Labor markets and income distribution
Today: Value of work, human capital, unions,
discrimination, and income distribution
Today: 5 mini-lectures about labor markets Value of work
How much is labor worth? Human capital
Training, education, experience, etc. Unions
Direct effects and indirect effects Discrimination
What does theory tell us about discrimination?
Income distribution Is income inequality a bad thing?
Value of work
Will every person get the same wage for the same hour of work?
Maybe It depends what the structure of the
market is It depends on the marginal value of
the hour of work
Suppose a competitive labor market
If each person’s hour of work results in $50 in additional output, should each worker get paid $50 per hour? Not quite You have to deduct the firm’s costs
Capital costs Input costs Transaction and handling costs
Simple example with input and capital costs
I need $20 in supplies and one hour to build a small cabinet
The firm I work for also needs to rent a cubicle, at $8 per hour
Once I finish building the cabinet, the firm can sell it to a wholesaler for $50
What is my worth to the company?
What is my worth to the company? The company is willing to pay up to $22
per hour for my labor to build cabinets Costs: $28 (supplies and cubicle) Benefits: $50
In a competitive environment, if Firm X offers less then $22, Firm Y can offer me more than what Firm X does
The battling between Firms X and Y will continue until one offers $22
Marginal product of labor In this example, my marginal product
(MP) of an hour of labor is 1 cabinet The value of my marginal product
(VMP) of an hour of labor is the additional value my hour of work produces: $22
All workers just like me will earn $22 per hour in a competitive labor market
Suppose that you could build two cabinets per hour
Should you earn $22 per hour? No
Costs per hour: $48 (Supplies for two cabinets and one hour’s cubicle rental)
Benefits per hour: $100 (two cabinets) You should earn $52 per hour for your
work
Back to an old example# of
empl./dayPhones per
day
0 0
1 20
2 45
3 55
4 63
5 67
Recall the following information
Phones sell for $18 each Variable cost is $100 per worker Only other costs are fixed
Different analysis, same resultProduce as long as VMP > $100
# of empl./day Phones per day
MP (extra phones per day)
VMP ($ per day)
0 0
20 360
1 20
25 450
2 45
10 180
3 55
8 144
4 63
4 72
5 67
Hire?
Yes
Yes
Yes
Yes
No
Recall this table from Lecture 6: We hire 4 workers either way
# of empl./day
Phones per day
MB ($/phone) MC ($/phone)
0 0
18.00 5.00
1 20
18.00 4.00
2 45
18.00 10.00
3 55
18.00 12.50
4 63
18.00 25.00
5 67
When analyzing labor problems…
You can often choose the method you use to maximize a firm’s benefits
Notice that we get the same answer either way
Summary: Value of work In a competitive labor market, the long-
run equilibrium wage is a worker’s VMP More productive workers will get paid more
in a competitive environment equilibrium Some labor problems that were analyzed
using the MB/MC approach can also be analyzed using a VMP approach
Human capital
Human capital comprises of the characteristics that affect the value of the person’s work when hired
The better the characteristics of human capital, the more a person is likely to earn
Some human capital qualities Education
Direct knowledge Intelligence Signaling
Training Work and life
experiences
Energy level Work habits Trustworthiness Initiative
Education sends many messages to a potential employer
“I have learned everything needed to finish this level of education”
“I am intelligent enough to finish this education, which probably means I am smarter than those without my level of education”
“I am using this level of education to send a signal that I have other good qualities that you are looking for; others that do not finish this level of education can say the same thing”
Education and employment
Many jobs require a minimum level of education to be considered for a job M.D. to be hired as a doctor License for many specialized fields
Real estate Pilot
High school or college diploma for many entry-level jobs
Education and employment
The more education you have, the higher you are in demand for your services Exceptions: People that get a Ph.D. in
the humanities often end up in the same type of job that they had before
For more on education
See “Mandatory starting dates for kindergarten,” p. 367
See Economic Naturalist 13.4, p. 387
A new class is being developed in the Economics department
Summary: Human capital
Many characteristics form human capital Education probably most important
for most people Human capital is valued by
employers due to the fact that it increases a workers productivity
Unions
Unions form so that workers can collectively bargain Wages Working conditions
Unions and wages
Can anyone unionize and demand higher wages? In most cases, yes Demands will not always be agreed to As wage increases, the firm can
employ fewer people profitably
When are unions effective?
Finding qualified workers outside of a union is difficult or impossible Example: Writers’ strike
See “Additional reading” on class website for more on this topic
When a firm is making economic profits
When a unionized firms can hire better workers than nonunionized firms
Quote from writers’ strike article
“In the world of labor negotiations today, the writer of a hot TV show has more power than an auto assembly worker with a rivet gun.”(From “Writers a rarity — a union with power.” Posted 11/5/07. See http://www.msnbc.msn.com/id/21598412/)
Why can writers form a powerful union?
Few good outsourcing options Requires specialized skills Unionization of all writers means that
no writer will write for a show without the union’s “blessing” “Scabs” that write without the union’s
blessing during a strike are often unable to obtain work once the strike is over
What can networks do to combat the writers’ union?
More unscripted programming Reality shows Game shows Sports TV news magazines (60 Minutes,
20/20, etc.) “Specials” (Barbara Walters,
concerts)
Summary: Unions Unions can be effective in some
situations When workers doing the same kind of
job are heterogeneous in human capital
When replacement workers cannot easily be found
No good outsourcing options Nobody outside of the union is able to do
the job
Discrimination
The “wage gap” between men and women has been a hot topic for decades
How much of this is due to discrimination?
How much of this is due to other factors?
Recall human capital theory
Human capital theory says that wages are determined by factors such as education and experience
Education likely to affect wage gap Mid-20th century: More men than
women with college education Today: 4 women graduate college for
every 3 men
The wage gap, declining
As more women enter the work force, the wage gap declines More women enter a job with the
same education as men Despite changes in education,
there is still a wage gap
What else explains the wage gap?
Holding constant important factors such as occupation, education, field of expertise, and years of experience Men often choose majors with high
salary potential after graduation Math, science
What else explains the wage gap?
Customer discrimination Examples
Lawyers Physicians
Incorrect conclusions about the relative productivity of men and women
Does discrimination actually occur?
Probably Likely due to the incorrect
conclusions about the productivity of men and women
Does discrimination actually occur? Example of what might be
occurring Some managers may look at two
candidates for a promotion, one male, one female
Both are nearly equally qualified On paper, most managers would
promote the woman 90% of managers would promote the
woman based solely on human capital
Does discrimination actually occur? Some managers may have experiences
from the past that “women are family oriented” and “men are career oriented”
Although today’s workforce is more homogeneous than it used to be, some managers may subconsciously favor the man when the gender of both applicants is known When gender of both is known, maybe only
30% of managers promote the woman
Does discrimination actually occur?
In jobs where men are mostly managers, they may incorrectly weigh human capital traits High weight to human capital traits
that men have more of Low weight to human capital traits
that women have more of
Does discrimination actually occur? What will happen when these managers
“get it wrong?” Promotion of a lower-productivity worker Lower productivity leads to lower profits Lower profits lead to a higher likelihood that
a business in a perfectly competitive environment will not survive in the long-run
Higher productivity worker may find a better job at another firm
Does discrimination actually occur? Results of this example
When human capital differences are clear, the best candidate will get the promotion
When human capital differences are not clear, the promotion may be more likely to go the male worker
Perfectly competitive firms that discriminate are less likely to survive in the long run
Summary: Discrimination A wage gap between men and women’s
pay has existed for decades Some of this can be explained by
controlling for education, experience, and other factors
Some discrimination may be occurring Firms that do discriminate based on factors
such as gender and race are less likely to be competitive in the long run
Income distribution
Is income inequality a bad thing? Some argue that people would prefer
more income equality Others argue that economic
incentives are needed to keep the “economic pie” from getting smaller
Mean income table (families), from F/B, p. 411 (2000 dollars)
Real income growth, 1980-2000 Bottom 20% has been flat Top 20% has seen huge growth (59%)
Quintile 1980 1990 2000Bottom 20 percent
$12,756 $12,625 $14,232
Second 20 percent
$27,769 $29,448 $32,268
Middle 20 percent
$41,950 $45,352 $50,925
Fourth 20 percent $58,200 $65,222 $74,918
Top 20 percent $97,991 $121,212 $155,527
Top 5 percent $139,302 $190,187 $272,349
The gap between rich and poor widens
The rich are getting richer, but the poor are notnot getting poorer
The middle class has seen moderate real growth in income 16-29% growth for the categories in
the middle 60%
The “veil of ignorance”
John Rawls, a moral philosopher, came up with the following argument to create income equality “Veil of ignorance”
Conceals knowledge and talents from people
Risk averse people will want to have income equality under these conditions
No inferiority, jealousy or envy based on income
Problems with income inequality
Those that are relatively poor may feel inferior This problem may perpetuate to their
children Jealousy towards other people Envy towards other people’s
accomplishments
Problem: The “economic pie” will shrink with Rawls’ ideas
If income was guaranteed to be equal to everyone, nobody will have an economic incentive to gain human capital Smaller “economic pie”
Less human capital People work less
Is there an optimal amount of income inequality?
Impossible to answer Different people have different
opinions about effectiveness of realistic ways to redistribute income
Some methods of income redistribution (& their problems)
Welfare payments Little economic incentive to get off of
welfare without time limits Negative income tax
Incentive to work for pay diminishes
Some methods of income redistribution (& their problems)
Minimum wage Unemployment
Public employment of the unemployed Needs to have enough incentives for
unemployed people to want to work Needs to have incentives low enough for
employed people to stay in their old job
A success story ofincome redistribution
The earned-income tax credit (EITC) The “working poor” receive a sizable
credit for working and making an income in a given range
Essentially a negative income tax for those working and making low incomes
Summary: Income distribution In recent decades, income inequality
has grown Due mostly to large real growth in upper
income groups Income equality is a moral issue, but
with many costs when implemented The EITC is a success story of balancing
income redistribution and economic incentives