16 Labor The Human Input Octavius a wealthy

16 Labor: The Human Input Octavius (a wealthy young Englishman): “I believe most intensely in the dignity of labor. ” The chauffeur: “That’s because you never done any. ” GEORGE BERNARD SHAW, MAN AND SUPERMAN, ACT II

Contents ● Wage Determination in Competitive Labor Markets ● The Supply of Labor ● Why Do Wages Differ? ● Unions and Collective Bargaining Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -1 Long-Run Trends in Real Wages, Compen. , & Hours FIGURE 180 Real hourly compensation (wages plus benefits) 160 140 Real hourly wages 1959 = 100 120 100 80 Hours worked per week 60 40 20 0 1909 1919 1929 1939 1949 1959 1969 1979 1989 2001 Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -2 Income Inequality, 1967 versus 2000 Share of U. S. Aggregate Household Income (percent) FIGURE Poorest one-fifth of U. S. households 60. 0 Richest one-fifth of U. S. households 49. 6 50. 0 43. 8 40. 0 30. 0 20. 0 10. 0 4 0. 0 3. 6 1967 2000 Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Wage Determination in Competitive Labor Markets ● The Demand for Labor and the Determination of Wages ♦ Marginal productivity demand for labor ♦ Marginal revenue product of labor (MRPL) = the increase in the employer’s total revenue that results when he or she hires an additional unit of labor Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Wage Determination in Competitive Labor Markets ● Influences on MRPL: Shifts in the Demand for Labor ♦ Investment in human capital MRPL ♦ Since the demand for labor is a derived demand, anything that improves the market for the goods and services that labor produces can shift the labor demand curve upward. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -3 Equilibrium in a Competitive Labor Market FIGURE Weekly Wage D $300 S

Wage Determination in Competitive Labor Markets ● Technical Change, Productivity Growth, and the Demand for Labor ♦ Technical change that increases the worker’s productivity has two opposing effects on MRPL: ■ increase in the worker’s marginal physical product (MPP, i. e. , the quantity of output that an additional worker can produce) ■ output price (P) Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Wage Determination in Competitive Labor Markets ● Technical Change, Productivity Growth, and the Demand for Labor ♦ Since a rise in productivity raises MPP but reduces P, we cannot be sure of the net effect on MRP; that is, the net effect on the demand curve for labor. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Wage Determination in Competitive Labor Markets ● The Service Economy and the Demand for Labor ♦ productivity employment & wages sometimes in the short run ♦ But in the long run, productivity reallocation of labor and higher incomes ♦ productivity in manufacturing employment in service sector Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -4 Growing Service Sector Jobs in 9 Countries Service-Sector Jobs as a Percentage of the Total Labor Force FIGURE 80 1967 70 1999 60 50 40 30 20 10 0 Spain Italy Germany Japan France Sweden United Canada United Kingdom States Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

The Supply of Labor ● Labor supply trends ♦ Total labor force increased from about 60 million jobholders right after the WWII to over 132 million today. ♦ Proportion of population with jobs has grown from about 58% after WWII to 67% today. ♦ Entry of new workers into labor force ♦ Protracted and substantial relative decline in union membership Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

The Supply of Labor ● Rising Labor-Force Participation ♦ labor force participation wages, at least for a time: ■The sheer increase in the supply of workers tends to depress wages. ■A combination of discrimination and the initial lack of experience of the new entrants into the labor market has had a similar effect. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

The Supply of Labor ● An Important Labor Supply Puzzle ♦ Supply of labor = demand for leisure ♦ Effects of wage increase ■Substitution effect: cost of leisure positively sloped supply curve (more hours worked) ■Income effect: wealth negatively sloped curve (fewer hours worked) Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

The Supply of Labor ● An Important Labor Supply Puzzle ♦ Over the long run, the income effect seems to have predominated, leading to a negative relationship between real wages and hours per worker. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -5 A Typical Labor Supply Schedule FIGURE Income effects outweigh substitution effects Wage Rate B Income effects balance substitution effects A Substitution effects outweigh income effects Quantity of Labor Supplied Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

The Supply of Labor ● The Labor Supply Resolved ♦ Rising wages enable workers to provide for their families with fewer hours of work. ♦ Thus, it is the strong income effect of rising wages that may account for the fact that labor supply has responded in the “wrong” direction, with workers working ever-shorter hours as real wages rose and longer hours as wages fell. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Why Do Wages Differ? ● The explanation of wage differences is the fact that there is not one labor market but many. ♦ Each has its own supply and demand curves. ♦ Each has its own equilibrium wage. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

FIGURE 16 -6 Wage Differentials D 1 S 1 D 2 S 2 Wage

Why Do Wages Differ? ● Labor Demand in General ♦ Different workers have different productivities. ♦ Each worker’s marginal physical product depends on: ■His or her own abilities ■His or her degree of effort ■The other factors of productions with which he or she has to work Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Why Do Wages Differ? ● Labor Supply in General ♦ Factors that influence the supply side: ■The size of the available working population ■The non-monetary attractiveness of a job ■The abilities needed ■The amount and expense of the necessary training Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Why Do Wages Differ? ● Ability and Earnings: The Rent Component of Wages ♦ The concept of economic rent can explain at least part of the earnings of people whose abilities cannot (or at least not easily) be duplicated. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Why Do Wages Differ? ● Investment in Human Capital ♦ Human capital theory sees education and training as investments, leading to a later payoff of higher earnings. ♦ The higher earnings are necessary to induce the sacrifices needed in terms of education and training. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Why Do Wages Differ? ● Education and Earnings: Dissenting Views ♦ Education as a Sorting Mechanism ■Education viewed as a sorting device that does not itself increase productivity. ■The educational system sorts individuals by ability. The skills necessary to succeed in school are closely related to the skills that lead to success in jobs. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Why Do Wages Differ? ● Education and Earnings: Dissenting Views ♦ Dual Labor Market Theory ■Two labor markets, not one: ● Primary labor market--good jobs ● Secondary labor market--“dead-end” jobs ■Dual labor market theorists see some people shunted into dead-end jobs where education is of little use. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Why Do Wages Differ? ● The Effects of Minimum Wage Legislation ♦ Teenagers are more vulnerable to unemployment than other workers, and some observers have blamed minimum wage laws. ♦ Recent research shows, however, that increases in the minimum wage do not reduce the number of teenage workers employed much, if at all. ♦ In any case, the real value of the minimum wage has not increased over time. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -7 The Teenage Unemployment Problem FIGURE 50 45 Black male teenagers Unemployment Rate (Percent) 40 35 30 25 White male teenagers 20 15 10 5 All workers 0 1972 1977 1982 1987 1992 1997 2001 Year Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -8 The Minimum Wage, 1950 -2001 FIGURE 6 Minimum Hourly Wage Rate 5 4 Nominal rate 3 2 Real rate (adjusted for inflation) 1 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2001 Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Unions and Collective Bargaining ● Unions attempt to monopolize the sale of labor, so the competitive model breaks down in this case. ● Union membership is only a small and declining portion of the American labor force, however. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -9 Unionization in the United States, 1930 -2000 FIGURE Percentage of Wage and Salary Workers 30 25 20 15 10 5 0 1930 1940 1950 1960 1970 1980 1990 2000 Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Unions and Collective Bargaining ● Why has unionism been declining? ♦ The shift of the U. S. labor force into service industries and out of manufacturing ♦ Deregulation forced some industries to compete more intensely, and it may, thus, have influenced the firms to hire less-expensive, non -union labor. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Unions and Collective Bargaining ● Why has unionism been declining? ♦ American workers’ preferences seem to have shifted away from unions. ♦ American unions have been under increasing pressure in the 1990 s owing to stronger competition both at home and from abroad. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Unions and Collective Bargaining ● Unionization is much less prevalent in America than it is in most other industrialized countries. ● The main sector of the U. S. economy in which the unions are still fairly healthy is government employment. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Unions as a Labor Monopolies ● Unions monopolize the supply of labor, but they are not all powerful. ● Unions must choose among competing goals, and they need to weigh alternative strategies. ♦ Attaining the highest wage possible for current union members ♦ Increasing the size of the union Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Unions as a Labor Monopolies ● Unions also try to the demand for labor: ♦ Featherbedding: forcing management to employ more workers than they really need ♦ Institute a campaign to raise worker productivity ♦ Raise the demand for the company’s product ■Flex political muscle (for example, by obtaining legislation to reduce foreign competition) ■Appeal to the public to buy union products. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -10 Union Control over the Demand Curve FIGURE S D 1 D 0

Unions as a Labor Monopolies ● Have Unions Really Raised Wages? ♦ Unionized workers generally receive somewhat higher wages (approximately 15 percent) than non-unionized workers, but it is not clear just how responsible unions have been for wage increases. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Monopsony and Bilateral Monopoly ● Monopolistic unions sometimes face employers who have a monopsony, or something close to it, in the hiring of labor. ♦ Monopsony = market situation in which there is only one buyer ♦ Bilateral monopoly = a market situation in which there is both a monopoly on the selling side and a monopsony on the buying side Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Collective Bargaining and Strikes ● It is almost impossible to develop models to predict

Collective Bargaining and Strikes ● Mediation and Arbitration ♦ Sometimes the parties come to a mutual agreement among themselves. ♦ Sometimes they resort to a (non-binding) mediator or to a (binding) arbitrator. ♦ Sometimes the bargaining breaks down and a strike ensues. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Collective Bargaining and Strikes ● Strikes ♦ It is important to the credibility of unions to be willing to strike, and to the credibility of employers to be willing to endure a strike. Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -11 Work Time Lost in the U. S. because of Strikes FIGURE 0. 50 0. 45 Percentage of Work Time Lost 0. 40 0. 35 0. 30 0. 25 0. 20 0. 15 0. 10 0. 05 0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2001 Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

16 -12 The Incidence of Strikes in 8 Industrial Countries FIGURE Days Lost per Thousand Workers per Year 160 140 120 100 80 60 40 20 0 Italy Canada Sweden United States France United Germany Japan Kingdom Copyright© 2003 South-Western/Thomson Learning. All rights reserved.