Microeconomics Module 12 Labor Markets Why It Matters

Microeconomics Module 12: Labor Markets

Why It Matters: Labor Markets • • • In a market economy like the U. S. , incomes from ownership of the means of production: resources or assets One’s income is a function of two things: • • The quantity of each resource one owns The value society places on those resources For the majority of us, the most important resource we own is our labor

What is the Labor Markets? • • The labor market is the term that economists use for all the different markets for labor There is a different market for every different type of labor, depending on: • • • Work skill level geographical location The labor market is influenced by supply and demand If a firm wants to maximize profits, it will pay more for a worker than the value of his or her marginal productivity to the firm, this is called the first rule of labor markets

Labor Markets •

Demand for Labor in Perfectly Competitive Output Markets • • The question for any firm is how much labor to hire A perfectly competitive labor market is one where firms can hire all the labor they wish at the going market wage • • Employers who need secretaries can probably hire as many as they need if they pay the going wage rate Graphically, this means that firms face a horizontal supply curve for labor

Demand for Labor in Imperfectly Competitive Output Markets •

What Determines the Going Market Wage Rate? • • The labor market has demand supply curves like other markets The demand for labor curve is a downward sloping function of the wage rate The market demand for labor is the horizontal sum of all firms’ demands for labor The supply for labor curve is an upward sloping function of the wage rate

Balance Between Workers and Employers • To give workers more power, the U. S. government has passed a number of laws to create a more equal balance of power between workers and employers, the laws include the following: • • • Setting a minimum hourly wages Setting a maximum hours of work (before overtime) Prohibiting child labor Regulating health and safety conditions in the workplace Preventing discrimination on the basis of race, ethnicity, gender, sexual orientation, and age Requiring employers to provide family leave Requiring employers to give advance notice of layoffs Covering workers with unemployment insurance Setting a limit on the number of immigrant workers

Prominent U. S. Workplace Protection Laws • • • Social Security Act of 1935: establishes unemployment insurance Fair Labor Standards Act of 1938: establishes a minimum wage, limits on child labor, and rules requiring payment of overtime pay for those in jobs that are paid by the hour and exceed 40 hours Civil Rights Act of 1964: Title VII of the Act prohibits discrimination in employment on the basis of race, gender, national origin, religion, or sexual orientation Occupational Health and Safety Act of 1970: creates the Occupational Safety and Health Administration which protects workers from physical harm in the workplace Employee Retirement and Income Security Act of 1974: regulates employee pension rules and benefits

Prominent U. S. Workplace Protection Laws cont. • • Pregnancy Discrimination Act of 1978: prohibits discrimination against women in the workplace who are planning to get pregnant or who are returning to work after pregnancy Americans with Disabilities Act of 1990: prohibits discrimination against those with disabilities and requires reasonable accommodations Family and Medical Leave Act of 1993: allows employees to take up to 12 weeks of unpaid leave per year for family reasons, including birth and family illnesses Lilly Ledbetter Fair Pay Act of 2009: restores protection for pay discrimination claims on the basis of sex, race, national origin, age, religion, or disability

Labor Market Power by Employers • • A competitive labor market is one where there are many potential employers for a given type of worker, say a secretary or an accountant If there was only one employer in a labor market, that employer has no direct competition in hiring • • If they offer lower wages than would exist in a competitive market, employees would have few options Since the employer is exploiting its market power, we call the firm a monopsony However, because they face the market supply curve for labor, if they want to hire more workers, they must raise the wage they pay This creates a quandary, which we can understand by introducing a new concept: the marginal cost of labor • The marginal cost of labor is the cost to the firm of hiring one more worker

Labor Market Power by Employees • • • A labor union seeks to change the balance of power between employers and workers by requiring employers to deal with workers collectively • A labor union operates like a monopoly in a labor market Collective bargaining- negotiations between unions and firms The subject of labor unions can be controversial • • Supporters of labor unions view them as the workers’ primary line of defense against efforts by profitseeking firms to hold down wages and benefits Critics of labor unions view them as having a tendency to grab as much as they can in the short term

Facts about Union Membership and Pay • • • According to the U. S. Bureau of Labor and Statistics, about 10. 7% of all U. S. workers belong to unions 11. 2% of U. S. male workers belong to unions; 10. 2% of female workers do 10. 5% of white workers, 13% of black workers, and 8. 8 % of Hispanic workers belong to unions 11. 8% of full-time workers and 5. 7% of part-time workers are union members 5. 11% of workers ages 16– 24 belong to unions, as do 13. 9% of workers ages 45 -54 Some of the Largest American Unions are: • • • National Education Association (NEA) Service Employees International Union (SEIU) American Federations of Teachers (AFT)

Percentage of Wage and Salary Workers Who Are Union Members

Higher Wages for Union Workers • • • Because a union is the sole supplier of labor, it can act like a monopoly and ask for whatever wage rate it can obtain for its workers If employers need workers, they have to meet the union’s wage demand This labor market situation resembles what a monopoly firm does in selling a product, but in this case a union is a monopoly selling labor to firms

Higher Wages for Union Workers cont. • • • From the union point of view, workers who receive higher wages are better off A sensible union must recognize that when it pushes up the wage, it also reduces the firms’ incentive to hire From the firm’s point of view, the key question is whether union workers’ higher wages are matched by higher productivity If so, then the firm can afford to pay the higher union wages and, the demand curve for “unionized” labor could actually shift to the right Union workers might have higher productivity than nonunion workers because: • • Higher wages may elicit higher productivity Union workers tend to stay longer at given job, reduces the employer’s costs for training and hiring

The Decline in U. S. Union Membership • • The proportion of U. S. workers belonging to unions has declined dramatically since the early 1950 s Economists have offered a number of possible explanations: • • The shift from manufacturing to service industries The force globalization and increased competition from foreign producers A reduced desire for unions because of the workplace protection laws now in place U. S. legal environment that makes it relatively more difficult for unions to organize workers and expand their membership

The Growth Service Jobs

Employment Discrimination • • • Discrimination involves acting on the belief that members of a certain group are inferior solely because of a factor such as race, gender, or religion There are many types of discrimination but the focus here will be on discrimination in labor markets This arises if workers with the same skill levels—as measured by education, experience, and expertise—receive different pay or have different job opportunities because of their race or gender

Earnings Gaps by Race and Gender • A possible signal of labor market discrimination is when an employer pays one group less than another • • Research by the economists Francine Blau and Laurence Kahn shows that the gap between the earnings of women and men did not move much in the 1970 s, but has declined since the 1980 s According to the U. S. Census, the gap between the earnings of blacks and whites diminished in the 1970 s, but has not changed in 50 years

Competitive Markets and Discrimination • • In a competitive market, if the business owners care more about the color of money than about the color of skin, they will have an incentive to make buying, selling, hiring, and promotion decisions strictly based on economic factors Discriminatory impulses can emerge at a number of levels: among managers, among workers, and among customers • • • If the business owners care more about the color of money than about the color of skin, they will have an incentive to make buying, selling, hiring, and promotion decisions strictly based on economic factors If a business is located in an area with a large minority population and refuses to sell to minorities, it will cut into its own profits If some businesses run by bigoted employers refuse to pay women and/or minorities a wage based on their productivity, then other profit-seeking employers can hire these workers

An Increasingly Diverse Workforce

Immigration • • A surge of immigration can affect the economy in a number of different ways About one-third of immigrants over the age of 25 lack a high school diploma • • As a result, many of the recent immigrants end up in jobs like restaurant and hotel work, lawn care, and janitorial work This kind of immigration represents a shift to the right in the supply of unskilled labor for a number of jobs, which will lead to lower wages for these jobs The middle- and upper-income households that purchase the services of these unskilled workers will benefit from these lower wages However, low-skilled U. S. workers who must compete with low-skilled immigrants for jobs will tend to suffer from immigration

Quick Review • • What are labor markets? Why is the value of the marginal product of labor the demand for labor? What is the demand for labor in perfectly competitive output markets? How do you graph it? What is the demand for labor in imperfectly competitive output markets? How do you graph it? How does supply and demand interact to determine the market wage rate? How are wages and employment determined in labor markets where employers have market power (monopsonies)? What is the role and impact of labor unions? How does the existence of a labor union affect wages and employment in a labor market?

More Quick Review • • • What are the earning gaps based on race and gender? What is the impact of discrimination in a competitive market? What are the economic implications of immigration?