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Wage Structure. Law of One Price? Observed wage differentials Occupational Industry Geographic Reasons Heterogeneous jobs Heterogeneous workers Labor market imperfections. Of the following occupational groups, average hourly earnings in 2003 were greatest among . service workers

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wage structure
Wage Structure
  • Law of One Price?
  • Observed wage differentials
    • Occupational
    • Industry
    • Geographic
  • Reasons
    • Heterogeneous jobs
    • Heterogeneous workers
    • Labor market imperfections
of the following occupational groups average hourly earnings in 2003 were greatest among
Of the following occupational groups, average hourly earnings in 2003 were greatest among
  • service workers
  • installation, maintenance, and repair workers
  • sales workers
  • managerial, business, and financial workers
slide6

Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium:

  • the wage at Ajax will be higher than at Acme
  • the wage at Ajax will be lower than at Acme
  • workers will have lower net utility at Acme
  • employment will be higher at Ajax if demand is the same in both markets
heterogeneous jobs
Heterogeneous Jobs
  • Compensating differentials
    • risky jobs
    • fringe benefits
    • job status
    • job security
  • Differing skill requirements
  • Differences based on efficiency wages
  • Other factors
    • Union status
    • Discrimination
    • Firm size
slide8
Which of the following research findings would support an efficiency wage explanation of pay differentials?
  • Firms with higher turnover costs pay lower than average wages
  • Firms with higher costs of detecting shirking pay higher than average wages
  • Pay is positively correlated with human capital investments in a given industry
  • Differences in observable worker characteristics explain most of the variance in pay across industries
slide9
Which of the following research findings would support an efficiency wage explanation of pay differentials?
  • Firms with higher turnover costs pay lower than average wages
  • Firms with higher costs of detecting shirking pay higher than average wages
  • Pay is positively correlated with human capital investments in a given industry
  • Differences in observable worker characteristics explain most of the variance in pay across industries
heterogeneous workers
Differing human capital

Non-competing groups

Differing individual preferences

Time preferences

Tastes for nonwage aspects

Married vs Single Males

Married men received 8-40% higher wages

Differing personal attributes

Differing incentives to accumulate HK

Differing costs of acquiring HK

Heterogeneous Workers
labor market imperfections

6.00

6.20

6.40

6.60

6.80

7.00

7.20

7.40

7.60

7.80

Wage rates

Labor Market Imperfections
  • Imperfect information
    • Wage rate distributions
    • Lengthy adjustment periods
labor market imperfections1
Labor Market Imperfections
  • Immobilities
    • Geographic
      • Transportation costs
      • Family concerns
    • Institutional
      • Licensing
      • Pension plans
      • Health insurance
    • Sociological
      • Discrimination
slide13

Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium:

  • the wage at Ajax will be higher than at Acme
  • the wage at Ajax will be lower than at Acme
  • workers will have lower net utility at Acme
  • employment will be higher at Ajax if demand is the same in both markets

D is good also

government regulation
Government Regulation
  • Minimum Wage Laws
  • Occupational Health and Safety Regulation
  • Occupational Licensing
minimum wage law
Minimum Wage Law
  • Fair Labor Standards Act (1938)
    • Established federal minimum wage
      • 1938: $0.25
      • 2006: $5.15
    • Established 1.5 overtime premium
    • Prohibited child labor

Ohio’s minimum wage went up to $6.85 this January

the minimum wage 1950 2006
The Minimum Wage, 1950-2006

9

8

7

6

minimum wage in 2006 dollars

5

Dollars per hour

4

3

minimum wage in current dollars

2

1

0

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

a majority of the workers earning the minimum wage
A majority of the workers earning the minimum wage:
  • are males
  • are females
  • work full-time
  • are teenagers
competitive model
Competitive Model

Covered Sector

  • Free Market: W1, Q1
    • no unemployment
  • Gov’t imposes min. wage at W2
    • at W2: QD < QS
    • Unemployment occurs
  • How can employers offset impact?
    • Reduce hours of work
    • Reduce fringe benefits
    • Raise price
    • Reduce quality
    • Hire illegal aliens

unemployment

Wage

S1

W2 = $7

W1= $5

D1

QD

Q1

QS

Labor

B

W

layoffs

new entrants

What happens in the uncovered sector?

monopsony model
Monopsony Model
  • Monopsony hiring rule: MRP = MWC
    • Monopsony outcome: W1, Q1
  • Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve
    • Monopsonist will hire Q2 workers at W*
  • Minimum wage increases employment!

MWC1

Wage

S1

W*

W1

D1

Q1

Q2

Labor

slide23

MWC

$

S

W*

W2

W1

MRP

Q4

Q1

Q2

Q3

Labor

0

Suppose this labor market is competitive, so that the wage rate is W2. If W* is imposed as the minimum wage, then employment in this market:

  • will rise
  • will fall
  • remain the same
  • may or may not change; more info is required
slide24

MWC

$

S

W*

W2

W1

MRP

Q4

Q1

Q2

Q3

Labor

0

Suppose this labor market is competitive, so that the wage rate is W2. If W* is imposed as the minimum wage, then employment in this market:

  • will rise
  • will fall
  • remain the same
  • may or may not change; more info is required
slide25

MWC

$

S

W*

W2

W1

MRP

Q4

Q1

Q2

Q3

Labor

0

Suppose this labor market is monopsonistic, so that the wage rate is W1. If W* is imposed as the minimum wage, then employment in this market:

  • will rise to Q2
  • will rise to Q4
  • will fall
  • Remain the same
slide26

MWC

$

S

W*

W2

W1

MRP

Q4

Q1

Q2

Q3

Labor

0

Suppose this labor market is monopsonistic, so that the wage rate is W1. If W* is imposed as the minimum wage, then employment in this market:

  • will rise to Q2
  • will rise to Q4
  • will fall
  • Remain the same
empirical evidence
Empirical Evidence
  • Brown (1982)
    • 10% increase in MW reduces employment of teens/low-skilled workers by 1 to 3%
  • Card and Krueger (1994)
    • MW had no effect on employment at fast food restaurants in NJ surveyed before and after the increase
  • Neumark and Wascher (1995)
    • Rexamined payroll data from NJ fastfood restaurants
    • MW had negative effects on employment consistent with conventional wisdom

New research is looking at impact on Human Capital and Poverty

workplace safety

Rate of Occupational Fatalities by Industry, 2002

Workplace Safety
  • Occupational Safety and Health Act (1970)
    • Permissable exposure levels
    • Protective equipment
    • Process safety management
model of optimal safety

Uninformed workers

Model of Optimal Safety

$

  • MC slopes upward to reflect the rising opportunity cost of providing safety
  • MB slopes downward to reflect diminishing returns to safety
    • Permits paying lower wages
    • Reduced worker turnover
    • Lower worker comp rates
  • MB = MC determines optimal safety

MC1

MB1

MB2

S2

S*

Safety

  • If workers possess perfect information about potential risks, then S* is socially optimal
  • If workers underestimate potential risks, they won’t demand a proper wage premium:
    • Safety will be less than optimal: S2 < S*
osha revisited
OSHA Revisited
  • Case for OSHA
    • Imperfect information
    • Barriers to occupational mobility
  • Case against OSHA
    • Workers might overestimate potential risks
    • Workplace standards often bear no relationship to reductions to job injuries and illness
  • Empirical evidence
    • There is mixed evidence that OSHA has reduced occupational injuries.
    • If OSHA has reduced job risks, wage premiums between hazardous and safe jobs should decline over time.
job search
Job Search
  • External search
  • Internal search
  • Why Search?
    • Workers search for the best job offer and firms search for employees to fill job vacancies.
    • Search occurs because:
      • Workers and jobs are highly heterogeneous.
      • Information about differences in jobs and workers is imperfect and takes time to obtain.
job search model
Job Search Model
  • Assumptions
    • Job searcher is unemployed and seeking work
    • Job seeker knows distribution of wage offers (mean and variance), but does not know which employer is offering which wage
job search model1
Worker formulates an acceptance wage, wA

If w > wA accept wage offer

If w < wA reject wage offer

Benefits of search

Get additional wage offers

Costs of search

Explicit: employment agency fees + transportation

Implicit: foregone earnings

Job Search Model
job search model implications
Job Search Model: Implications
  • The higher the acceptance wage, the lower the probability of finding a job (the longer the unemployment duration)
  • Inflation will shift the distribution of wage offers to the right
    • Expected inflation will shift acceptance wage
    • Unexpected inflation will not shift the acceptance wage
  • Unemployment compensation increases acceptance wage

If wA = $20,000, what is probability that first offer will be accepted?

wA

.30

Probability = 65%

.20

.10

.05

___

___

___

_____

slide39
If $8.50 is the acceptance wage, what is the probability of Sally finding her next wage offer acceptable?
  • 0.25
  • 0.30
  • 0.50
  • 0.70
if the rate of inflation increases but sally mistakenly believes it has not then
If the rate of inflation increases but Sally mistakenly believes it has not, then:
  • both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged
  • the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration
  • the acceptance wage will shift to the right, thereby reducing excepted search duration
  • both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged
if the rate of inflation increases but sally mistakenly believes it has not then1
If the rate of inflation increases but Sally mistakenly believes it has not, then:
  • both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged
  • the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration
  • the acceptance wage will shift to the right, thereby reducing excepted search duration
  • both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged
internal labor markets

Shipping Department

Dispatcher

Long-distance driver

Local Driver

Packer

External

Labor

Market

Loader

Internal Labor Markets
  • A worker typically enters an internal labor market at the least-skilled port-of- entry job in the job ladder or mobility chain.
  • Wage rates and the allocation of workers within the internal labor market are governed primarily by administrative rules and procedures.

Port of

Entry

reasons for internal labor markets
Reasons for Internal Labor Markets
  • Firms use job ladders as method to reduce worker turnover.
    • The lower turnover increases the return on firm investments in specific training.
    • Firms can lower recruiting and screening costs since they will have a lot of information about the existing workforce.
    • The job ladder also provides an incentive for workers to seek new skills and work hard.
    • Workers get the benefits of increased job security, opportunities for promotion and training, protection from the external labor market.
    • Also, the formal rules protect workers from arbitrary management decisions.
government as economic rent provider
Government as Economic Rent Provider
  • Economic rent in the labor market is the difference between the wage paid to a particular worker and the wage just sufficient to keep that person in his or her employment.
  • Government provides economic rents through occupational licensing and trade barriers.
slide45
Suppose that all other nonwage aspects of the jobs in these two markets are identical. We would expect labor supply in B to increase if:
  • the probability of job loss rises in B
  • earnings are more variable in A
  • job safety improves in A
  • there are better prospects for advancement in A
slide46
The wage rate paid workers at Flow, Inc. will most likely exceed that at otherwise identical Stock Co. if:
  • Flow, Inc. is a more prestigious firm than Stock Co
  • earnings are subject to greater variability at Stock, Co.
  • Stock Co. offers better pension and insurance benefits than Flow, Inc.
  • the demand for labor at Stock Co. exceeds the demand for labor at Flow, Inc.
slide47

Currently, the minimum wage law does not apply to about 12% of non-supervisory workers. Assuming that all consequently displaced workers find jobs in the uncovered sector, an increase in the minimum wage will:

  • make all workers better off
  • cause a migration of workers from the uncovered to the covered sector
  • create additional output in the uncovered sector of a lower value than the output lost in the covered sector
  • cause an increase in economic rent to original workers in the uncovered sector
slide48

Consider a proposed law to deregulate the hair-care industry. Barbers would be allowed to do work previously confined to stylists, and the latter would no longer be required to pass strict licensure exams. Which outcome would you expect to result from this deregulation?

  • A decrease in economic rent to current stylists
  • A decrease in economic rent to current barbers
  • An increase in economic rent to beauty school operators
  • An increase in economic rent to workers in occupations in which displaced stylists find jobs
slide49

In addition to their regular unemployment benefits, a recent Washington state program offered an average of $562 to any job loser who became reemployed within 13 weeks of filing for unemployment compensation. Economic theory suggests that such a “bounty” scheme should:

  • reduce job search duration by shifting the wage offer distribution to the left
  • reduce job search duration by decreasing the acceptance wage and intensifying job search
  • reduce job search duration by shifting the wage offer distribution to the right
  • have no effect on job search duration, as the acceptance wage will decrease to offset the effect of the shifting wage offer distribution