The Role of Labor Chapter 9 Section 1

The Role of Labor

Chapter 9 Section 1 How are wages determined?

Labor: Demand Supply • Demand for Labor ▫ Wages reflect productivity—value of product produced in set time ▫ Producer’s demand for labor is a derived demand: demand based on its contribution to the final product ▫ Workers with higher productivity tend to earn higher wages ▫ Demand curve is downward sloping: lower price means higher demand

Labor: Demand Supply • Supply of Labor ▫ More workers willing to work at higher wages supply curve for labor is upward sloping

Labor: Demand Supply • Equilibrium Wage ▫ Wages gravitate toward equilibrium price at which there is neither surplus nor shortage

Why Do Wage Rates Differ? • Factor 1: Human Capital ▫ Unskilled: few skills; include house cleaning, sanitation workers ▫ Semiskilled: some training; include construction, clerical workers ▫ Skilled: specialized training; include plumbers, electricians ▫ Professional: much specialized training; include doctors, lawyers ▫ Skilled workers: high demand productivity, low supply, high wages

Why Do Wage Rates Differ? • Factor 2: Working Conditions ▫ High wages paid for dangerous or unpleasant occupations examples: washing skyscraper windows, collecting garbage ▫ Advantages may make up for low wages examples: employee discounts, short commute

Why Do Wage Rates Differ? • Factor 3: Discrimination ▫ Wage discrimination based on race, ethnicity, gender, other factors ▫ Some low-paying jobs seen as realm of certain groups workers trapped, unable to earn enough to invest in training Equal Pay Act and Civil Rights Act try to break cycle ▫ glass ceiling—unseen barriers preventing skilled workers from advancing

Why Do Wage Rates Differ? • Factor 4: Government Actions ▫ Minimum wage—lowest wage legally allowed for one hour of work acts as price floor for wages of low-income workers businesses say would hire more workers if could pay less ▫ In 1933, Congress passed first minimum wage; has increased several times ▫ Many states, local governments require higher minimum wage

Gary Becker: The Importance of Human Capital • Investing in Yourself ▫ Says economic principle of rational choice can be used in other areas ▫ The Economics of Discrimination studied how prejudice affected “the earnings, employment, and occupations of minorities” ▫ Thinks human capital includes good work habits, good medical care ▫ Helped quantify importance of education, on-thejob training

Chapter 9 Section 2 Trends in Today’s Labor Market

A Changing Labor Force • Changes in the U. S. Labor Force ▫ Since 1950 s, many women have entered work force more types of jobs have opened up; wages have risen ▫ Work force is better educated 30 percent are college graduates; 30 percent have some college credits High degree of human capital means high productivity and wages

Changing Occupations • Technology and Change ▫ Technology has eliminated or changed many jobs in all three sectors ▫ Computers, Internet changed how information stored, transferred, used ▫ About half of American workers use computer on the job 80 percent of managers and professionals 20 percent of machine operators, farmers, laborers

Changing Occupations • Globalization and Jobs ▫ Outsourcing—contracting with outside company for goods or services most with United States companies; some in foreign countries where wages are lower ▫ Insourcing—foreign companies establishing operations in U. S. ▫ Both practices tied to trends toward service, technology-related jobs

Changes in the Way People Work • Working at the Office from Home ▫ Workers get less stress, flexible work time, no commute ▫ Employers get larger labor pool, more productivity; need less real estate ▫ Society gets less pollution from fewer drivers ▫ Workers find work spills into private life; miss social, network time ▫ Number of telecommuters grew by about 20 percent from 2000 to 2005

Changes in the Way People Work • Alternatives to Permanent Employment ▫ 1990 s fewer full-time, more contingent workers and contractors hired today’s workforce: over 5 percent temps; over 7 percent contractors ▫ Easier for businesses to adjust work force to fit production demands discharging temps is less costly; no benefits means lower labor costs ▫ Most temps want permanent jobs; many contractors want to be own boss

Changes in the Way People Work • Changing Careers More Often ▫ New technologies create new jobs older occupations become less in demand or obsolete workers must learn and adapt to new technologies ▫ Economy changing more quickly than in past companies change their business plans constantly to maximize profits

Questions 1. Suppose you are the owner of a video store. Explain how you would decide what to pay your workers. Make reference to specific factors that influence wages. 2. If the equilibrium wage for bowling alley managers is $16/ hour, why would a wage of $20 / hour result in a labor surplus? Why would a wage of $12 / hour lead to a laborshortage?

Questions 3. Explain why working conditions can either justify higher wages or make up for lower wages.