substitutes in production, and if an increase in the price of one input shifts the demand for another input to the left then the scale effect dominates and the inputs are gross complements. (Hotdog buns are a gross complement for hotdogs if an increase in the hotdogs causes a decrease in demand for hotdog buns .)

Indifference curve

Indifference curves show the various combinations of money income (or goods and services) and the hours of leisure/work per day that will yield the same level of happiness.

Minimum wage laws

Laws setting minimum wage rates. People are not allowed to work for less than what the minimum law designates. This law was meant to be helpful to employees, but the effects have shown that unemployment, replacement of human workers by machinery and imports increase due to minimum wage laws.

Marginal Revenue Product

Marginal Revenue x Marginal product Equal to the marginal revenue per unit of output sold which equals the product price. (is the market value of one additional unit of output.) remember the marginal revenue productivity of detectives in a store- if one detective can prevent a $50 loss per hour, his MRP (his value) is $50. if with a second detective they can prevent $90 of theft per hour, the second detective's MRP is $40. etc. If the MRP per hour is higher than the wage, the store owner would consider hiring.

Inelastic labor demand,

Nii is relatively inelastic labor demand if the %ΔEi < %ΔWi . if theres a change in the wage and the levels of employment do not change then the demand for labor in that case is inelastic

Assume that in year 1, two things happened: (a) Wmin is raised to W2 such that W2/P1 > W1/P1 = W0/P0. (b) economic expansion led to an increase in demand for low-skilled labor/workers, which shifts labor demand to the right with an increase in employment. The increase in employment due to economic expansion led some investigators to conclude that Wmin increases had no adverse employment effects. In a growing economy, the expected effect of a one-time increase in the minimum wage is to reduce the rate of growth of employment

Possible essay question: Show graphically and explain the problems created by minimum wage laws

A demand is elastic if the demand for labor is greater than 1. This one percent in wages leads to an employment decline of greater than 1. -Inelastic: when the value is less than 1 -Unitary elastic means aggregate earnings will remain unchanged if wages increase -Elasticity varies along the demand curve Estimating the elasticity of demand for labor is actually very difficult. 1. If we have data on wages and employment of workers who are homogeneous in many characteristics, this homogeneity often requires analyzing groups so narrow that data are difficult to obtain. 2. Wage and Employment are determined simultaneously by the interaction of supply and demand curves. Labor demand elasticities and wage gains are related, that is, the more elastic the demand for labor, the smaller the wage gain a union will succeed in winning for its members. Employers' labor demand responses to a wage change can be broken down into two components which can be expressed in elasticities: Scale effect Substitution effect The short-run scale effect (elasticity) is defined as: holding production technology constant The substitution effect (elasticity) is defined as: holding output constant Hicks-Marshall Laws of Derived Demand: These laws assert that, other things equal, the own-wage elasticity of demand for a category of labor is generally higher under the following conditions: When price elasticity of demand for the product being produced is higher. When other factors of production can be more easily substituted for the category of labor. When the supply of other factors of production is more highly elastic. When the cost of employing the category of labor is a larger share of the total costs of production.

Possible essay questions: Explain the elasticity of demand for labor and what makes the demand more or less elastic.

Labor is the most abundant and important factor of production, therefore, a country's economic performance depends on the willingness of its people to work. A person's discretionary time (16 hours a day) can be spent: (a) working for pay to derive income (Y ) for consumption, and (b) on leisure (L). -Demand for good/service depends on: The opportunity cost of the good=market price -one's level of wealth -one's set of preferences Opportunity Cost of Leisure - The demand for leisure depends on: The opportunity cost of leisure, which is equal to one's wage rate or the extra earnings a worker can take home from an extra hour of work.

Possible essay questions: Show graphically and explain how the worker reaches an equilibrium with respect to the choice of hours worked and hours spent in leisure activities.

See figure 3.4 in the book. A payroll tax is paid by both the employer and the employees, because wages do not fall by the full amount of the tax. employees bear the burden in forms of lower wages and lower employment levels. employers pay the tax as stated above unless the labor market supply curve was vertical, meaning that it was not affected by lower wages. When a payroll tax is imposed on a firm a few things can happen. 1. It is important to note that all payroll taxes shift the labor demand curve to the left. -The second thing to note is that employers will hire less people if by hiring people it means their tax on wage bill increases (wage+ tax) -If the tax burden falls on employees then employers will keep workers -Workers wages will drop below the tax amount of (x) -In terms of the changes to wages it really depends on the elasticity's of the labor demand and supply -If the wages don't fall, employment levels will fall (See second note ^) and employer labor costs will rise thus reducing the quantity of labor demanded -Subsidies shift the labor demand curve to the right creating pressures to increase employment levels and wages "Employers are not exempted from bearing costs when the government chooses to generate revenues through a payroll tax on employers." -Employers do bear a small portion of the cost in this situation.

Possible essay questions: Show graphically and explain who pays the most when a payroll tax is imposed on the firm.

A monoponistic labor market works in the way that it must make two decisions about hiring. 1: it must decide how much labor to hire. This must be consistent with the profit maximization criteria ( hire labor until the point that marginal revenue product of labor equals the labors marginal expense). Secondly, the firm must find the wage rate necessary to generate enough employees. (Figure 5.3 in book)

Possible essay questions:Explain and show graphically how a monopsonistic labor market works.

Concepts: Elasticity calculations

See diagrams in chapter 4 slides

general training

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

specific training

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

Economic Rent

The amount by which one's wage exceeds one's reservation wage (the lowest amount they would stand to be paid) in a particular job

Possible Essay: Use the model of indifference curves and budget restraints to explain the income and the substitution effect.

The effects of increases in income and wages on leisure-work preferences of a person can be categorized as: (1) Income effect (2) Substitution effect -If income increases, holding wages constant, desired hours of work will go down -If income is held constant, an increase in the wage rate will raise the price and reduce the demand for leisure, which then increases work incentives (Substitution effect) -An income effect is observed if nonlabor income increased and the person supplied 0 hours work to the labor market -Holding the wage constant can cause workers to supply less hours of work and take more leisure time - The difference between the substitution effect and the income effect is the shape of the indifference curves See figures 6.8/6.9

Wage elasticity of demand

The own-wage elasticity of demand for a category of labor is defined as the percentage change in its employment (E) induced by a 1 percent increase in its wage rate (W)

Unemployment Rate

The ratio of those unemployed to those in the labor force; Unemployed people are classified as those who have no work but are looking for a job

Cross elasticities of demand

When two inputs are both categories of labor, you must examine the effects of the demand for any one category. For example, if carpenters wages increase, then fewer houses will be built, which will decrease the need for as many plumbers

Marginal Product of Labor

When you change the units of labor to complete a project it produces a change in the physical output. What is the term for adding one additional unit of labor to a project when capital is held constant?it is the difference between the 0 salespeople and 1 salesperson. between 1 salesperson and 2 salespeople etc.

Law of one price

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

Elastic labor demand

elasticity of labor demand is relatively elastic if the percentage change in employment is greater than the percentage change in wages. if employment levels change when theres a change in the wage level then the demand for labor is considered elastic

Labor Force Participation Rate

labor force divided by population; the labor force is all those above age 16

Internal labor market.

refers to the fact that many firms hire into low level jobs in their company and higher level jobs are filled only from within the firm when they figure out who the good workers are.

Marginal expense of labor

the change in expense that results from employing an added unit of labor.

Real Wage

the real purchasing power of a worker's earnings; nominal wages divided by some measure of prices (adjusted for inflation)

Reservation wage

the wage below which a person will not work in the labor market - that is, WR represents the value placed on an hour of lost leisure time.

Nominal Wage

the wage workers get paid per hour in current dollars; - not adjusted for inflation.