Transcript Wage Structure, Government Regulation, and Job Search Wage Structure Law of One Price? Observed wage differentials  Occupational  Industry  Geographic Reasons  Heterogeneous jobs  Heterogeneous workers  Labor.

Wage Structure,
Government Regulation,
and Job Search
Wage Structure
Law of One Price?
Observed wage differentials
 Occupational
 Industry
 Geographic
Reasons
 Heterogeneous jobs
 Heterogeneous workers
 Labor market imperfections
Hourly Earnings
By Occupational Group
2008
Occupational Group
Management, Business, And Financial
Hourly Wage
$31.50
Professional and related workers
27.16
Installation, Maintenance, And Repair
19.76
Construction and extraction workers
18.91
Sales Workers
17.58
Office and Administrative Support
15.78
Service Workers
12.74
Farming, Fishing, And Forestry
11.29
Hourly Earnings
By Industry Group
2008
Industry Group
Finance, Insurance, Real Estate
Hourly Wage
$25.55
Public Administration
25.27
Mining
25.32
Transportation and Warehousing
22.88
Manufacturing
22.60
Construction
20.23
Services
19.63
Retail Trade
14.50
Agriculture, forestry, and fisheries
12.53
Private Manufacturing
Hourly Earnings By State
2008
State
Hourly Wage
Connecticut
$29.30
New Jersey
29.69
California
27.16
Massachusetts
26.08
Michigan
24.30
Texas
22.79
New York
22.42
Pennsylvania
22.01
Florida
20.71
Ohio
20.40
Alabama
18.23
Arkansas
15.77
Mississippi
14.95
Hourly Compensation Around the World, 2007
55.03
N o rwa y
50.73
G e rm a ny
47.54
D e nm a rk
43.17
A us t ria
38.80
S we de n
Unit e d Kingdo m
36.66
Ire la nd
36.62
34.75
A us t ra lia
It a ly
32.19
C a na da
31.91
30.56
Unit e d S t a t e s
24.55
S pa in
23.95
J a pa n
19.19
N e w Z e a la nd
18.36
R e public o f Ko re a
15.92
Is ra e l
15.43
S inga po re
9.67
C ze c h R e public
8.49
S lo v a k ia
T a iwa n
8.15
A rge nt ina
7.98
P o la nd
7.69
7.13
B ra zil
3.91
M e xic o
1.37
P hilippine s
0
5
10
15
20
25
30
35
Dollars per hour
40
45
50
55
60
Reasons for Wage Differentials
Heterogeneous jobs
Heterogeneous workers
Labor market imperfections
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:
a)
b)
c)
d)
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 lower at Ajax
if demand is the same in both
markets
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
Beauty and the Labor Market
 Hammermesh and Biddle (1994)
 Beauty premium: 10-15% higher wages
“Hire ugly. All other things being equal, I'd give the nod to
an ugly candidate. It’s not charity: They have less value in
the marketplace and can be hired less expensively, even
though looks have, for most jobs, little or no bearing on job
performance. I've found that, on average, ugly people are
more likely to be kind and to work harder because they
know they're working at a disadvantage. And unattractive
people are more likely to stay with me because they tend
to have a tough time getting hired, in part because they
generally don’t network efficiently. If I treat unattractive
employees well, they’re usually very loyal.”
Marty Nemko, professional career advisor
Which of the following research findings would
support an efficiency wage explanation of pay
differentials?
a)
b)
c)
d)
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
Labor Market Imperfections
 Imperfect information
 Makes job search costly
 A distribution of wage rates result
0.25
0.20
Relative frequency
0.20
0.15
0.15
0.15
0.12
0.10
0.12
0.08
0.08
0.05
0.05
0.05
0.00
8.00
8.20
8.40
8.60
8.80
9.00
Wage rates
9.20
9.40
9.60
9.80
Labor Market Imperfections
 Immobilities
 Geographic
 Transportation costs
 Family concerns
 Institutional
 Licensing
 Pension plans
 Health insurance
 Sociological
 Discrimination
 Cultural
Government Regulation
 Minimum Wage Laws
 Occupational Health and Safety Regulation
 Occupational Licensing
Minimum Wage Law
 Fair Labor Standards Act (1938) established:
 Federal minimum wage
 1938: $0.25
 2009: $7.25
 Overtime premium
 Child labor restrictions
Ohio’s minimum wage went
up to $7.30 this past January
States with minimum wage rates higher than the Federal rate
States with minimum wage rates the same as the Federal rate
States with minimum wage rates lower than the Federal rate
States with no minimum wage law
Federal Minimum Wage Rate
1950-2009
$11.00
$10.00
minimum wage in
2008 dollars
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
minimum wage in
current dollars
$2.00
$1.00
$0.00
1950
1960
1970
1980
1990
2000
2010
60%
Minimum Wage Relative to the Average
Hourly Wage Rate
1965-2008
50%
40%
30%
20%
10%
0%
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Characteristics of Minimum Wage Workers, 2008
At or Below $6.55
Total
2.2 million
75.3 million
% Employment
2.3%
100%
Gender
Male
Female
31.5
68.5
49.6
50.4
Race
White
Black
Hispanic
Asian
80.1
13.8
14.6
3.1
80.3
13.1
17.4
3.8
Age
16-19
20 +
24.5
75.5
6.8
93.2
Hours of Work
Part-time
Full-time
60.8
39.2
24.3
75.5
Occupation
Sales
Service
16.3
69.2
27.3
22.9
Industry
Retail
Leisure & Hospitality
Manufacturing
11.7
56.0
2.8
14.2
11.5
12.7
Education
Less than HS
HS only
Some college
BA +
26.0
31.9
33.8
8.4
14.9
36.1
33.6
15.4
# Hourly Workers
2009 Poverty Guidelines
(48 Contiguous States and DC)
Persons in Family
Poverty Threshold
1
$10,830
2
$14,570
3
$18,310
4
$22,050
5
$25,790
6
$29,530
7
$33,270
8
$37,010
For families with more than 8 persons, add $3,740 for
each additional person.
Source: http://aspe.hhs.gov/poverty/09poverty.shtml
Competitive Labor Market
Covered sector

Free Market: W1, Q1
 no unemployment: QD = QS

Gov’t imposes min. wage at W2
 at W2: QD < QS
 Unemployment occurs

unemployment
Wage
S1
W2 = $7
DWL
W1= $6
How can employers offset
impact?





Reduce hours of work
Reduce fringe benefits
Raise price
Reduce quality
Hire illegal aliens
D1
B
W
QD
layoffs
Q1
QS
new entrants
What happens in the uncovered sector?
Labor
A majority of the workers earning the minimum
wage:
a)
b)
c)
d)
are males
are females
work full-time
are teenagers
Suppose that the equilibrium wage in the low-skilled labor
market is $8.00. Further, suppose the federal government
raises the minimum wage to $7.25 an hour from its present
level of $6.55. The government’s action of increasing the
minimum wage will result in:
a)
b)
c)
d)
a decrease in unemployment
an increase in unemployment
a shortage of low-skilled labor.
neither a shortage nor a surplus of
labor in the low-skilled labor market.
Monopsony Model
MWC1
 Monopsony hiring rule: MRP = MWC
 Monopsony outcome: W1, L1
Wage
 Minimum wage at W* creates a kinky
supply curve and a discontinuous
MWC curve
 Monopsonist will hire L2 workers at W*
 Minimum wage increases
employment!
S1
W*
W1
D1
L1
L2
Labor
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:
a)
b)
c)
d)
will rise
will fall
remain the same
may or may not
change; more info
is required
MWC
$
S
W*
W2
W1
MRP
0
Q1
Q2 Q3
Q4
Labor
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:
a)
b)
c)
d)
will rise to Q2
will rise to Q4
will fall
Remain the same
MWC
$
S
W*
W2
W1
MRP
0
Q1
Q2 Q3
Q4
Labor
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 negative 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
Services
Retail Trade
Government
Manufacturing
Transportation
Construction
Agriculture
Mining
0
5
10
15
20
Rate per 100,000 Workers
 Occupational Safety and Health Act (1970)
 Permissable exposure levels
 Protective equipment
 Process safety management
25
Model of Optimal Safety
$
MC1
Uninformed workers
 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
MB1
MB2
S2
S*
 MB = MC determines optimal
safety
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
 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
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
 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
Figure 1
0.35
0.30
Probability
0.25
0.20
0.15
0.10
0.05
0.00
0
5
10
15
20
25
30
Earnings (000's $)
35
40
45
50
Job Search Model
 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: Implications
Figure 1
If wA = $20,000, what is
probability that first offer
will be accepted?
wA
0.35
0.30
.30
Probability
0.25
0.20
.20
0.15
0.10
.10
0.05
.05
0.00
0
5
10
15
20
25
30
35
40
45
50
Earnings (000's $)
 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 $8.50 is the acceptance wage, what is the probability
of Sally finding her next wage offer acceptable?
a)
b)
c)
Frequency
d)
0.25
0.30
0.50
0.70
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
$7
$8
$9
Wage
$10
$11
If the rate of inflation increases but Sally
mistakenly believes it has not, then:
a)
b)
c)
d)
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
• A worker typically enters
an internal labor market at
the least-skilled port-ofentry 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.
Long-distance driver
Local Driver
Packer
Loader
Port of
Entry
External
Labor
Market
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
 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.