Upload
chaitanya-mynampati
View
227
Download
0
Embed Size (px)
Citation preview
8/3/2019 Wages Structure
1/36
Next
page
The Wage Structure
M. Chaitanya
8/3/2019 Wages Structure
2/36
Jump to first page
1. Perfect Competition:Homogenous Workers
and Jobs
8/3/2019 Wages Structure
3/36
Jump to first page
Homogenous Workers andJobs
Assume that the wage of $10 insubmarket a is higher than thewage in other submarkets.
Assuming that jobs andworkers are homogenous andinformation and mobility iscostless, workers will leave the
other submarkets for higherpaying submarket a.
The equilibrium wage rate willdecrease in submarket a and risein the other submarkets until thewage rate is the same in allsubmarkets ($8).
Quantity of
Labor Hours
Wage rate S0a
D0a
Q0
$10
S1a
Q1
$8
This will decrease the laborsupply in the other submarketsand increase the labor supply insubmarket a (S0to S1).
8/3/2019 Wages Structure
4/36
Jump to first page
2. The Wage Structure:Observed Differential
8/3/2019 Wages Structure
5/36
Jump to first page
Hourly Earnings ByOccupational Group, 2003
Occupational Group Hourly Wage
Management, Business, And Financial $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
8/3/2019 Wages Structure
6/36
Jump to first page
Hourly Earnings ByIndustry Group, 2003
Industry Group Hourly Wage
Finance, Insurance, Real Estate, $20.99
Public Administration 20.22
Mining 19.81
Transportation, Warehousing,
Information, and Utilities
19.27
Manufacturing 18.51
Construction 17.31
Services 16.53
Retail Trade 13.21
8/3/2019 Wages Structure
7/36Jump to first page
Private Manufacturing WorkersHourly Earnings By State, 2003
State Hourly Wage
Connecticut $23.13
New Jersey 22.91
Massachusetts 21.44New York 19.09
Pennsylvania 18.26
Ohio 18.12
Texas 17.53
Arkansas 14.77
Mississippi 13.80
8/3/2019 Wages Structure
8/36Jump to first page
3. Wage Differentials:Heterogenous Jobs
8/3/2019 Wages Structure
9/36Jump to first page
Compensating wage differentialsconsist of extra pay that an employer
must provide a worker for some
undesirable job characteristic that does
not exist in alternative employment.
The wage differential is caused by a
decreased labor supply for the job that
has the undesirable job characteristicand an increased labor supply for the
alternative employment.
Compensating Differentials
8/3/2019 Wages Structure
10/36Jump to first page
Sources of compensating differentialsRisk of job injury or death
Riskier jobs pay higher wages
Fringe benefits Jobs with greater fringe benefits pay
lower wages
Job status
Jobs with greater prestige pay lowerwages
Compensating Differentials
8/3/2019 Wages Structure
11/36Jump to first page
Job locationCities with greater amenities pay
lower wages.
Cities with greater cost of living pay
higher nominal wages. Job security
Jobs with greater job security pay
lower wages.
Prospect of wage advancement
Jobs with greater wage advancement
have lower startingwages.
Compensating Differentials
8/3/2019 Wages Structure
12/36Jump to first page
Extent of control over the work place Jobs with less personal control over
the workplace and less flexible work
hours pay higher wages.
Compensating Differentials
8/3/2019 Wages Structure
13/36Jump to first page
Jobs that require more education andtraining will pay a higher wage rate
than those that do not.
The wage difference between skilled
and unskilled workers is called theskill differential.
Skill differentials can increase,
decrease, or reverse wage differencescaused by compensating differentials.
Example: Nurses earn more than ditch
diggers
Differing Skill Requirements
8/3/2019 Wages Structure
14/36Jump to first page
Shirking modelFirms will pay above-market wages
where it is costly to monitor employee
performance or the employers cost of
poor performance is high.
Turnover model
Firms will pay above-market wages
when hiring and training costs are high. Empirical evidence
There is mixed empirical evidence.
Efficiency Wage Payments
8/3/2019 Wages Structure
15/36Jump to first page
Union statusUnion workers earn more than
nonunion workers.
Most of the differential is an economic
rent to union workers.
Discrimination
Discrimination against women and
minorities exists in some markets andcreates wage differentials.
Other Job or EmployerHeterogeneities
8/3/2019 Wages Structure
16/36Jump to first page
Firm sizeLarge firms pay higher wages than
small firms.
Large firms are more likely to be
unionized.
Workers at large firms may be more
productive
Training, better workers, greater capital
Higher wages may be a compensatingwage differential.
Other Job or EmployerHeterogeneities
8/3/2019 Wages Structure
17/36
Jump to first page
4. Wage Differentials:Heterogenous
Workers
8/3/2019 Wages Structure
18/36
Jump to first page
Individuals differ in the type, amount,and quality of their human capital.
The result is the labor force consists ofnoncompeting groupsof workers that
are not easily substitutable for eachother.
In the short run, these differences inhuman capital generate wagedifferentials.
In the long run, the wage differentialscause individuals to move to higherpaying jobs to some extent.
NonCompeting Groups
8/3/2019 Wages Structure
19/36
Jump to first page
Differences in time preferencesPersons who are presented-oriented (i.e.,
have a high discount rate) are not willing tosacrifice present consumption without a
large increase in future income.Persons who are future-oriented (i.e., have
a high discount rate) are willing to sacrificepresent consumption for a small increase infuture income.
Persons with lower discount rates acquiremore human capital and thus create wagedifferentials.
Differing Preferences
8/3/2019 Wages Structure
20/36
Jump to first page
Differences in tastes for nonwage aspectsof jobs
People have different preferences for job
security, location, and risk.
These differences in preferences create
wage differentials
Differing Prefences
8/3/2019 Wages Structure
21/36
Jump to first page
Married males earn 8 to 40% more thansingle males.
Possible explanations:
Differing personal attributes.
Characteristics such as personality and
reliability enhance the probability of
being married andalso increase ones
wage.
Greater incentive to acquire human
capital.
Need to help support a family
Married vs Single Males
8/3/2019 Wages Structure
22/36
Jump to first page
Lower cost to acquire human capital.Face a lower interest rate and wives can
help finance education.
Mixed evidence
One study finds that marriage makesmen more productive.
The marriage premium grows with
years married.
Other studies find that differing
personal attributes explain the wage
differential.
Married vs Single Males
8/3/2019 Wages Structure
23/36
Jump to first page
Questions for Thought:
1. Discuss: Many of the lowest-paid people in thesocietyfor example, short-order cooksalsohave relatively poor working conditions. Hence,the theory of compensating wage differentials isdisproved.
2. Explain why pay comparability legislationrequiring that the public sector remunerategovernment employees at wages equal to private-sector counterparts might create excess suppliesof labor in public-sector labor markets.
8/3/2019 Wages Structure
24/36
Jump to first page
5. The Hedonic Theoryof Wages
8/3/2019 Wages Structure
25/36
Jump to first page
Indifference Map
The hedonic indifference mapis composed of a number ofindifference curves.
Nonwage amenity (job safety)
Wage Rate
I1
I2I3
Each individual curve shows thevarious combinations of wagerates and a particular nonwageamenity (for example job safety)that yield a specific level of totalutility.
Each curve to the northeastreflects a higher level of totalutility.
A steep curve implies that theperson is risk averseit takes alarge increase in the wage rateto compensate for a smallreduction in job safety.
8/3/2019 Wages Structure
26/36
Jump to first page
Isoprofit Curve
Nonwage amenity (job safety)
Wage Rate
P
The employers isoprofit curve
shows the various combinationsof wage rates and a particularnonwage amenity (for examplejob safety) that yield a givenlevel of total profit.
Competition among firms willresult in only normal profits(zero economic profit) in thelong run.
Firms will have to make theirwage rate-job amenity decisionsalong a curve such as P.
The isoprofit curve gets steeperwith higher levels of job safety
since it gets more and moreexpensive to increase job safety.
Firms differ in their ability toincrease job safety and thus havedifferent isoprofit curves.
8/3/2019 Wages Structure
27/36
Jump to first page
Matching The slope of isoprofit curve PAis
less steep than curve PB,whichimplies the marginal cost of jobsafety is more expensive at firmB than at firm A.
Workers maximize utility bybeing tangent to the highestpossible isoprofit curve.
The risk averse worker will work
for the firm able to raise safety atlow marginal cost. The workerwill get wage WA and safety SA.
Indifference curve IA is steeperthan curve IB which implies that
person A is more risk averse thanperson B.
The risk loving worker will workfor the firm able to raise safetyat high marginal cost. The worker
will get wage WB and safety SB.
A
SA
WA
IB
IA
PA
Nonwage amenity (job safety)
Wage Rate
PB
B
SB
WB
8/3/2019 Wages Structure
28/36
Jump to first page
Workers with fewer nonwage amenitieswill get higher wages.
Laws with minimum safety standards mayreduce utility of some workers.
Risk loving workers would prefer higherwages to greater safety.
Part of the male-female wage differentialmay reflect differences in preferences for
nonwage amenities.Women may prefer shorter commuting
distances and safer jobs.
Labor Market Implications
8/3/2019 Wages Structure
29/36
Jump to first page
Workers with strong preferences for fringebenefits will match up with firms that can
provide fringe benefits at low cost.
Cafeteria plans which allow workers to
choose from a variety of fringe benefitsallow workers to get higher utility since
they are not forced to accept a fixed bundle.
Labor Market Implications
8/3/2019 Wages Structure
30/36
Jump to first page
6. Wage Differentials:Labor Market
Imperfections
8/3/2019 Wages Structure
31/36
Jump to first page
Wage Rate Distributions If information and job search is
costly, then a single equilibriumwage for a specific occupation isnot likely to occur.
A range of possible wages willexist for an occupation.
These wage differentials willnot cause job switching sincethe expected marginal benefitsof the higher wage are exceededby the expected marginal cost ofobtaining the information.
In this example, 20 percent of
workers will earn between $6.80and $6.99 per hour. However,5% of the workers will earnbetween $6.00 and $6.19, whileanother 5% will earn between$7.60 and $7.79.
5%
8%
12%
15%
20%
15%
12%
8%
5%
0%
5%
10%
15%
20%
25%
Wage Rate
6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4 7.6
L th Adj t t
8/3/2019 Wages Structure
32/36
Jump to first page
Lengthy AdjustmentPeriod
An increase in labor demand
initially may cause a substantialwage increase to W0 inoccupations with lengthytraining periods.
For a time the wage rate mayoscillate above and below thelong-run equilibrium wage rate
We before equilibrium in themarket is finally restored.
But the supply response tohigher wage may create surplusof labor to the occupation in thenext period, driving the wagerate lower to W1.
During the transition periods,wage differentials between thisoccupation and others paying Wewill be observed.
Units of Time
Wage Rate
W0
W1
W2
W3
WeWe
8/3/2019 Wages Structure
33/36
Jump to first page
Labor immobilities are impediments to themovement of labor and can cause wage
differentials.
Geographic immobilties
Costs to moving can deter migration and
thus permit wage differentials to exist
across geographic areas.
Institutional immobiltiesRestrictions on mobility imposed by the
government or unions can deter mobility.
Occupational licensing, apprenticeships
Immobilities
8/3/2019 Wages Structure
34/36
Jump to first page
Sociological immobiltiesRace and gender discrimination will cause
racial and gender wage differentials to
exist.
Immobilities
8/3/2019 Wages Structure
35/36
Jump to first page
Questions for Thought:
1. Suppose that (a) employees must pay higherwages to attract workers from wider geographicareas and hence higher wages are associatedwith longer commuting distances (less of theamenity closeness of job to home) and (b)
females have greater tastes for having jobs closeto their homes than males. Use the hedonic wagemodel to show graphically why a male-femalewage differential might emerge, independentlyof skill differences or gender discrimination.
8/3/2019 Wages Structure
36/36
Thank you