work and the labor market 19 work and the labor market work banishes those three great evils:...

Work and the Labor Market

19


Work banishes those three great evils: boredom, vice, and poverty.

— Voltaire

CHAPTER

19

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin


19

Chapter Goals

• Use the theory of rational choice to explain why an increase in the marginal tax rate is likely to reduce the quantity of labor supplied

• Explain how the demand for labor is a derived demand

• Discuss four factors that influence the elasticity of market labor supply

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Chapter Goals

• Define monopsony and bilateral monopoly

• Discuss three types of discrimination

• Explain real-world characteristics of labor markets in terms of market, political, and social forces

• Discuss four factors that influence the elasticity of market labor demand

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19


• A labor market is a factor market in which individuals supply labor services for wages to individuals and firms that demand labor services

• Incentive effect is how much a person will change hours worked in response to the wage rate

• The labor supply choice is between nonmarket activities and legal market activities

• Economists focus on the incentive effect when considering an individual’s choice of whether and how much to work

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The Supply of Labor

Applying rational choice theory to the supply of labor tells us that the higher the

wage, the higher the quantity of labor supplied

The labor supply curve has a positive slope because the

opportunity cost of not working increases as wages get higher

Wage Rate

Q of Labor

Supply of Labor

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Real Wages and the Opportunity Cost of Work

• The upward sloping labor supply curve tells you that, other things equal, as wages go up, the quantity of labor supplied goes up

• This is explained by the income effect causing a decrease in hours worked and the increased cost of leisure activities causing an increase in hours worked

• Historically real wages have been increasing and people have reduced the number of hours they work, but they still work more hours than predicted

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Income Tax, Work, and Leisure

• Taxes reduce the net wage of individuals, reducing the incentive to work

• For welfare recipients, the tax penalties for working create a great incentive to not work or to work in the underground economy

• An increase in the marginal tax rate is likely to reduce the quantity of labor supplied

• EU countries, which have relatively high marginal tax rates, are struggling with the problem of providing incentives for people to work

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The Elasticity of Labor Supply

• Elasticity of labor supply depends on:• Individuals’ opportunity cost of working• The type of labor market being discussed• The elasticities of individuals’ supply curve• Individuals entering and leaving the labor market

• Employees prefer an inelastic labor supply, but employers prefer an elastic labor supply

• Estimates for labor supply elasticity are about 0.1 (inelastic) for heads of household and 1.1 (elastic) for secondary earners

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Immigration and the International Supply of Labor

• International limitations on the flow of people play an important role in elasticities of labor supply

• Large differentials in wages mean that many people from low wage countries would like to move to high wage countries to earn higher wages

• EU countries have open borders among member countries, allowing the flow of labor between low and high wage countries

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The Derived Demand for Labor

The demand for labor follows the basic law of demand: the higher the wage, the

lower the quantity of labor demanded

The demand for labor by firms is a derived demand meaning the demand

for factors of production by firms depends on consumers’ demands

Wage Rate

Q of Labor

Demand for Labor

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Factors Influencing the Elasticity of Demand for Labor

• Four factors that influence the elasticity of demand for labor are:

• The elasticity of demand for the firm’s good

• The relative importance of labor in the production process

• The possibility, and cost, of substitution in production

• The degree to which the marginal productivity falls with an increase in labor

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Labor as a Factor of Production

• The labor market includes labor and entrepreneurship

• Entrepreneurship refers to labor services that require high degrees of organizational skills, concern, oversight responsibility, and creativity

• The traditional factors of production are land, labor, capital, and entrepreneurship

• Days of entrepreneurship can be equivalent to weeks and months of non-entrepreneurial labor

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Equilibrium in the Labor Market

Equilibrium is where the quantity demanded of labor is equal to the

quantity supplied

Wage Rate

Q of Labor

Demand for Labor

Supply of Labor

Qe

We

Equilibrium wage is We

Equilibrium quantity is Qe

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Shift Factors of Demand

• International competitiveness may increase the demand for labor in the U.S. in spite of lower wages in foreign countries because:

• U.S. workers may be more productive• Transportation costs are lower• Foreign companies can avoid trade restrictions• Production techniques are not compatible with foreign

social institutions• Focal point phenomenon is a situation where a

company moves to a country because others have already moved there

• Technology both increases/decreases the demand for labor

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The Role of Other Forces in Wage Determination

• Real-world labor markets are filled with examples of individuals or firms who resist these supply and demand pressures through;

• Labor unions

• Professional associations

• Agreements among employers

• Supply and demand forces strongly influence wages, but they do not fully determine wages

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Labor Market in Action

The effect of an above equilibrium wage is an

excess supply of labor and jobs must be rationed

Wage Rate

Q of Labor

Demand for Labor

Supply of Labor

QD

W1

QS

Excess supply of labor

We

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Labor Market in Action

The effect of an increase in the supply

of labor will cause:

Wage Rate

Q of LaborD

S0

Q0

W1

Q1

W0

Equilibrium wage to decrease

Equilibrium quantity to increase

S1

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Imperfect Competition and the Labor Market

• If a monopsonist hires another worker, the equilibrium wage will rise

• The marginal factor cost is above the supply curve

• Monopsony is a market in which a single firm is the only buyer of labor

• A bilateral monopoly is one in which a single seller of labor (a union) faces a single buyer of labor

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Marginal Factor Cost

• Derived from supply curve• Calculated as the change in total cost which results from

a one-unit change in the use of an input (e.g., labor)• If supply is upward-sloping, MFC will lie ABOVE the

supply curve (just as MR lies below the D curve)

• Using differential calculus, MFC = dTCL/dQL where TCL = QL times the wage rate

McGraw-Hill/Irwin Colander, Economics 19


19

Example of MFC


Quantity Supplied

Wage Rate Total Cost Marginal Factor Cost

0 $7 $0 Undefined

1 8 8 $8

2 9 18 10

3 10 30 12

4 11 44 14

5 12 60 16

6 13 78 18


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Monopsony, Union Power, and the Labor Market

W

Q

D

Marginal Factor Cost

QU

WU

S

WC

WM

MR

In a competitive labor market, equilibrium is WC and QCMonopsony equilibrium is at point A where fewer workers are hired, QM, and the wage, WM

A union pushes for a higher wage, WU, and a lower quantity of workers, QU

In bilateral monopoly the wage will be between WU and WM and quantity between QU and QMQM QC

A

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Fairness and the Labor Market

• Social and political views of fairness play a role in wage determination

• Efficiency wages are wages paid above the going market wage to keep workers happy and productive

• Comparable worth laws mandate comparable pay for comparable work

• Living wage laws require employers to pay a worker a wage that would support a family of four at the poverty level

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Job Discrimination and the Labor Market

• Discrimination exists in all walks of life

• The three types of demand-side discrimination are:

• Discrimination based on individual characteristics that will affect job performance

• Discrimination based on correctly-perceived statistical characteristics of the group

• Discrimination based on individual characteristics that do not affect job performance or are incorrectly perceived

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Institutional Discrimination

• Institutional demand-side discrimination can also exist

• Institutional factors have an effect on things such as pay, but workplace discrimination also explains a portion

• Institutional discrimination is a discrimination in which the structure of the job makes it difficult for certain groups of individuals to succeed

• Institutions can have built-in discrimination

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Evolution of Labor Markets

• Labor markets as we now know them developed in the 1700s and 1800s

• The political and social rules that operated at that time pushed wage rates down to subsistence levels, work weeks were long, and working conditions were poor

• Laws, such as minimum wage or child labor laws, play an important role in the structure of labor markets

• Labor laws and unions have evolved in response to workers’ political pressure

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Unions and Collective Bargaining

• In the late 1800s and early 1900s, the government supported business’ opposition to workers’ right to strike

• In the 1930s the Wagner Act guaranteed workers the right to form unions, strike, and bargain collectively

• In 1947 the Taft-Hartley Act was passed limiting union activities and also provided for:

• States could pass right-to-work laws• Closed shops were illegal• Union shops were allowed• Prohibited secondary boycotts

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Unions and Collective Bargaining

• Unions were weakened in 1981 when Ronald Reagan fired striking air traffic controllers

• Union membership has declined in recent years partly due to the unions’ successes

• Today, nearly 50% of union members work for the government

• These unions are becoming stronger and will likely be exerting their influence

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Changes in Union Membership, 1895-2007

Percent of the Labor Force

1930 1940 1950 1960 1970 1980 1990 2000 2010

30

25

20

15

10

5

0

After the Depression in the 1930s, unions grew in importance, but

since the mid-1970s the importance of unions has declined

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Recent (2013) Data

• As of 2013,• Percentage of wage & salary workers who were

members of unions was 11.3%• Public sector rate was 35.3%• Private sector rate was 6.7%• New York had the highest rate (24.4%)• North Carolina had the lowest rate (3.0%)• Ethnic: Black (13.6%), White (11.0%), Asian (9.4%),

Hispanic (9.4%)



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Right-to-Work Laws

• Exist in 24 states• Permitted by Taft-Hartley, which outlawed the closed

shop (must be a member of the union to be hired)• Does NOT guarantee anyone employment; merely

outlaws to join a union (union shop) or pay dues to a union (agency shop) as a condition of employment

• Right-to-work states have lower unemployment; lower wages; lower employer-sponsored health insurance; and lower rates of employer-sponsored pensions



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Right-to-Work States



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Chapter Summary

• Incentive effects are important in labor supply decisions

• The higher the wage, the higher the quantity supplied

• The demand for labor by firms is derived from the demand by consumers for goods and services

• The higher the wage, the lower the quantity demanded

• Elasticity of labor supply depends on:• Individuals’ opportunity cost of working• Type of market• Elasticity of individuals’ supply curves• Individuals entering and leaving the labor market

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Chapter Summary

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Chapter Summary • A bilateral monopoly is a market in which there is a

single seller and a single buyer• The wage and number of workers hired depend

on the relative strength of the union and the monopsonist

• Views of fairness have led to laws that mandate comparable pay for comparable work

• Discrimination may be based on relevant individual characteristics, group characteristics, or irrelevant individual characteristics

• Since the 1980s, labor unions have been declining in importance

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Preview of Chapter 20: Who Gets What? The Distribution of Income

• Explain what a Lorenz curve is

• Present U.S. income inequality in a global context

• Discuss how the poverty definition is both an absolute and a relative measure

• Summarize the statistical findings on income and wealth distribution

• Explain three problems in determining whether an equal distribution of income is fair

• Summarize the U.S. tax and expenditure programs to redistribute income

• Present three side effects of redistributing income

• Discuss two alternative ways to describe the distribution of income

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work and the labor market 19 work and the labor market work banishes those three great evils:...

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