Wage Structure Law of One Price Observed wage

Wage Structure Law of One Price? ¡ Observed wage differentials ¡ l l l ¡ Occupational Industry Geographic Reasons l l l Heterogeneous jobs Heterogeneous workers Labor market imperfections

Of the following occupational groups, average hourly earnings in 2003 were greatest among service workers installation, maintenance, and repair workers sales workers managerial, business, and financial workers a) b) c) d) 1 2 3 4 5

Hourly Earnings By Occupational Group, 2003 Occupational Group Management, Business, And Financial Hourly Wage $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

Hourly Earnings By Industry Group, 2003 Industry Group Finance, Insurance, Real Estate Hourly Wage $20. 99 Public Administration 20. 22 Mining 19. 81 Transportation and Warehousing 19. 27 Manufacturing 18. 51 Construction 17. 31 Services 16. 53 Retail Trade 13. 21

Private Manufacturing Worker’s Hourly Earnings By State, 2003 State Hourly Wage Connecticut $23. 13 New Jersey 22. 91 Massachusetts 21. 44 New York 19. 09 Pennsylvania 18. 26 Ohio 18. 12 Texas 17. 53 Arkansas 14. 77 Mississippi 13. 80

Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium: a) b) c) d) 1 2 3 the wage at Ajax will be higher than at Acme the wage at Ajax will be lower than at Acme workers will have lower net utility at Acme employment will be higher at Ajax if demand is the same in both markets 4 5

Heterogeneous Jobs ¡ Compensating differentials l l ¡ ¡ ¡ risky jobs fringe benefits job status job security Differing skill requirements Differences based on efficiency wages Other factors l l l Union status Discrimination Firm size

Which of the following research findings would support an efficiency wage explanation of pay differentials? Firms with higher turnover costs pay lower than average wages Firms with higher costs of detecting shirking pay higher than average wages Pay is positively correlated with human capital investments in a given industry Differences in observable worker characteristics explain most of the variance in pay across industries a) b) c) d) 1 2 3 4 5

Heterogeneous Workers ¡ Differing human capital l ¡ Differing individual preferences l l ¡ Non-competing groups Time preferences Tastes for nonwage aspects Married vs Single Males l l Married men received 8 -40% higher wages Differing personal attributes Differing incentives to accumulate HK Differing costs of acquiring HK

Labor Market Imperfections ¡ Imperfect information l l Wage rate distributions Lengthy adjustment periods 6. 00 6. 20 6. 40 6. 60 6. 80 7. 00 7. 20 Wage rates 7. 40 7. 60 7. 80

Labor Market Imperfections ¡ Immobilities l l l Geographic ¡ Transportation costs ¡ Family concerns Institutional ¡ Licensing ¡ Pension plans ¡ Health insurance Sociological ¡ Discrimination

Suppose all workers are identical but working for Ajax is more pleasant than working for Acme. In all other non-wage respects the two firms offer the same job characteristics. In equilibrium: a) b) c) d) the wage at Ajax will be higher than at Acme the wage at Ajax will be lower than at Acme workers will have lower net utility at Acme employment will be higher at Ajax if demand is the same in both markets D is good also 1 2 3 4 5

Government Regulation ¡ ¡ ¡ Minimum Wage Laws Occupational Health and Safety Regulation Occupational Licensing

Minimum Wage Law ¡ Fair Labor Standards Act (1938) l Established federal minimum wage 1938: $0. 25 ¡ 2006: $5. 15 ¡ l l Ohio’s minimum wage went up to $6. 85 this January Established 1. 5 overtime premium Prohibited child labor

The Minimum Wage, 1950 -2006 9 Dollars per hour 8 7 6 5 4 3 2 minimum wage in 2006 dollars minimum wage in current dollars 1 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Minimum Wage Relative to the Average Private Non-supervisory Wage, 1950 - 2005

A majority of the workers earning the minimum wage: a) b) c) d) 1 2 3 are males are females work full-time are teenagers 4 5

Characteristics of Minimum Wage Workers, 2004 At or Below $5. 15 Total 2. 0 million 139. 2 million % Employment 1. 4% 100% Gender Male Female 33. 9 66. 1 51. 9 48. 1 White Black Hispanic 83. 9 11. 3 12. 5 69. 6 11. 1 13. 4 16 -19 20 + 24. 8 75. 2 4. 7 95. 3 Hours of Work Part-time Full-time 61. 9 37. 9 18. 6 81. 4 Occupation Sales Service 12. 6 74. 6 10. 9 16. 8 Industry Retail Leisure & Hospitality Manufacturing 8. 2 62. 0 3. 0 11. 9 8. 7 12. 8 Education Less than HS HS only Some college BA + 28. 9 31. 6 32. 6 6. 9 9. 9 30. 2 27. 5 32. 3 # Workers Race Age

Competitive Model Covered Sector ¡ Free Market: W 1, Q 1 l ¡ no unemployment S 1 W 2 = $7 Gov’t imposes min. wage at W 2 l unemployment Wage at W 2: QD < QS Unemployment occurs W 1= $5 How can employers offset impact? l l l Reduce hours of work Reduce fringe benefits Raise price Reduce quality Hire illegal aliens D 1 B W QD layoffs What happens in the uncovered sector? Q 1 QS new entrants Labor

Monopsony Model MWC 1 Wage S 1 ¡ Monopsony hiring rule: MRP = MWC l ¡ Minimum wage at W* creates a kinky supply curve and a discontinuous MWC curve l ¡ Monopsony outcome: W 1, Q 1 Monopsonist will hire Q 2 workers at W* Minimum wage increases employment! W* W 1 D 1 Q 2 Labor

Suppose this labor market is competitive, so that the wage rate is W 2. If W* is imposed as the minimum wage, then employment in this market: a) b) c) d) will rise will fall remain the same may or may not change; more info is required MWC $ S W* W 2 W 1 MRP 0 1 2 3 4 5 Q 1 Q 2 Q 3 Q 4 Labor

Suppose this labor market is monopsonistic, so that the wage rate is W 1. If W* is imposed as the minimum wage, then employment in this market: a) b) c) d) will rise to Q 2 will rise to Q 4 will fall Remain the same MWC $ S W* W 2 W 1 MRP 0 1 2 3 4 5 Q 1 Q 2 Q 3 Q 4 Labor

Empirical Evidence ¡ Brown (1982) l ¡ Card and Krueger (1994) l ¡ 10% increase in MW reduces employment of teens/low-skilled workers by 1 to 3% MW had no effect on employment at fast food restaurants in NJ surveyed before and after the increase Neumark and Wascher (1995) l l Rexamined payroll data from NJ fastfood restaurants MW had negative effects on employment consistent with conventional wisdom New research is looking at impact on Human Capital and Poverty

Workplace Safety Rate of Occupational Fatalities by Industry, 2002 ¡ Occupational Safety and Health Act (1970) l l l Permissable exposure levels Protective equipment Process safety management

Model of Optimal Safety $ MC 1 Uninformed workers ¡ ¡ MC slopes upward to reflect the rising opportunity cost of providing safety MB slopes downward to reflect diminishing returns to safety l l l MB 1 ¡ MB 2 S 2 ¡ ¡ S* Permits paying lower wages Reduced worker turnover Lower worker comp rates MB = MC determines optimal safety Safety If workers possess perfect information about potential risks, then S* is socially optimal If workers underestimate potential risks, they won’t demand a proper wage premium: l Safety will be less than optimal: S 2 < S*

The profit-maximizing level of job safety is a probability level of: 0. 65 0. 75 0. 80 0. 85 a) b) c) d) 1 2 3 4 5 Ps MBs MCs . 70 22 10 . 75 19 12 . 80 16 14 . 85 13 16 . 90 10 18 . 95 7 20 . 65 25 8

OSHA Revisited ¡ Case for OSHA l l ¡ Case against OSHA l l ¡ Imperfect information Barriers to occupational mobility Workers might overestimate potential risks Workplace standards often bear no relationship to reductions to job injuries and illness Empirical evidence l l There is mixed evidence that OSHA has reduced occupational injuries. If OSHA has reduced job risks, wage premiums between hazardous and safe jobs should decline over time.

Session Base Run Search Costs Unemp Insurance Recession Education Variation None $100 period $200 period for first 10 periods Probability of receiving wage offer decreases $1500 period for two periods Range $0 -$1000 $0 -$1000 (no education) $0 -$1500 (education) Wage Frequency Wage Frequency 0 10 10 10 20 0 10 100 1 1 100 1 200 2 2 200 2 300 3 3 300 3 400 4 4 400 2 600 1 1 500 1 E 1000 1 1 600 1 800 2 E 1000 2 (1 E) 1500 1 E Distribution

Job Search External search ¡ Internal search ¡ ¡ Why Search? l l Workers search for the best job offer and firms search for employees to fill job vacancies. Search occurs because: ¡ Workers and jobs are highly heterogeneous. ¡ Information about differences in jobs and workers is imperfect and takes time to obtain.

Job Search Model ¡ Assumptions l l Job searcher is unemployed and seeking work Job seeker knows distribution of wage offers (mean and variance), but does not know which employer is offering which wage

Job Search Model ¡ Worker formulates an acceptance wage, w. A l l ¡ Benefits of search l ¡ If w > w. A accept wage offer If w < w. A reject wage offer Get additional wage offers Costs of search l l Explicit: employment agency fees + transportation Implicit: foregone earnings

Job Search Model: Implications If w. A = $20, 000, what is probability that first offer will be accepted? w. A. 30 Probability = 65%. 20 . 10. 05 ¡ ¡ The higher the acceptance wage, the lower ___ the probability of finding a job (the longer ___ the unemployment duration) ___ Inflation will shift the distribution of wage offers to the right l l ¡ Expected inflation will shift acceptance wage Unexpected inflation will not shift the acceptance wage Unemployment compensation increases _____ acceptance wage

If $8. 50 is the acceptance wage, what is the probability of Sally finding her next wage offer acceptable? a) b) c) d) 1 2 3 0. 25 0. 30 0. 50 0. 70 4 5

If the rate of inflation increases but Sally mistakenly believes it has not, then: both the acceptance wage and the entire distribution will shift to the left, thereby leaving expected search duration unchanged the entire distribution will shift to the right, but the acceptance wage will not, thereby reducing expected search duration the acceptance wage will shift to the right, thereby reducing excepted search duration both the acceptance wage and the entire distribution will shift to the right, thereby leaving expected search duration unchanged a) b) c) d) 1 2 3 4 5

Internal Labor Markets Shipping Department Dispatcher • A worker typically enters an internal labor market at the least-skilled port-ofentry job in the job ladder or mobility chain. • Wage rates and the allocation of workers within the internal labor market are governed primarily by administrative rules and procedures. Long-distance driver Local Driver Packer Loader Port of Entry External Labor Market

Reasons for Internal Labor Markets ¡ Firms use job ladders as method to reduce worker turnover. l l l The lower turnover increases the return on firm investments in specific training. Firms can lower recruiting and screening costs since they will have a lot of information about the existing workforce. The job ladder also provides an incentive for workers to seek new skills and work hard. Workers get the benefits of increased job security, opportunities for promotion and training, protection from the external labor market. Also, the formal rules protect workers from arbitrary management decisions.

Government as Economic Rent Provider ¡ ¡ Economic rent in the labor market is the difference between the wage paid to a particular worker and the wage just sufficient to keep that person in his or her employment. Government provides economic rents through occupational licensing and trade barriers.

Suppose that all other nonwage aspects of the jobs in these two markets are identical. We would expect labor supply in B to increase if: the probability of job loss rises in B earnings are more variable in A job safety improves in A there are better prospects for advancement in A a) b) c) d) 1 2 3 4 5

The wage rate paid workers at Flow, Inc. will most likely exceed that at otherwise identical Stock Co. if: a) b) c) d) 1 2 3 Flow, Inc. is a more prestigious firm than Stock Co earnings are subject to greater variability at Stock, Co. Stock Co. offers better pension and insurance benefits than Flow, Inc. the demand for labor at Stock Co. exceeds the demand for labor at Flow, Inc. 4 5

Currently, the minimum wage law does not apply to about 12% of non-supervisory workers. Assuming that all consequently displaced workers find jobs in the uncovered sector, an increase in the minimum wage will: make all workers better off cause a migration of workers from the uncovered to the covered sector create additional output in the uncovered sector of a lower value than the output lost in the covered sector cause an increase in economic rent to original workers in the uncovered sector a) b) c) d) 1 2 3 4 5

Consider a proposed law to deregulate the hair-care industry. Barbers would be allowed to do work previously confined to stylists, and the latter would no longer be required to pass strict licensure exams. Which outcome would you expect to result from this deregulation? a) b) c) d) 1 2 3 A decrease in economic rent to current stylists A decrease in economic rent to current barbers An increase in economic rent to beauty school operators An increase in economic rent to workers in occupations in which displaced stylists find jobs 4 5

In addition to their regular unemployment benefits, a recent Washington state program offered an average of $562 to any job loser who became reemployed within 13 weeks of filing for unemployment compensation. Economic theory suggests that such a “bounty” scheme should: reduce job search duration by shifting the wage offer distribution to the left reduce job search duration by decreasing the acceptance wage and intensifying job search reduce job search duration by shifting the wage offer distribution to the right have no effect on job search duration, as the acceptance wage will decrease to offset the effect of the shifting wage offer distribution a) b) c) d) 1 2 3 4 5