Transcript Wage Structure Law of One Price? Observed wage differentials Reasons

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
installation, maintenance, and
repair workers
sales workers
managerial, business, and
financial workers
a)
b)
c)
d)
in
se
rv
i
ce
w
or
st
ke
al
la
rs
tio
n,
m
ai
sa
...
le
s
w
m
or
an
ke
ag
rs
er
ia
l,
bu
s.
..
0% 0% 0% 0%
1
2
3
4
5
Hourly Earnings By Occupational Group, 2003
Occupational Group
Management, Business, And Financial
Hourly Wage
$26.24
Installation, Maintenance, And Repair
17.14
Sales Workers
15.89
Office and Administrative Support
13.73
Service Workers
10.96
Farming, Fishing, And Forestry
9.81
Hourly Earnings By Industry Group, 2003
Industry Group
Finance, Insurance, Real Estate
Hourly Wage
$20.99
Public Administration
20.22
Mining
19.81
Transportation and Warehousing
19.27
Manufacturing
18.51
Construction
17.31
Services
16.53
Retail Trade
13.21
Private Manufacturing Worker’s Hourly
Earnings By State, 2003
State
Hourly Wage
Connecticut
$23.13
New Jersey
22.91
Massachusetts
21.44
New York
19.09
Pennsylvania
18.26
Ohio
18.12
Texas
17.53
Arkansas
14.77
Mississippi
13.80
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)
a)
0%
1
2
3
4
5
0%
0%
0%
d)
c)
c)
b)
b)
a)
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
Which of the following research findings would support
an efficiency wage explanation of pay differentials?
1
2
3
4
5
0%
0%
0%
0%
d)
d)
c)
c)
b)
b)
a)
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
a)
Which of the following research findings would support
an efficiency wage explanation of pay differentials?
1
2
3
4
5
0%
0%
0%
0%
d)
d)
c)
c)
b)
b)
a)
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
a)
Heterogeneous Workers

Differing human capital


Differing individual preferences



Non-competing groups
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


Wage rate distributions
Lengthy adjustment periods
0.25
0.2
0.2
Relative frequency

0.15
0.15
0.15
0.12
0.1
0.12
0.08
0.08
0.05
0.05
0.05
0
6.00 6.20
6.40 6.60
6.80 7.00 7.20
Wage rates
7.40
7.60 7.80
Labor Market Imperfections

Immobilities



Geographic
 Transportation costs
 Family concerns
Institutional
 Licensing
 Pension plans
 Health insurance
Sociological
 Discrimination
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)
a)
0%
D is good also
1
2
3
4
5
0%
0%
0%
d)
c)
c)
b)
b)
a)
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
 2006: $5.15



Ohio’s minimum wage went
up to $6.85 this January
Established 1.5 overtime premium
Prohibited child labor
The Minimum Wage, 1950-2006
9
Dollars per hour
8
7
6
5
minimum wage
in 2006 dollars
4
3
2
minimum wage in
current dollars
1
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Minimum Wage Relative to the Average Private
Non-supervisory Wage, 1950 - 2005
60%
50%
40%
30%
20%
10%
0%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
A majority of the workers earning the
minimum wage:
w
1
2
3
4
5
0%
na
ge
rs
0%
te
e
es
0%
fe
m
al
e
ar
ar
e
m
al
es
0%
e
d)
ar
c)
fu
lltim
e
b)
are males
are females
work full-time
are teenagers
or
k
a)
Characteristics of Minimum Wage Workers, 2004
At or Below $5.15
Total
2.0 million
139.2 million
% Employment
1.4%
100%
Gender
Male
Female
33.9
66.1
51.9
48.1
White
Black
Hispanic
83.9
11.3
12.5
69.6
11.1
13.4
16-19
20 +
24.8
75.2
4.7
95.3
Hours of Work
Part-time
Full-time
61.9
37.9
18.6
81.4
Occupation
Sales
Service
12.6
74.6
10.9
16.8
Industry
Retail
Leisure & Hospitality
Manufacturing
8.2
62.0
3.0
11.9
8.7
12.8
Education
Less than HS
HS only
Some college
BA +
28.9
31.6
32.6
6.9
9.9
30.2
27.5
32.3
# Workers
Race
Age
Competitive Model
Covered Sector

Free Market: W1, Q1




no unemployment
S1
W2 = $7
Gov’t imposes min. wage at W2

unemployment
Wage
at W2: QD < QS
Unemployment occurs
W1= $5
How can employers offset impact?





Reduce hours of work
Reduce fringe benefits
Raise price
Reduce quality
Hire illegal aliens
D1
B
W
QD
layoffs
What happens in the uncovered sector?
Q1
QS
new entrants
Labor
Monopsony Model
MWC1
Wage
S1

Monopsony hiring rule: MRP = MWC


Minimum wage at W* creates a kinky
supply curve and a discontinuous MWC
curve


Monopsony outcome: W1, Q1
Monopsonist will hire Q2 workers at W*
Minimum wage increases employment!
W*
W1
D1
Q1
Q2
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:
will rise
will fall
remain the same
may or may not change;
more info is required
a)
b)
c)
d)
$
MWC
S
W*
W2
W1
MRP
0
fa
m
l
ai l
n
m
ay t..
or
m
..
ill
re
w
w
ill
ris
e
0% 0% 0% 0%
1
2
3
4
5
Q1 Q2 Q3 Q4
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:
will rise
will fall
remain the same
may or may not change;
more info is required
a)
b)
c)
d)
$
MWC
S
W*
W2
W1
MRP
0
fa
m
l
ai l
n
m
ay t..
or
m
..
ill
re
w
w
ill
ris
e
0% 0% 0% 0%
1
2
3
4
5
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:
will rise to Q2
will rise to Q4
will fall
Remain the same
a)
b)
c)
d)
$
MWC
S
W*
W2
W1
MRP
0
1
2
3
4
ill
em fal
l
ai
n
t..
..
R
w
ris
e
ill
w
w
ill
ris
e
..
0% 0% 0% 0%
5
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:
will rise to Q2
will rise to Q4
will fall
Remain the same
a)
b)
c)
d)
$
MWC
S
W*
W2
W1
MRP
0
1
2
3
4
ill
em fal
l
ai
n
t..
..
R
w
ris
e
ill
w
w
ill
ris
e
..
0% 0% 0% 0%
5
Q1 Q2 Q3 Q4
Labor
Empirical Evidence

Brown (1982)


Card and Krueger (1994)


10% increase in MW reduces employment of
teens/low-skilled workers by 1 to 3%
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
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



MB1

MB2
S2


S*
Permits paying lower wages
Reduced worker turnover
Lower worker comp rates
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*
The profit-maximizing level of job safety
is a probability level of:
0.65
0.75
0.80
0.85
b)
c)
d)
1
2
3
0%
0.
8
0%
0.
75
0.
65
0%
4
5
Ps
MBs
MCs
.70
22
10
.75
19
12
.80
16
14
.85
13
16
.90
10
18
.95
7
20
.65
0%
0.
85
a)
25
8
The profit-maximizing level of job safety
is a probability level of:
0.65
0.75
0.80
0.85
b)
c)
d)
1
2
3
0%
0.
8
0%
0.
75
0.
65
0%
4
5
Ps
MBs
MCs
.70
22
10
.75
19
12
.80
16
14
.85
13
16
.90
10
18
.95
7
20
.65
0%
0.
85
a)
25
8
OSHA Revisited

Case for OSHA



Case against OSHA



Imperfect information
Barriers to occupational mobility
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.
Session
Base Run
Search
Costs
Unemp
Insurance
Recession
Education
Variation
None
$100 per
period
$200 per
period for
first 10
periods
Probability
of receiving
wage offer
decreases
$1500 per period for two
periods
Range
$0-$1000
$0-$1000
$0-$1000
$0-$1000
$0-$1000 (no education)
$0-$1500 (education)
Wage
Frequency
Frequency
Frequency
Frequency
Wage
Frequency
0
10
10
10
20
0
10
100
1
1
1
1
100
1
200
2
2
2
2
200
2
300
3
3
3
3
300
3
400
4
4
4
4
400
2
600
1
1
1
1
500
1E
1000
1
1
1
1
600
1
800
2E
1000
2 (1E)
1500
1E
Distribution
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
0.25
Probability

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



Benefits of search


If w > wA  accept wage offer
If w < wA  reject wage offer
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
Probability = 65%
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?
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
0%
0.
25
Frequency
d)
$7
$8
$9
Wage
1
2
3
4
5
$10
$11
0%
0%
0%
0.
7
c)
0.
5
b)
0.25
0.30
0.50
0.70
0.
3
a)
If the rate of inflation increases but Sally
mistakenly believes it has not, then:
1
2
3
4
5
ac
e
th
th
bo
...
ta
n
ce
p
ce
ta
n
ce
p
ac
e
th
ce
ag
e
w
ut
io
di
st
rib
en
t ir
e
e
...
...
n
...
ce
ta
n
ce
p
ac
e
th
d)
0% 0% 0% 0%
th
c)
th
b)
bo
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
a)
If the rate of inflation increases but Sally
mistakenly believes it has not, then:
1
2
3
4
5
ac
e
th
th
bo
...
ta
n
ce
p
ce
ta
n
ce
p
ac
e
th
ce
ag
e
w
ut
io
di
st
rib
en
t ir
e
e
...
...
n
...
ce
ta
n
ce
p
ac
e
th
d)
0% 0% 0% 0%
th
c)
th
b)
bo
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
a)
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.
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
a)
b)
c)
d)
3
4
5
...
ro
s
es
er
e
ar
eb
et
te
rp
m
pr
ov
th
jo
b
sa
fe
ty
i
ar
ng
s
rn
i
in
..
a.
...
em
or
ev
ob
fj
yo
ilit
2
ea
ro
ba
b
ep
th
1
A
0% 0% 0% 0%
The wage rate paid workers at Flow, Inc. will most
likely exceed that at otherwise identical Stock Co. if:
2
3
4
5
tt .
.
.
th
e
k
de
m
an
d
.o
f fe
Co
fo
r
rs
la
be
ct
.
bj
e
su
e
ar
ea
rn
i
ng
s
.i
s
,I
nc
ow
Fl
1
bo
r..
.
0% 0% 0% 0%
a
d)
St
oc
c)
p.
..
b)
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.
m
or
e
a)
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
2
3
4
5
n
ea
us
ca
n.
..
in
cr
ea
s
lo
on
a
dd
iti
ea
ei
.
of
..
n
ig
ra
tio
ea
t
ca
us
ea
m
wo
rk
e
all
ak
e
m
1
ut
p.
.
0% 0% 0% 0%
rs
d)
cr
c)
t..
b)
be
t
a)
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)
b)
c)
d)
1
2
3
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
4
5
0% 0% 0% 0%
..
..
..
..
a
a
a
a
e
e
e
e
cr
cr
cr
cr
n
n
e
e
i
i
d
d
n
n
A
A
A
A
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
a)
b)
c)
d)
1
2
3
4
5
0% 0% 0%
j..
j..
j..
ce u ce u ce e
u
v
d
d
d
re
re
re
ha
no
0%
...