1. Productivity - output per worker.
- Productivity growth is the source for real income growth.
- In 1997, U.S. workers were twice as productive as U.S. workers in the 1950s.
- Workers' income also doubled.
- Human capital - knowledge increases job productivity.
- Use more physical capital.
- Automation - machines that reduce the amount of labor required.
- Permits larger output and higher income levels.
- Will be used if it reduces costs.
- May reduce employment in a specific industry.
- This excess labor can be employed in other areas.
- Accountants - can handle more accounts with a computer than paper & pencil. His output and salary are higher.
||U.S. worker is 15 times more productive than a worker in China or India and the U.S. has a higher standard of
2. Why do earnings differ?
- 4/5 of national income is earned by employees.
- 1/5 of national income is earned by interest, rents, & corporate profits.
- U.S. workers' income is ranked towards the top in the world.
- Wages vary widely even within the same occupation, education, and intelligence.
- Physicians - $100 per hour.
- Unskilled labor - $6.00 per hour.
- Earnings would be equal among all people if:
- All individuals are identical.
- All jobs are equally attractive.
- Workers are perfectly mobile among jobs.
- Ex: If Tulsa has the highest paying jobs in country.
- Workers move there because of higher wages.
- Supply of labor (i.e. workers) increases.
- Wage rate decreases until wage rates are equal in all regions.
3. Skilled / unskilled earning differences.
- More productive workers earn more
- Produce more parts per hour, sell more products, etc.
- Employers pay wages based on productivity
- Wages = MRP
- MRP - Marginal Revenue Product.
- Employers have greater demand for skilled labor
- Skilled workers are productive than unskilled labor
- The supply is less for skilled workers than unskilled
- Education & training have costs
|Demand for Labor
||Supply of Labor|
|# of labors
||# of labors|
- Putting the demand and supply together for skilled and unskilled workers yield the graph below.
|# of laborers|
||Skilled labor earns higher wages than unskilled.|
4. Tournament pay - the top-ranked person receives the big payoff, wages > MRP. Person ranked second earn
- Strong incentive to become the best.
- Only applies to sports, CEOs, and entertainment stars.
5. More education leads to higher earnings.
|Full-time Workers in 2005
Source: 2008 Statistical Abstracts of the United States, Table 681
- More education may reflect:
- Greater native ability.
- More intelligence.
- More motivation.
- The supply for doctors and engineers is limited relative to demand.
- Signals - indirectly provides information to employers.
- Employers - too costly to measure abilities.
- Degree provides information.
- College educated tend to be smarter or more motivated.
- Grades in courses:
- Previous work experience.
6. People have different preferences.
- Some work 2 jobs.
- Some do not work at all.
||People motivated by money will more likely pursue more education and training to obtain higher wages.|
7. Earnings differential due to nonidentical jobs.
- Nonpecuniary job characteristics - nonwage factors that are important:
- Pecuniary - relating to money.
- Working conditions.
- Employee freedom.
- FBI - wants agents with advanced degrees, e.g. lawyers, accountants, bilingual people, strong technical backgrounds, etc.
- Pay is low - start around $27K
- Employees attracted to the strong prestige.
- Compensating wage differentials - undesirable working conditions.
- Job risk.
- Washing windows on 60-story building.
- Job location.
- Working hours.
- 3rd shift pays more than 1st and 2nd.
8. Labor may be immobile, causing wage rates to differ:
- Costly to move to new location.
- Costly for training.
- Specialized labor.
- Example: Internet grew over night.
- Wages for webmasters were very high in the beginning.
- Wages decreased as more people learned to design webpages.
- Institutional barriers.
- Minimum wage
- Trouble for low-skill labor.
- Occupational licensing.
- Medicine, truck drivers, lawyers, CPAs, etc.
- Labor unions
- Restrict supply of labor.
9. Wage discrimination - minorities or women.
- Dual labor market: White male and minority/female labor markets.
- Employers prefer "white males:"
- Demand for white males increases.
- Wages increases.
- Number of employed white males increases.
- Offered "good, high-paying jobs."
|# of laborers|
Customer-based discrimination - customers can discriminate, causing hardship on professional minorities and females
- Employer discriminates against minorities and females.
- Demand for minorities and females decreases.
- Wages decreases
- Number of employed minorities/females decreases
- Offered "Bad, low-paying jobs."
- May also limit education or training.
- Very difficult to correct.
- Female dentist.
- Hispanic doctor.
- African American CPA accountant.
||Firms that discriminate have lower profits, because they pay higher wages to white males.
Competitors can hire minorities and females to reduce labor costs and earn higher profits.
- Measure the extent of discrimination.
- Table has average wage rates for different ethnic
Source: 2008 Statistical Abstract of the United States, Table 683
- Different ethnic groups have different characteristics.
- Statistics are not adjusted for:
- Work experience
- Union status
- Location - minorities concentrate in urban areas.
- Marital status.
10. Gender discrimination
- Women working full-time earn about 75% of what males earn, even
after adjusting for education, age, and marital status.
- Participation rates.
- 37.6% of women worked in 1960.
- 60.5% of women worked in 1997.
- Married women account for most of this increase.
- Women traditionally worked in four occupations.
- Clerical workers.
- Food-service workers.
- Earnings differences:
- Employment discrimination.
- Family specialization.
- More flexible hours.
- Temporary leaves from the labor force.
- Accepted jobs with long hours, out-of-town travel, etc.
- More women are earning degrees in:
- The earnings gap between men & women will narrow.
||There is economic incentives for firms to hire women to lower costs and increase profits. Wages should become equal for men and
11. Principal Agent Problem -
- Principal Agent Problem
- Firm's goal is to earn a profit.
- Firm hires workers to help achieve this goal.
- Workers should contribute and help firms achieve this goal by working
- Some workers may shirk, i.e. work less than full productivity
- Correct shirking
- Piece rate - worker is paid by how many pieces he makes
- Negative - produce more parts for lower quality
- Commission - worker earns a percentage of the sales
- Real estate agents, insurance agents, stockbrokers, and retail sales person
- Negative - fraudulent sales or questionable behavior
- Royalties - artists and authors receive a percentage of the sales
- Bonuses/profit sharing - additional payment if firm does well
- Negative - bad workers also free ride and get bonuses
- Stock options - workers have the option to buy their company stock for a good price
- Workers may work harder, if the value of their stock increases
- Efficiency wages - an employer pays higher than average wages
- Increase workers' morale and they work harder
- Reduce worker turnover
1. Competitive labor markets - were shown in the last lecture
2. Monopsony - a single buyer dominates the buyer's side of the market
- Examples - a large employer that dominates employment in a small town
- Lumber mill in a rural Arkansas town
- Textile mill in rural Maine town
- Silver mine in Montana
- Fish processor in Alaska
- Specialized employment
- Small towns have only one hospital, school district, newspaper, etc.
- Limited options for teachers, nurses, building trades, newspaper employees
- A large city may have several of each type
- Model assumptions
- One buyer
- Labor is immobile
- Employer has influence over the wage
- Supply function (S) - workers supply their labor
- Firm demands workers, which is the MRP
- MRP is the workers' contribution to the firm
- Firm is small and the only one
- Each worker the firm hires raises the marginal cost (MC)
- MC lies above the labor supply function
- Competitive market - firm hires Lc and pays wc
- Workers earn their full contribution to the firm
- Monopsony market - firm hires Lm and pays wm
- Workers contribute Wrent, but earn wm
- rent - firm has power that it uses to enhance profits, etc.
- Conclusion - monopsonist hires fewer workers and pays them less as compared to a competitive market
3. Labor Unions - labor union acts like a monopoly by uniting all workers into one entity
- Enhance demand - labor unions help expand demand for products made by unions
- Public campaigns - "Buy American"
- Political lobbying
- Teachers' Union lobbies for more money, job security, etc.
- Encourage government to build a stadium, highway, or expand airport
- Construction jobs tend to be union
- Lobby for higher minimum wage
- Wage differential between union and minimum wages becomes smaller
- Demand for product causes the firm to demand more labor
- firm can pay higher wages and higher more workers
- Restrict labor supply
- Lobby government
- Restrict immigration
- Compulsory retirement
- Enact a shorter work week
- Reduce child labor
- Crafts union - restrict workers with special skills
- Carpenters, brick masons, or plumbers
- Union has agreement with employer, so employer only hires union workers
- Unions use strikes
- Union gets workers to stop working, so firm cannot make anything
- Unions have
- Long apprentice programs
- High initiation fees
- Limit new membership
- Occupational licensing - grants a worker permission to work in a particular occupation
- Pest control
- Bilateral monopoly - a market with one buyer and one seller
- We do not know what wages or the amount of labor a firm hires
- Each side has power
- Possible the outcome is close to competitive as powers cancel
- The party with the most power wins and gets to determine the wages and number of laborers