Chapter 13 Labor Markets. Copyright © Houghton Mifflin Company. All rights reserved.13 | 2 Measuring Workers’ Pay Pay includes fringe benefits Fringe

Chapter 13

Labor Markets

Copyright © Houghton Mifflin Company. All rights reserved. 13 | 2

Measuring Workers’ Pay

•Pay includes fringe benefitsFringe benefits ( 附加利益 ) : compensation that a worker receives, excluding direct money payments for time worked, but including insurance, retirement benefits, vacation time, and sick leave.

Wage: the price of labor defined over period of time; expressed as currency per unit of labor worked; also known as the nominal wage.


Real wage: the wage or price of labor adjusted for inflation. In contrast, the nominal wage has not been adjusted for inflation.

Real wage = Nominal wage CPI

Adjusting for Inflation:Real vs. Nominal Wage


If the nominal wage for a truck driver increased from $10 to $20 when the CPI increased from 1 to 1.285, then the real wage increased from

$10$10

1 to

$20$15.56

1.285

Adjusting for Inflation:Real vs. Nominal Wage


The average wage in the United States in 2006 (in 2000 dollars) was $23.33 per hour, which included $7.00 in fringe benefits (in 2000 dollars).

Figure 1 shows the trend for the average real hourly wage in the United States from 1991 to 2005.

Wage Trends


Figure 1: The AverageHourly Real Wage



Other U.S. Labor Market Trends1. Workers with higher skills are paid more than

unskilled workers, and the gap is increasing.2. College graduates earn more than high

school graduates, and the gap is increasing.3. Women are paid less than men, although the

gap has become narrowed over the years.

Wage Trends


The Labor Market

Labor market: the market in which individuals supply their labor time to firms in exchange for salaries and wages.


Labor supply: the relationship between the quantity of labor supplied by individuals and the wage.

Labor demand: the relationship between the quantity of labor demanded by firms and the wage. Labor demand is a derived demand.

The Labor Market


Figure 2: Labor DemandCurve and Labor Supply Curve


The Labor Market

Derived demand: the demand for an input derived from the demand for the product produced with that input.


A Firm’s Employment Decisions

Firms follow a simple rule when hiring a worker:

If employing another worker increases the firm’s profits, then the firm will employ that worker. If employing another worker decreases the firm’s profits, then the firm will not employ that worker.



Marginal product of labor: the change in production due to a one-unit increase in the labor input.

MP of labor = Change in QChange in L


Marginal revenue product of labor: the change in total revenue due to a one-unit increase in the labor input.

MRP of labor = Change in TR Change in L




From Table 2:

1. The marginal product of labor is declining. The firm is producing in the short run, and has a fixed capital input.

2. The marginal revenue product of labor is declining. Because the MRP = P × MP, a decline in marginal product will result in a declining marginal revenue product as well.



If a firm is maximizing profit, it will hire the largest number of workers for which the MRP is greater than the wage. If the firm can hire fractional units of labor, then the firm will continue to hire until the MRP equals the wage.

If MRP ＞ W → continue to hire until the MRP equals the wage

MRP = WIf MRP ＜ W → reduce to hire until the MRP equals the wage

MRP = W



The Firm’s Derived Demand Curve

Because the firm will hire workers using the rule MRP = wage, the demand curve for labor is determined completely by the marginal revenue product of labor.

A higher wage will reduce the quantity of labor demanded. A lower wage will increase the quantity of labor demanded.

•P × MP ＝ W ，或 MP ＝ W/ P ， ( 即隨著 L↑→MP↓→W/P↓ ，故 MP 即為廠商之勞動需求線。 )


Figure 3: Determining aFirm’s Demand Curve for Labor

W=1700→hire one workerW=800 →hire 4 workersW=600→ hire 5 workersW=250 →hire 7 workers


What if the Firm Has Market Power?

If a firm has market power in the product market, then the price of the good is no longer constant, so P × MP = wage no longer holds.

MRP = wage is still the profit-maximizing rule. We just need to calculate the marginal revenue product of labor in a slightly different way.



The marginal revenue product of labor should be calculated as follows:

MRP = the marginal revenue times the marginal product of labor

= MR × MP

L

TRMRP

in Change

in Change


• Since P = MR in a competitive firm, the marginal revenue product of labor can also be calculated as MP × P.

• If the firm has market power, the marginal revenue drops faster than the price.

Thus, the marginal revenue product of labor will fall faster in a firm with market power than in a competitive firm.




The Market Demand for Labor

The market demand for labor is derived by the summing up the quantity of labor demanded by all firms, at every given wage.


This quantity Plus This quantity

Sums up to this quantity

Figure 4: Summing Firms’ Demands to Get the Labor Market Demand Curve


Labor Supply

In economics, the decision to supply labor is analyzed as a decision between working and leisure.

Leisure: a generic term used by economists for nonwork activities; it may include activities such as painting the house, going bowling, or hiking.

Price of leisure: wage; the opportunity cost of not working.


Labor Supply• 勞動供給是人們對消費和休閒的選擇所決定的。• 工資率是休閒的機會成本，當工資率上升時，休閒的成

本增加，因此工作的意願提高，此稱為替代效果。但工資率上升時，可享受較高的所得，所得效果可能使休閒的需求增加，因而工作意願減少。工資率上升是否會提高工作意願，視替代效果和所得效果大小而定。

• 影響勞動供給的因素：非工作所得—非工作所得多，工作意願降低。教育—教育是一種投資；受教育必須放棄工作機會。所得稅—所得稅使淨工資下降，產生替代和所得效果


Labor Supply

• 設每人對時間的運用為：休閒或工作 ( 為了消費。 )

• 每天 24 小時有 H 小時用於工作，每小時工資 W ，工作 H 小時則得 HW 。

• 若消費品 C 的單價為 P ，全部工資購買 C 可得HW/P 單位的 C 。

• 若此人不休閒只工作則可得 24W/P 單位的 C ，可得 A point 。若不工作則有 24 小時的休閒，可得 B point 。聯結 AB 線即為預算線。其 slope的絕對值為 W/P 。

• 令 L 代表休閒，設某人的滿足程度決定於 C and L ，則其效用函數為： U(C,L) 。


Labor Supply

當工資率不斷變動時，預算線上移 (I0, l1, l2, l3) ，形成勞動選擇點之改變。將 w 與勞動選擇點畫於同一圖上，即為勞動供給。W↑→L↓→H↑→Labor supply is a positive curve.


The effects of a wage change can be broken down into two effects:

1. The income effect2. The substitution effect

Labor Supply


Substitution effect: the higher the hourly wage, the more attractive work will seem relative to the other activities. As a result, the quantity of work supplied will increase when the wage increases.

Labor Supply


Income effect: a price change will either increase (if the price decreases) or decrease (if the price increases) your ability to purchase all goods by changing your real income.

Labor Supply


The Shape of Supply Curves

The supply curve will be upward sloping if the income effect is small the substitution effect.

The supply curve will be downward sloping if the income effect is greater than the substitution effect. This situation is also known as the backward-bending labor supply curve.

The supply curve will be vertical if the income effect equals the substitution effect.


Figure 5: Three Labor Supply Curves


Figure 6: Backward-BendingLabor Supply Curve


Human capital: a person’s accumulated knowledge and skills.

On-the-job training: the building of skills of a firm’s employees while they work for the firm.

Work vs. Another Alternative:Getting Human Capital


Benefits: College will improve your skills and increase your probability of landing a higher-paying job (higher pay).

Costs: College will cause you to forego earning income and pay tuition.

As with any economic decision, you decide to go to college if you perceive the benefits to be greater than the costs.

Work vs. Another Alternative:Getting Human Capital


Figure 7: Higher Educationand Economic Success


Labor Productivity

Labor market equilibrium: the situation in which the quantity of labor supplied equals the quantity of labor demanded; the point of intersection of the labor supply and the labor demand curve.

Labor productivity: output per hour of work.


Figure 8: Labor ProductivityGrowth and Real Wage Growth


Labor Productivity

Figure 8 shows a strong correlation between labor productivity and the real wage. When the growth rate of labor productivity is low, real wages drop or rise slowly. When the growth rate of labor productivity is high, real wages rise more rapidly.

This observation suggests that the growth rate of labor productivity is a major explanation for wage changes over time.


Compensating Wage Differentials

Compensating wage differential: a difference in wage for people with similar skills based on some characteristics of the job, such as riskiness, discomfort, or convenience of time schedule.


Discrimination

Discrimination: not hiring workers even though their marginal product is as high as or exceeds the marginal product of other workers; alternatively, paying a lower wage to a worker when the worker’s marginal product of labor is equal to or greater than other workers’ marginal product of labor.

Discrimination may be based on race, gender, or other observable differences of workers.


• Fifty years ago, women earned about 50 percent of the wages of men. Today, women earn 80 percent of the wages of men.

• In the 1950s, blacks earned 60 percent of the wages of whites. The gap has narrowed to 70 percent since then.

Discrimination


Figure 9: Discriminationin the Labor Market


Discrimination

In Figure 9, discrimination is depicted as an incorrect perception that the discriminated-against worker has a lower marginal revenue product.

Discrimination will lead to a suboptimal profits made by the firm. If the firm hires more of the workers it previously discriminated against, its profits will rise.


Minimum Wage Laws

Minimum wage laws: government legislation requiring that firms pay a worker a wage no lower than the legislated minimum. The minimum wage is effectively a price floor, where paying a wage lower than the floor is not legal.


Figure 10: Effects of a Minimum Wage


Effects of Minimum Wage Laws• A minimum wage rate set higher than the

market equilibrium will create unemployment.

• A minimum wage set lower than the market equilibrium will have no effect.

• A minimum wage is more likely to cause unemployment in the market for unskilled workers.

Minimum Wage Laws


Minimum Wage Laws

Minimum Wages of Some States (as of April 2007)

Alaska: $7.15 per hourArizona: $6.75 per hourCalifornia: $7.50 per hourMassachusetts: $7.50 per hourTexas: $5.15 per hourWashington: $7.93 per hourDistrict of Columbia: $7.00 per hour

Source: Department of Labor, Wage and Hour Division (http://www.dol.gov/esa/minwage/america.htm).


Fixed Wage Contracts

Piece-rate system: a system in which workers are paid a specific amount per unit of output that they produce.

Examples:• Lettuce growers pay harvesters and packers

per box of lettuce that they pack.• Cotton pickers are paid per 100 pounds of

cotton that they pick.


Deferred Wage Payments

Deferred wage contract: an agreement between a worker and an employer under which the worker is paid less than the marginal revenue product when young, and subsequently paid more than the marginal revenue product when old.


Examples:

• Lawyers and accountants, who are paid a lot more once they become partners

• Generous retirement benefits

Deferred Wage Payments


Labor Unions

Labor union: a coalition of workers organized to improve the wages and working conditions of the group’s members.

Examples:• United Auto Workers (UAW)• United Farm Workers (UFW)• American Federation of Labor (AFL)• Congress of Industrial Organizations (CIO)


Industrial union: a union organized within an industry, whose members come from a variety of occupations.

Craft union: a union organized to represent a single occupation, whose members come from the same industries.

Labor Unions


National Labor Relations Act (1935): a law that gives workers the right to organize into unions and bargain with employers.

National Labor Relations Board: the government agency that ensures firms do not illegally prevent workers from organizing and that monitors the election of union officials.

Labor Unions


Labor unions can raise wages by restricting labor supply. By restricting the supply of workers in the union, the supply of non-union workers increase, and the equilibrium wages drop for non-union workers.

Labor Unions


Figure 11: The Effectof Unions on Wages


Labor Unions

Other explanations for why union workers have higher wages:

• Unions can reduce the exit of workers when a dispute with management occurs. This is beneficial when exit from the firm is costly.

• The “collective voice” role of unions provides workers with a means through which they can improve productivity.


Monopsony and Bilateral Monopoly

Monopsony: a situation in which there is a single buyer of a particular good or service in a given market.

Bilateral monopoly: a situation in which there is one buyer and one seller in a market.


Key Terms

• fringe benefits• wage• real wage• labor market• labor demand• labor supply• derived demand• marginal revenue product

of labor• backward-bending labor

supply curve• human capital

• on-the-job training• labor market equilibrium• labor productivity• compensating wage

differential• piece-rate system• deferred payment contract• labor union• industrial union• craft union• monopsony• bilateral monopoly

Documents

Chapter 13 Labor Markets. Copyright © Houghton Mifflin Company. All rights reserved.13 | 2 Measuring Workers’ Pay Pay includes fringe benefits Fringe