12 labor: the human input octavius (a wealthy young englishman): “i believe most intensely in the...

12Labor:

The Human InputOctavius (a wealthy young Englishman):

“I believe most intensely in the dignity of labor.”

The chauffeur: “That’s because you never done any.”

GEORGE BERNARD SHAW, MAN AND SUPERMAN, ACT II

● Wage Determination in Competitive Labor Markets

● The Supply of Labor

● Why Do Wages Differ?

● Unions and Collective Bargaining

● Wage Determination in Competitive Labor Markets

● The Supply of Labor

● Why Do Wages Differ?

● Unions and Collective Bargaining

ContentsContents

Copyright© 2006 South-Western/Thomson Learning. All rights reserved.

FIGURE 1: Index of Trends in Real Wages, Compen., & Hours

FIGURE 1: Index of Trends in Real Wages, Compen., & Hours


180

160

140

120

100

80

60

40

01919 19291909 1939 1949 1969 19791959 1989 2004

20

Hourly compensation(wages plus benefits)

Hours workedper week

Hourlywages

FIGURE 2: Income Inequality, 1967 versus 2003

FIGURE 2: Income Inequality, 1967 versus 2003


60.0

50.0

40.0

30.0

20.0

10.0

0.030027691

Poorest one-fifth of U.S. households

Richest one-fifth of U.S. households

4

43.8

49.8

3.4


● The Demand for Labor and the Determination of Wages♦ Marginal productivity demand for labor

♦ Marginal revenue product of labor (MRPL) = the increase in the employer’s total revenue that results when he or she hires an additional unit of labor

● The Demand for Labor and the Determination of Wages♦ Marginal productivity demand for labor

♦ Marginal revenue product of labor (MRPL) = the increase in the employer’s total revenue that results when he or she hires an additional unit of labor

Wage Determination in Competitive Labor MarketsWage Determination in Competitive Labor Markets


● Influences on MRPL: Shifts in the Demand for Labor♦ Investment in human capital MRPL

♦ Since the demand for labor is a derived demand, anything that improves the market for the goods and services that labor produces can shift the labor demand curve upward.

● Influences on MRPL: Shifts in the Demand for Labor♦ Investment in human capital MRPL

♦ Since the demand for labor is a derived demand, anything that improves the market for the goods and services that labor produces can shift the labor demand curve upward.


FIGURE 3: Equilibrium in a Competitive Labor Market

FIGURE 3: Equilibrium in a Competitive Labor Market


We

ek

ly W

ag

e

Number of Workers

500,000

$300

D

D

S

S

E


● Technical Change, Productivity Growth, and the Demand for Labor♦ Technical change that increases the worker’s

productivity has two opposing effects on MRPL: increase in the worker’s marginal physical

product (MPP, i.e., the quantity of output that an additional worker can produce)

output price (P)

● Technical Change, Productivity Growth, and the Demand for Labor♦ Technical change that increases the worker’s

productivity has two opposing effects on MRPL: increase in the worker’s marginal physical

product (MPP, i.e., the quantity of output that an additional worker can produce)

output price (P)



● Technical Change, Productivity Growth, and the Demand for Labor♦ Since a rise in productivity raises MPP but

reduces P, we cannot be sure of the net effect on MRP; that is, the net effect on the demand curve for labor.

● Technical Change, Productivity Growth, and the Demand for Labor♦ Since a rise in productivity raises MPP but

reduces P, we cannot be sure of the net effect on MRP; that is, the net effect on the demand curve for labor.



● The Service Economy and the Demand for Labor productivity employment & wages

sometimes in the short run

♦ But in the long run, productivity reallocation of labor and higher incomes

productivity in manufacturing employment in service sector

● The Service Economy and the Demand for Labor productivity employment & wages

sometimes in the short run

♦ But in the long run, productivity reallocation of labor and higher incomes

productivity in manufacturing employment in service sector


FIGURE 4: Growing Service Sector Jobs in 9 Countries

FIGURE 4: Growing Service Sector Jobs in 9 Countries


40

10

70

80

20

30

50

60

0

1967

2003

90

Italy

38.3

62.9

Spain

36.2

63.6

Germany

42.8

65.6

Japan

45.1

66.6

France

44.8

73.0

Canada

58.7

74.7

U.K.

50.8

75.2

Sweden

48.8

75.2

U.S.

58.9

78.3


● Labor supply trends♦ Total labor force increased from about 60

million jobholders right after the WWII to over 140 million today.

♦ Proportion of population with jobs has grown from about 58% after WWII to 66% today.

♦ Entry of new workers into labor force♦ Protracted and substantial relative decline in

union membership

● Labor supply trends♦ Total labor force increased from about 60

million jobholders right after the WWII to over 140 million today.

♦ Proportion of population with jobs has grown from about 58% after WWII to 66% today.

♦ Entry of new workers into labor force♦ Protracted and substantial relative decline in

union membership

The Supply of LaborThe Supply of Labor



● Rising Labor-Force Participation labor force participation wages, at least

for a time:■The sheer increase in the supply of workers tends

to depress wages.■A combination of discrimination and the initial lack

of experience of the new entrants into the labor market has had a similar effect.

● Rising Labor-Force Participation labor force participation wages, at least

for a time:■The sheer increase in the supply of workers tends

to depress wages.■A combination of discrimination and the initial lack

of experience of the new entrants into the labor market has had a similar effect.


● An Important Labor Supply Puzzle♦ Supply of labor = demand for leisure

♦ Effects of wage increase■Substitution effect: cost of leisure positively

sloped supply curve (more hours worked)■Income effect: wealth negatively sloped

curve (fewer hours worked)

● An Important Labor Supply Puzzle♦ Supply of labor = demand for leisure

♦ Effects of wage increase■Substitution effect: cost of leisure positively

sloped supply curve (more hours worked)■Income effect: wealth negatively sloped

curve (fewer hours worked)



● An Important Labor Supply Puzzle♦ Over the long run, the income effect seems to

have predominated, leading to a negative relationship between real wages and hours per worker.

● An Important Labor Supply Puzzle♦ Over the long run, the income effect seems to

have predominated, leading to a negative relationship between real wages and hours per worker.


FIGURE 5: A Typical Labor Supply Schedule

FIGURE 5: A Typical Labor Supply Schedule


Quantity of Labor Supplied

Wag

e R

ate

Substitution effects outweigh income effects

Income effects balance substitution effects A

Income effects outweigh substitution effects

B



● The Labor Supply Resolved♦ Rising wages enable workers to provide for

their families with fewer hours of work.♦ Thus, it is the strong income effect of rising

wages that may account for the fact that labor supply has responded in the “wrong” direction, with workers working ever-shorter hours as real wages rose and longer hours as wages fell.

● The Labor Supply Resolved♦ Rising wages enable workers to provide for

their families with fewer hours of work.♦ Thus, it is the strong income effect of rising

wages that may account for the fact that labor supply has responded in the “wrong” direction, with workers working ever-shorter hours as real wages rose and longer hours as wages fell.


● The explanation of wage differences is the fact that there is not one labor market but many.♦ Each has its own supply and demand curves.

♦ Each has its own equilibrium wage.

● The explanation of wage differences is the fact that there is not one labor market but many.♦ Each has its own supply and demand curves.

♦ Each has its own equilibrium wage.

Why Do Wages Differ?Why Do Wages Differ?

FIGURE 6: Wage DifferentialsFIGURE 6: Wage Differentials


Wa

ge

(b)

Number of Workers

Wa

ge

(a)

Number of Workers

S2

S2 D2

D2

S1

S1 D1

D1

w2

w1



● Labor Demand in General♦ Different workers have different productivities.

♦ Each worker’s marginal physical product depends on:■His or her own abilities■His or her degree of effort■The other factors of productions with which he or

she has to work

● Labor Demand in General♦ Different workers have different productivities.

♦ Each worker’s marginal physical product depends on:■His or her own abilities■His or her degree of effort■The other factors of productions with which he or

she has to work



● Labor Supply in General♦ Factors that influence the supply side:

■The size of the available working population■The non-monetary attractiveness of a job■The abilities needed■The amount and expense of the necessary training

● Labor Supply in General♦ Factors that influence the supply side:

■The size of the available working population■The non-monetary attractiveness of a job■The abilities needed■The amount and expense of the necessary training



● Ability and Earnings: The Rent Component of Wages♦ The concept of economic rent can explain at

least part of the earnings of people whose abilities cannot (or at least not easily) be duplicated.

● Ability and Earnings: The Rent Component of Wages♦ The concept of economic rent can explain at

least part of the earnings of people whose abilities cannot (or at least not easily) be duplicated.



● Investment in Human Capital♦ Human capital theory sees education and

training as investments, leading to a later payoff of higher earnings.

♦ The higher earnings are necessary to induce the sacrifices needed in terms of education and training.

● Investment in Human Capital♦ Human capital theory sees education and

training as investments, leading to a later payoff of higher earnings.

♦ The higher earnings are necessary to induce the sacrifices needed in terms of education and training.



● Education and Earnings: Dissenting Views♦ Education as a Sorting Mechanism

■Education viewed as a sorting device that does not itself increase productivity.

■The educational system sorts individuals by ability. The skills necessary to succeed in school are closely related to the skills that lead to success in jobs.

● Education and Earnings: Dissenting Views♦ Education as a Sorting Mechanism

■Education viewed as a sorting device that does not itself increase productivity.

■The educational system sorts individuals by ability. The skills necessary to succeed in school are closely related to the skills that lead to success in jobs.



● Education and Earnings: Dissenting Views♦ Dual Labor Market Theory

■Two labor markets, not one:● Primary labor market--good jobs

● Secondary labor market--“dead-end” jobs

■Dual labor market theorists see some people shunted into dead-end jobs where education is of little use.

● Education and Earnings: Dissenting Views♦ Dual Labor Market Theory

■Two labor markets, not one:● Primary labor market--good jobs

● Secondary labor market--“dead-end” jobs

■Dual labor market theorists see some people shunted into dead-end jobs where education is of little use.



● The Effects of Minimum Wage Legislation♦ Teenagers are more vulnerable to

unemployment than other workers, and some observers have blamed minimum wage laws.

♦ Recent research shows, however, that increases in the minimum wage do not reduce the number of teenage workers employed much, if at all.

♦ In any case, the real value of the minimum wage has not increased over time.

● The Effects of Minimum Wage Legislation♦ Teenagers are more vulnerable to

unemployment than other workers, and some observers have blamed minimum wage laws.

♦ Recent research shows, however, that increases in the minimum wage do not reduce the number of teenage workers employed much, if at all.

♦ In any case, the real value of the minimum wage has not increased over time.

FIGURE 7: The Teenage Unemployment Problem

FIGURE 7: The Teenage Unemployment Problem


5

10

15

20

25

30

35

40

45

50

01972 1977 1982 1987 1992

White male teenagers

Black male teenagers

All workers

1997 2004

Year

FIGURE 8: The Minimum Wage, 1950-2004

FIGURE 8: The Minimum Wage, 1950-2004


5

6

Nominal rate

Real rate (adjusted for inflation)

4

3

1

2

01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2004


● Unions attempt to monopolize the sale of labor, so the competitive model breaks down in this case.

● Union membership is only a small and declining portion of the American labor force, however.

● Unions attempt to monopolize the sale of labor, so the competitive model breaks down in this case.

● Union membership is only a small and declining portion of the American labor force, however.

Unions and Collective BargainingUnions and Collective Bargaining

FIGURE 9: Unionization in the United States, 1930-2003

FIGURE 9: Unionization in the United States, 1930-2003


25

30

20

15

5

10

01930 1940 1950 1960 1970 1980 1990 2003

Uni

on M

embe

rshi

p as

a P

erce

nta

geof

Wag

e a

nd S

alar

y W

ork

ers



● Why has unionism been declining?

♦ The shift of the U.S. labor force into service industries and out of manufacturing

♦ Deregulation forced some industries to compete more intensely, and it may, thus, have influenced the firms to hire less-expensive, non-union labor.

● Why has unionism been declining?

♦ The shift of the U.S. labor force into service industries and out of manufacturing

♦ Deregulation forced some industries to compete more intensely, and it may, thus, have influenced the firms to hire less-expensive, non-union labor.



● Why has unionism been declining? ♦ American workers’ preferences seem to have

shifted away from unions.

♦ American unions have been under increasing pressure in the 1990s owing to stronger competition both at home and from abroad.

● Why has unionism been declining? ♦ American workers’ preferences seem to have

shifted away from unions.

♦ American unions have been under increasing pressure in the 1990s owing to stronger competition both at home and from abroad.


● Unionization is much less prevalent in America than it is in most other industrialized countries.

● The main sector of the U.S. economy in which the unions are still fairly healthy is government employment.

● Unionization is much less prevalent in America than it is in most other industrialized countries.

● The main sector of the U.S. economy in which the unions are still fairly healthy is government employment.


● Unions monopolize the supply of labor, but they are not all powerful.

● Unions must choose among competing goals, and they need to weigh alternative strategies.♦ Attaining the highest wage possible for current

union members

♦ Increasing the size of the union

● Unions monopolize the supply of labor, but they are not all powerful.

● Unions must choose among competing goals, and they need to weigh alternative strategies.♦ Attaining the highest wage possible for current

union members

♦ Increasing the size of the union

Unions as a Labor MonopoliesUnions as a Labor Monopolies


● Unions also try to the demand for labor:♦ Featherbedding: forcing management to

employ more workers than they really need

♦ Institute a campaign to raise worker productivity

♦ Raise the demand for the company’s product ■Flex political muscle (for example, by obtaining

legislation to reduce foreign competition)■Appeal to the public to buy union products.

● Unions also try to the demand for labor:♦ Featherbedding: forcing management to

employ more workers than they really need

♦ Institute a campaign to raise worker productivity

♦ Raise the demand for the company’s product ■Flex political muscle (for example, by obtaining

legislation to reduce foreign competition)■Appeal to the public to buy union products.



FIGURE 10: Union Control over the Demand Curve

FIGURE 10: Union Control over the Demand Curve


D1

D1

D0

D0

S

S

Number of Workers

Wa

ge

E

A

● Have Unions Really Raised Wages?♦ Unionized workers generally receive

somewhat higher wages (approximately 15 percent) than non-unionized workers, but it is not clear just how responsible unions have been for wage increases.

● Have Unions Really Raised Wages?♦ Unionized workers generally receive

somewhat higher wages (approximately 15 percent) than non-unionized workers, but it is not clear just how responsible unions have been for wage increases.



● Monopolistic unions sometimes face employers who have a monopsony, or something close to it, in the hiring of labor.♦ Monopsony = market situation in which there

is only one buyer

♦ Bilateral monopoly = a market situation in which there is both a monopoly on the selling side and a monopsony on the buying side

● Monopolistic unions sometimes face employers who have a monopsony, or something close to it, in the hiring of labor.♦ Monopsony = market situation in which there

is only one buyer

♦ Bilateral monopoly = a market situation in which there is both a monopoly on the selling side and a monopsony on the buying side

Monopsony and Bilateral MonopolyMonopsony and Bilateral Monopoly


● It is almost impossible to develop models to predict the outcomes of collective bargaining.

● It is almost impossible to develop models to predict the outcomes of collective bargaining.

Collective Bargaining and StrikesCollective Bargaining and Strikes


● Mediation and Arbitration♦ Sometimes the parties come to a mutual

agreement among themselves.

♦ Sometimes they resort to a (non-binding) mediator or to a (binding) arbitrator.

♦ Sometimes the bargaining breaks down and a strike ensues.

● Mediation and Arbitration♦ Sometimes the parties come to a mutual

agreement among themselves.

♦ Sometimes they resort to a (non-binding) mediator or to a (binding) arbitrator.

♦ Sometimes the bargaining breaks down and a strike ensues.



● Strikes♦ It is important to the credibility of unions to be

willing to strike, and to the credibility of employers to be willing to endure a strike.

● Strikes♦ It is important to the credibility of unions to be

willing to strike, and to the credibility of employers to be willing to endure a strike.



FIGURE 11: Work Time Lost in the U.S. Because of Strikes

FIGURE 11: Work Time Lost in the U.S. Because of Strikes


0.20

0.05

0.10

0.15

0.25

0.30

0.35

0.40

0.50

0.45

01948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2004

Per

cen

tag

e o

f W

ork

Tim

e Lo

st

FIGURE 12: The Incidence of Strikes in 8 Industrial Countries

FIGURE 12: The Incidence of Strikes in 8 Industrial Countries


160

140

120

100

80

60

40

20

0

200

180

yCanada

190.8

UnitedStates

55.6

Italy

53.1

France

22.7

UnitedKingdom

18.7

Sweden

8.3

German

1.4

Japan

1.3

12 labor: the human input octavius (a wealthy young englishman): “i believe most intensely in the...

Documents

supply of labor

labor investment

labor demand curve

dignity of labor

competitive labor markets

labor technical change

total labor force

derived demand