Introduction to Labor Economics

Graphs and TablesHandout #2

Table B-1.1: Marginal Revenue Product of Labor

L Q MPL

P = $10 MRPL

1 100 100 $1,000

2 190 90 $900

3 270 80 $800

4 340 70 $700

5 400 60 $600

6 450 50 $500

7 490 40 $400

8 520 30 $300

Figure B-1.1: Marginal Revenue Product of Labor

MRPL

L

MRPL

1 8

$1,000

$300

Table B-1.2: Minimum Wage Legislation, 1938-2009

Date Wage Coverage Date Wage Coverage

10/24/38 $0.25 43.4% 02/01/67 $1.40 75.3%

10/24/39 $0.30 47.1% 02/01/68 $1.60 72.6%

10/24/45 $0.40 55.4% 02/01/69 $1.60 78.2%

01/25/50 $0.75 53.4% 02/10/70 $1.60 78.5%

03/01/56 $1.00 53.1% 02/01/71 $1.60 78.4%

09/03/61 $1.15 62.1% 05/01/74 $2.00 83.7%

09/03/63 $1.25 62.1% 01/01/75 $2.10 83.3%

09/03/64 $1.25 62.6% 01/01/76 $2.30

Table B-1.2: Minimum Wage Legislation, 1938-2009

Date Wage Coverage Date Wage Coverage

01/01/78 $2.65 83.3% 07/24/07 $5.85

01/01/79 $2.90 07/24/08 $6.55

01/01/80 $3.10 07/24/09 $7.25

01/01/81 $3.35

04/10/90 $3.80 88.6%

04/01/91 $4.25

10/01/96 $4.75 89.5%

09/01/97 $5.15

• Source: Ehrenberg and Smith, Modern Labor Economics, 7th Edition, p. 122

• US DOL, “History of Changes to the Minimum Wage Law”

Figure B-1.2:Conventional Approach to Minimum Wage for a Two Sector Model

Covered Low Skill Market Uncovered Low Skill Market

D

S0S1

W0

W2

S2

S0

L0 L2 L3

D

Lmin L0 LS

W0

Wmin

L L

W W

WL

Figure B-1.3: Minimum Wage Market with Employer Reductions in Fringes

Covered Low Skill Market

D0

S0

S1

Lmin L1L0

W0

Wmin

L

W

D1

W1

a

c

b

Figure B-2.1: Elasticity and the Demand Curve

w

L

$60

180 360

$30

eDL > 1

eDL = 1

eDL < 1

Figure B-2.2: Relatively Elastic Demand Curve

L

W

D

$10

$12

1000 1500

Figure B-2.3: Relatively Inelastic Demand Curve

L

W D

$25

$50

900 1000

Figure B-2.4: Unit Elastic Point on Demand Curve

W

L

$60

150 300

$30

eDL = 1

Figure B-2.5: Substitutability of Other Factors of Production

W

LL

W

L

D0

D1

(a) Easy to find substitutes (b) Difficult to find substitutes

400 600

$20$22

$10

$5

800 900

Figure B-2.6: Labor Cost as a Proportion of Total Cost

W

L L

W

(a) Labor Intensive Industry (b) Capital Intensive Industry

D0

D1

80 160 80 90

$10$12

$10$12

Figure C-2.1: Age-Earnings Profiles for High School Grads and College Grads

18 22 65Age

Earnings

(1)

(2)

(3)

YHS

YC

DirectCosts

Opportunity Costs

Net Benefits toCollege Attendance

Table C-2.1: Numerical Example

Occupation Occupation r = 15% r = 25%

Year YC YHS YC - YHS YC - YHS

1 $0 $10,000 -$8,695 -$8,000

2 $0 $10,000 -$7,561 -$6,400

3 $20,000 $10,000 $6,575 $5,120

4 $20,000 $10,000 $5,717 $4,096

5 $20,000 $10,000 $4,971 $3,277

6 $20,000 $10,000 $4,323 $2,621

Table C-2.2: Direct Costs

r = 15% r = 25%

Year C C C

1 $1,000 $869 $800

2 $1,000 $756 $640

Figure C-2.2a: Supply and Demand for Higher Education

PHE

QHE

S

D0

DSUB

$5K

10m 14m

$9K

$3KWL

• Explanation of Figure C-2.2a– (1) Subsidy lowers cost to students who now

have to pay $3K and get subsidies of $6K. Result: More students go to college.

– (2) Subsidy increases the overall cost of getting a higher education from $5K to $9K. Subsidy gets capitalized into value of inputs so the cost of education rises.

Figure C-2.2b: Supply and Demand for College Grads

D0

S0

SSUB

$30K

20m 22m

$26K WL

W

L

College Grad Labor Market

Figure C-2.3: Supply and Demand for College and High School Grads

HS Grads College GradsL

W

L

W

D

S

S

D

$12K

50m

$18K

30m

• Explanation of Figure C2-3– (1) Equilibrium differential between markets

and the cost of acquiring a college education.– (2) Where PV = C. Where is PV < C and PV >

C?

Figure C-2.4: Productivity in a Screening

Model

MP

Education

1

2

E*

Figure C-2.5: Costs in a Screening Model

$

Education

CB

CA

CA = High psychic cost of acquiring educationCB = Low psychic cost of acquiring education.

Figure C-2.6: The Signaling Model

E*Education

MP, $

1

2

CA

CB

g

h

0

• Explanation of Figure C-2.6– (1) Max Net Benefits for Group A

• Case #1: Acquiring Signal E*• Benefits = 2, Costs = E*h, Net Benefits <1• Case #2: Not Acquiring Signal E*• Net Benefits = 1, so don’t acquire signal E*

– (2) Max Net Benefits for Group B• Case #1: Acquiring Signal E*• Benefits = 2, Costs = E*g >1, Net Benefits >1• Case #2: Not Acquiring Signal E*• Net Benefits = 1, so acquire signal E*

Figure C-2.7: Signaling Failure

E0 E*Education

MP, $

1

2

CA

CB

g’

h’

0

• Explanation of Figure C-2.7– (1) Signal is set too low so that everyone from

both groups has an incentive to acquire signal E0. Why might this occur? (In-Class exercise)

Figure C-2.8: External Benefits of Higher Education

QHE

P

S

DPVT

DSOC

10m 14m

$5K

$3K

$9K

External Benefits = $6K so if only private individual preferences are considered there will be under-provision of higher education.

Figure C-2.9: Imperfect Capital Markets for Financing Higher Education

r

LoanableFunds

D

S0

SGOVT LOAN

$10m

5%

10%

Figure C-2.10: Effect of Minimum Wage on Lifetime Earnings

Earnings

AgeR

Earnings withMinimum Wage

Earnings withoutMinimum Wage

Gains

Losses