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The Role of Labor. Chapter 9: The Role of Labor. KEY CONCEPT Labor, the human effort used to produce goods and services, is subject to the same forces of demand and supply that govern the rest of the economy. WHY THE CONCEPT MATTERS

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Chapter 9: The Role of Labor


  • Labor, the human effort used to produce goods and services, is subject to the same forces of demand and supply that govern the rest of the economy.


  • The value of your labor depends on the demand for what you do and the supply of other people able to do the same thing. You have to figure out what you do best and to create a plan to get a job that suits your talents. Consider the demand for the job, the training needed, and the supply of people capable of performing it.


How Are Wages Determined?

Labor: Demand and Supply


  • Price of land, labor, capital, entrepreneurship are production costs
  • Price of labor is wages—payment workers receive for their work
  • Wages are governed by supply and demand

— equilibrium wage: number of workers needed equals number available


Labor: Demand and Supply

Demand for Labor

  • Wages reflect productivity—value of product produced in set time
  • Producer’s demand for labor is a derived demand:

— demand based on its contribution to the final product

  • Workers with higher productivity tend to earn higher wages
  • Demand curve is downward sloping: lower price means higher demand

Labor: Demand and Supply

Supply of Labor

  • More workers willing to work at higher wages

— supply curve for labor is upward sloping


Labor: Demand and Supply

Equilibrium Wage

  • Wages gravitate toward equilibrium

— price at which there is neither surplus nor shortage


Why Do Wage Rates Differ?


  • Wage rates—rates of pay for specific jobs
  • Rates determined by supply and demand
  • Supply and demand influenced by four factors:

— human capital—knowledge and skills that enable workers to be productive

— working conditions; discrimination in workplace; government actions


Why Do Wage Rates Differ?

Factor 1: Human Capital

  • Unskilled: few skills; include house cleaning, sanitation workers
  • Semiskilled: some training; include construction, clerical workers
  • Skilled: specialized training; include plumbers, electricians
  • Professional: much specialized training; include doctors, lawyers
  • Skilled workers: high demand and productivity, low supply, high wages

Why Do Wage Rates Differ?

Factor 2: Working Conditions

  • High wages paid for dangerous or unpleasant occupations

— examples: washing skyscraper windows, collecting garbage

  • Advantages may make up for low wages

— examples: employee discounts, short commute


Why Do Wage Rates Differ?

Factor 3: Discrimination

  • Wage discrimination based on race, ethnicity, gender, other factors
  • Some low-paying jobs seen as realm of certain groups

— workers trapped, unable to earn enough to invest in training

— Equal Pay Act and Civil Rights Act try to break cycle

  • glass ceiling—unseen barriers preventing skilled workers from advancing

Why Do Wage Rates Differ?

Factor 4: Government Actions

  • Minimum wage—lowest wage legally allowed for one hour of work

— acts as price floor for wages of low-income workers

— businesses say would hire more workers if could pay less

  • In1933, Congress passed first minimum wage; has increased several times
  • Many states, local governments require higher minimum wage

Gary Becker: The Importance of Human Capital

Investing in Yourself

  • Says economic principle of rational choice can be used in other areas
  • The Economics of Discrimination studied how prejudice affected “the earnings, employment, and occupations of minorities”
  • Thinks human capital includes good work habits, good medical care
  • Helped quantify importance of education, on-the-job training

Reviewing Key Concepts

Explain the relationship between the terms in each of these pairs:

  • wages and derived demand
  • equilibrium wage and minimum wage
  • wage rate and human capital


Trends in Today’s Labor Market

A Changing Labor Force


  • 1950s workers planned to work for same company most of life

— counted on company pensions for retirement

  • Today, few workers stay with same company

— workers responsible for own retirement

  • Civilian labor force is people 16 or older who are employed or looking for work

A Changing Labor Force

Changes in the U.S. Labor Force

  • Since 1950s, many women have entered work force

— more types of jobs have opened up; wages have risen

  • Work force is better educated

— 30 percent are college graduates; 30 percent have some college credits

— High degree of human capital means high productivity and wages


Changing Occupations


  • Occupations grouped into three economic sectors

— primary: jobs related directly to natural resources

—secondary: jobs producing goods or processing raw materials

— tertiary: service-industry jobs

  • Ten fastest-growing occupations are service related, most medical

Changing Occupations

Technology and Change

  • Technology has eliminated or changed many jobs in all three sectors
  • Computers, Internet changed how information stored, transferred, used
  • About half of American workers use computer on the job

— 80 percent of managers and professionals

— 20 percent of machine operators, farmers, laborers


Changing Occupations

Globalization and Jobs

  • Outsourcing—contracting with outside company for goods or services

— most with United States companies; some in foreign countries where

wages are lower

  • Insourcing—foreign companies establishing operations in U.S.
  • Both practices tied to trends toward service, technology-related jobs

Changes in the Way People Work


  • Telecommuting—working away from the office, using computers, Internet
  • Contingent employment—temporary or part-time work
  • Independent contractors sell services to businesses on contract basis
  • Most people change careers several times as working world changes

Changes in the Way People Work

Working at the Office from Home

  • Workers get less stress, flexible work time, no commute
  • Employers get larger labor pool, more productivity; need less real estate
  • Society gets less pollution from fewer drivers
  • Workers find work spills into private life; miss social, network time
  • Number of telecommuters grew by about 20 percent from 2000 to 2005

Changes in the Way People Work

Alternatives to Permanent Employment

  • 1990s fewer full-time, more contingent workers and contractors hired

— today’s workforce: over 5 percent temps; over 7 percent contractors

  • Easier for businesses to adjust work force to fit production demands

— discharging temps is less costly; no benefits means lower labor costs

  • Most temps want permanent jobs; many contractors want to be own boss

Changes in the Way People Work

Changing Careers More Often

  • New technologies create new jobs

— older occupations become less in demand or obsolete

— workers must learn and adapt to new technologies

  • Economy changing more quickly than in past

— companies change their business plans constantly to maximize profits


Reviewing Key Concepts

Explain the relationship between the terms in each of these pairs:

  • outsourcing and insourcing
  • contingent employment and independent contractor


Organized Labor in the United States

The Labor Movement’s Rise to Power


  • Labor unions helped shape modern workplace; brought about

— eight-hour day, five-day week, vacation, sick leave

  • Labor union—workers’ organization that seeks to improve work matters
  • Strike—work stoppage to convince employer to meet union demands
  • Different types for different needs, such as craft, industrial unions

The Labor Movement’s Rise to Power

Early Developments

  • Earliest unions were local craft unions; in 1830s began federations

— National Trades Union was first national federation

  • In 1869, Knights of Labor organized workers by industry; grows to become nationwide organization
  • In late 1800s, employers resisted workers’ efforts to organize

— government often used violence to end strikes, such as Carnegie Steel and Pullman strikes


The Labor Movement’s Rise to Power

A New Model for Unions

  • Violence, controversial politics led to decline in union membership
  • 1886 Samuel Gompers founded American Federation of Labor—craft unions

— at first focused on using economic power of workers

— legal action against unions led to support of pro-union candidates

  • Other actions by International Ladies’ Garment Workers, Mother Jones

The Labor Movement’s Rise to Power

Unions Gain Power

  • During Great Depression membership declined as people lost jobs
  • Several New Deal laws helped workers and unions:

— Norris-LaGuardia, National Labor Relations, Fair Labor Standards Acts

  • Congress of Industrial Organizations organized industrial unions
  • United Auto Workers, United Mine Workers became powerful in 1930s–1940s

The Labor Movement’s Rise to Power

Backlash Against Unions Following World War II

  • Post-World War II period of anti-union legislation

— Taft-Hartley limited union activities, allowed government intervention

  • Fear of Communism led to more restrictions

— Landrum-Griffin banned communist officers, required close accounting

— AFL-CIO’s George Meany got rid of unions sympathetic to communist ideas


The Labor Movement’s Steady Decline


  • For 30 years post-World War II, unions included 30 percent work force
  • Since mid-1970s, membership declined to about 12.5 percent in 2005

— three causes: poor reputations, labor force changes, restrictive laws


The Labor Movement’s Steady Decline

Loss of Reputation and Labor Force Changes

  • Unions looked bad: long strikes, featherbedding, organized crime ties
  • Lost members: economy shifted from manufacturing to service
  • Today, many contingent and contract workers who do not organize
  • Unions have now shifted efforts to service industries

The Labor Movement’s Steady Decline

Right-to-Work Laws

  • Closed shop—business had to hire only union members; now outlawed

— maintained union standards for temporary workers

  • Union shop—business where workers had to join union within set period

— allowed hiring of non-union workers without weakening union

  • Right-to-work laws—make it illegal to require workers to join unions

Union Negotiating Methods


  • Collective bargaining—negotiation process of businesses and organized workers

— establishes wages and working conditions

  • Unions can get better deal for workers than individual employees

— unionized companies tend to pay higher wages


Union Negotiating Methods

Collective Bargaining

  • In past bargained for wages, conditions, benefits; today to stop cuts
  • Few strikes now since managers will replace workers, close plants
  • If agreement cannot be reached, mediator may be brought in
  • Next step: binding arbitration—decision made by impartial third party
  • Government may issue injunction forcing public safety workers back

Reviewing Key Concepts

Explain the relationship between the terms in each of these pairs:

  • closed shop and union shop
  • strike and collective bargaining

Managing Change in Your Work Life


  • The United States economy has shifted from manufacturing to service and knowledge-based industries.
  • Companies establish offices around the globe. Outsourcing and insourcing of jobs result in both benefits and challenges.

What’s the Issue?

  • How will you respond to the changing dynamics of the work environment?

Managing Change in Your Work Life {continued}

Thinking Economically

  • What skills are you likely to need in order to manage change successfully in your work life? Use examples from the documents.
  • In documents A and B, are the types of change similar or different? Are their effects on workers positive or negative? Explain.
  • Compare the opportunities afforded by change in documents A and C. How are they similar? How are they different?

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