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17 CHAPTER DYNAMIC P OWERP OINT™ S LIDES BY S OLINA L INDAHL Labor Markets CHAPTER OUTLINE The Demand for Labor and the Marginal Product of Labor Supply of Labor Labor Market Issues How Bad Is Labor Market Discrimination, or Can Lakisha Catch a Break? For applications, click here To Try it! questions To Video Food for Thought…. Some good blogs and other sites to get the juices flowing: SEE THE INVISIBLE HAND What determines their pay? Understanding Wages Labor has a supply and demand like all markets. This market determines each wage rate. For a detailed comparison of typical wage rates by occupation in the U.S. see the Bureau of Labor Statistics page (click below). BACK TO The Demand for Labor and the Marginal Product of Labor A firm is willing to hire a worker when the worker increases the firm’s revenues more than the firm’s costs. The increase in revenue created by hiring an additional worker is called the Marginal Product of Labor (MPL). The increase in costs from hiring an additional worker is (for a competitive firm) simply the worker’s wage. BACK TO How Many Workers Should a Firm Hire? Firms hire workers that add to profit… so the rule is: Firms hire more workers as long as the MPL > wage And MPL changes as more workers are hired…. BACK TO The Marginal Product of Labor Number of Cleaners Task Marginal Product of Labor (MPL per hour) One Clean restrooms, once a day $35 Two Empty trash $30 Three Clean restrooms, twice a day $24 Four Wash floors $20 Five Pick up outside trash $16 Six Clean restrooms, three times a day $12 Seven Clean windows $11 Eight Remove gum from the bottom of tables $8 MP declines as more workers are hired. If the wage rate is high, not many will be hired, but if it’s low, more will be hired. BACK TO The Marginal Product of Labor Is the Firm’s Demand Curve for Labor Wages If the Wage = $40, none are hired 40 If the Wage = $27, two are hired 30 If the Wage = $10, seven are hired Demand Curve for Labor 20 10 1 2 3 4 5 6 7 8 9 10 Cleaners BACK TO Try it! What is the marginal product of labor for the fifth worker? a) b) c) d) $1,760 $230 $180 $1,885 To next Try it! Try it! MPL 230 180 125 80 50 If the market wage for each worker is $100 per day, how many workers will the company hire? a) b) c) d) 4 5 6 7 To next Try it! Labor Supply Is Upward-Sloping Joe’s Supply of Office Cleaning The Market Supply of Office Cleaning If Joe’s wage rises, he may take more time off… Although individuals may work less as wages rise, more people enter the workforce as wages increase. Wage Wage $28 $28 $20 $20 $16 $16 $7 $7 40 50 Hours (millions) 80 200 320 640 Hours (millions) BACK TO Click below for another look at what motivates us to work… Dan Pink’s popular TED talk, turned into an animated story by RSA Animate. (10:48 minutes) http://www.youtube.com/watch?v=u6XAPnuFjJc To next Video BACK TO Labor Market Equilibrium Equilibrium in the labor market occurs at the intersection of the market supply and demand curves from labor. A firm will hire workers whenever the marginal product of labor exceeds the market wage (MPL > w). Thus, at equilibrium in the labor market, the marginal product of labor equals the market wage (MPL = w). BACK TO The Labor Market The Market for Labor Wages Supply wmkt Demand = MPL Qmkt Quantity of Labor BACK TO Labor Market Issues: Wage Differentials Why do workers in the U.S. usually earn more than foreign workers for the same job? One reason: the U.S. is a more productive economy. U.S. firms are often producing a product with a higher market value. BACK TO Labor Market Issues: Wage Differentials Another reason why wages differ across countries is skill levels. Human Capital refers to tools of the mind, the stuff in people’s heads that makes them productive. Education, training, and experience. The U.S. often has a much larger human capital stock than its trading partners and thus higher wages. BACK TO More Education Means Higher Wages Source: Census Bureau 2006 Advanced Degree $80,000 Wages 60,000 Bachelor’s Degree 40,000 High School Graduate 20,000 No Degree BACK TO The Return to Education Has Increased Source: Census Bureau, Goldin and Katz 2008 BACK TO Try it! All else held constant, wages for low-skill workers are often higher in the U.S. than in other countries because a) b) c) d) the overall labor supply in the U.S. is lower than in other countries. the demand for low-skill workers in the U.S. is very low compared to other countries. there is a greater supply of low-skill workers in other countries than in the U.S. the U.S. economy is more productive overall than other economies. To next Try it! Labor Market Issues: Compensating Differentials The real wage of a job includes not just the pay but also other non-monetary factors. A Compensating Differential is a difference in wages that offsets differences in working conditions. Fewer people are willing to work in dangerous or unpleasant jobs, so the supply of labor is reduced and wage is increased. BACK TO Riskier Jobs Pay More, All Else Equal Supply, high risk jobs Wages Higher wage must be paid to get the same number of workers Supply, low risk jobs wagehigh risk Fewer workers at the same wage wage low risk Demand Nhigh risk Number of Workers Nlow risk BACK TO Labor Market Issues: Compensating Differentials Each job has a different combination of wages, benefits, fun, risk and other conditions. People will flock to jobs with higher overall compensation… Wages will adjust to these changes in the labor market so that total compensation packages equalize… Therefore, similar jobs must have similar compensation packages. BACK TO Wages Adjust Until Similar Jobs Have Similar Compensation Packages BACK TO Try it! Consider the following: The average person doesn't like working the night shift, & most companies do their highskilled work during the day. So, firms prefer to hire workers with more human capital during the day, and they prefer to hire less-skilled workers at night. Based on the theories of compensating differentials and human capital, how would pay for night shift workers differ from that of day shift workers? a) Night shift workers would be paid more. b) Night shift workers would be paid less. c) They would be paid equally. d) This cannot be determined without more information. To next Try it! SEE THE INVISIBLE HAND Suppose a new and cheap technology increases mine safety. What do you predict will happen to the wages of mine workers? Labor Market Issues: Do Unions Raise Wages? Are unions driving the wage differentials across countries? The evidence seems to be: No. The U.S. and Switzerland, have much lower levels of unionization than other countries in Western Europe but have very similar wage levels. It is true that wages in unionized jobs tend to be higher than those in non-unionized jobs. BACK TO By Reducing the Supply of Labor a Union Can Increase Wages Supply with union Wages Supply without union Wagewith Wageno By restricting membership and threatening to strike unless employers hire union labor, unions reduce the supply of labor available to an industry. union union Demand Nwith union Number of Workers Nno union 28 BACK TO How Bad Is Labor Market Discrimination? How often do you discriminate? Does the market erase discrimination? BACK TO Types of Discrimination 1. Statistical Discrimination is using information about group averages to make conclusions about individuals. In a dark alley, you hear footsteps… your reaction depends on who it is… An elderly lady walking her dog? An angry tattooed younger man muttering to himself? Same man with a baby? BACK TO Statistical Discrimination Is this discrimination rational? Markets tend to develop shortcuts to judging job candidates- with some errors. Judging a book by its cover doesn’t always work. Profit-seeking employers have the greatest incentive to overcome unfairness. BACK TO Types of Discrimination Preference-Based Discrimination is based on a plain, flat-out dislike of some group of people due to race, religion, gender, etc. There are three different kinds of preference-based discrimination: 1. Discrimination by Employers 2. Discrimination by Customers 3. Discrimination by Employees BACK TO Preference-Based Discrimination Discrimination by Employers: Fortunately, this kind of discrimination tends to be broken down by market forces. Employer discrimination can be expensive to the employer. Wages for the discriminated group of workers will be lower, so the employer may be giving up considerable profits to indulge its taste for discrimination. BACK TO Preference-Based Discrimination Discrimination by Customers: When it is customers driving the discrimination, firms are reluctant to hire workers from the discriminated groups. Firms that employ these workers may lower costs on account of the lower wages, but the firms may also earn lower revenues as customers avoid their establishments. Bigoted customers create an economic incentive for firms to discriminate. BACK TO Preference-Based Discrimination Discrimination by Employees: Discrimination can also arise from workers who do not wish to mix with people from different groups. The profit incentive doesn’t necessarily break down this sort of discrimination. Employee-based discrimination is selfreinforcing and hard to identify: Are fewer women applying in male-dominated careers because of discrimination by other employees? B A CK T O Try it! Employee discrimination is difficult to overcome because a) b) c) d) no one can really tell when it is happening. it is required by law. it is reinforced by the profit incentive, meaning that firms find it more profitable to discriminate than to not. it does not actually harm anyone. To next Try it! Preference-Based Discrimination Discrimination by Government: Governments can be part of the problem and actually promote labor market discrimination. E.g. During the era of apartheid in South Africa from 1948-1994, Black South Africans: Had to live in areas separate from whites. Could not compete with whites for jobs. Could not vote. BACK TO Do Markets Crush Discrimination? Market forces bring different groups into contact with each other, reducing distrust. Economic growth generally reduces discrimination. In the long run, no successful market economy has succeeded in maintaining formal segregation on a widespread basis. BACK TO Evidence of Persistent Discrimination? Explain why the data seem to show that: Tall people earn more than short people. Good-looking people earn more too. People with African-American-sounding names got 50% fewer job interviews (but equal long-run earnings) than people with neutral names. BACK TO Try it! Think-Pair-Share: Is it a good idea for a human resources director to visit the Facebook pages of potential employees? Is it fair to cut out the applicants whose pictures show them holding beer? Whose pages contain typos? To next Try it! Are sweatshops bad or good? Click below for an ABC news clip on the debate. (6:17 minutes) BACK TO Try it! How might the following factors affect Joe's office cleaning labor supply? I. The government raises Joe's income tax rate. II. The price of comfortable work shoes falls dramatically. Now, his feet won't ache nearly as much after a full day of work. III. While in Las Vegas for the weekend, Joe wins a $1 million jackpot. a) I and II will increase supply and III b) III will increase supply and I and II c) II will increase supply and I and III d) I will increase supply and II and III will will will will decrease decrease decrease decrease supply. supply. supply. supply . BACK TO