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CHAPTER 16 Labor Markets

CHAPTER 16 Labor Markets. Learning Objectives. Explain why college graduates earn more, on the average, than high school graduates Explain why union workers earn higher wages than nonunion workers Explain why, on the average, men earn more than women and whites earn more than minorities.

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CHAPTER 16 Labor Markets

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  1. CHAPTER16Labor Markets

  2. Learning Objectives • Explain why college graduates earn more, on the average, than high school graduates • Explain why union workers earn higher wages than nonunion workers • Explain why, on the average, men earn more than women and whites earn more than minorities

  3. Learning Objectives (cont.) • Predict the effects of a comparable-worth program • Explain the effects of immigration on the wages of immigrants and native Americans

  4. Learning Objectives • Explain why college graduates earn more, on the average, than high school graduates • Explain why union workers earn higher wages than nonunion workers • Explain why, on the average, men earn more than women and whites earn more than minorities

  5. Skill Differentials • The Demand for High-Skilled and Low-Skilled Labor • High skilled workers can perform more tasks than low skilled workers • Different MRP's

  6. Skill Differentials 10.00 Wage rate (dollars per hour) 5.00 DL 0 1 2 3 4 Labor (thousands of hours per day)

  7. Skill Differentials 12.50 10.00 Wage rate (dollars per hour) MRP of skill DH 5.00 DL 0 1 2 3 4 Labor (thousands of hours per day)

  8. Skill Differentials • The Supply of High-Skilled and Low-Skilled Labor • The acquisition of a skill is an investment in human capital • It is costly. • The cost is paid prior to receiving a higher wage. • Human capital is the accumulated skill and knowledge of human beings.

  9. Skill Differentials • Supply Curves of High-Skilled and Low-Skilled Labor • Wages compensate labor for time spent on the job. • High-skilled labor must be compensated for time and cost of acquiring the skill.

  10. Skill Differentials 10.00 Wage rate (dollars per hour) SL 5.00 0 1 2 3 4 Labor (thousands of hours per day)

  11. Skill Differentials Compensation for cost of acquiring skill SH 10.00 Wage rate (dollars per hour) SL 8.50 5.00 0 1 2 3 4 Labor (thousands of hours per day)

  12. Skill Differentials • Supply Curves of High-Skilled and Low-Skilled Labor • The Equilibrium Wage • The equilibrium wage rate is higher for high-skilled labor than for low-skilled labor • MRP • Quantity supplied of labor

  13. Skill Differentials 10.00 Wage rate (dollars per hour) SL 5.00 DL 0 1 2 3 4 Labor (thousands of hours per day)

  14. Skill Differentials SH 10.00 Wage rate (dollars per hour) SL 5.00 DH DL 0 1 2 3 4 Labor (thousands of hours per day)

  15. Do Education and Training Pay? • Amount of education is related to income. • Age is correlated to income. • Age is related to experience and training. • 5%–10% return/year on high school and college education

  16. Education and Earnings

  17. Learning Objectives • Explain why college graduates earn more, on the average, than high school graduates • Explain why union workers earn higher wages than nonunion workers • Explain why, on the average, men earn more than women and whites earn more than minorities

  18. Union-NonunionWage Differentials • Monopoly Power in the Labor Market • Labor unions are the main source of monopoly power in the labor market. • A labor union is an organized group of workers whose purpose it is to increase wages and influence other job conditions for its members.

  19. Union-NonunionWage Differentials • Two Types of Union • Craft unions • Industrial unions • Most unions are members of the AFL-CIO • Union membership has declined from 35% in 1950 to 12% today • Unions vary tremendously in size.

  20. Unions with the Largest Membership

  21. Union-NonunionWage Differentials • A local is a subunit of a union that organizes the individual workers. • Three Possible Forms of Organization for a Local: • Open shop • Closed shop • Union shop • Right-to-work

  22. Union-NonunionWage Differentials • Collective bargaining is the process of negotiation between employers and union representatives. • A strike is a group decision to refuse to work under prevailing conditions. • A lockout is a firm’s refusal to operate its plant and employ its workers.

  23. Union-NonunionWage Differentials • Binding arbitration is a process in which a third party — an arbitrator — determines wages and other employment conditions on behalf of the negotiating parties. • A professional association is an organized group of professional workers such as lawyers, dentists, or physicians. • These act similar to unions.

  24. Union’s Objectives and Constraints • Three Broad Objectives of Unions • To increase compensation • To improve working conditions • To expand job opportunities

  25. Union’s Objectives and Constraints • Two Constraints on Unions • Limited by how well it can restrict nonunion workers from offering their labor in the same market. • Higher wages result in a decrease in the quantity demanded of labor.

  26. Unions in a CompetitiveLabor Market • Unions seek to increase compensation and to limit employee reductions by increasing the demand for the labor of its members.

  27. A Union in a CompetitiveLabor Market 9 Wage rate (dollars per hour) 8 7 0 85 90 100 Labor (hours per day

  28. A Union in a CompetitiveLabor Market SC 9 Wage rate (dollars per hour) 8 7 DC 0 85 90 100 Labor (hours per day

  29. A Union in a CompetitiveLabor Market SU SC 9 Wage rate (dollars per hour) 8 7 DC 0 85 100 Labor (hours per day

  30. A Union in a CompetitiveLabor Market SU SC 9 Wage rate (dollars per hour) 8 DU 7 DC 0 85 90 100 Labor (hours per day

  31. How Unions Try to Change the Demand for Labor • How Unions Attempt to Increase Demand • It tries to make the demand for union labor less elastic. • It tries to increase the demand for union labor

  32. How Unions Try to Change the Demand for Labor • Methods used by unions to increase the demand for labor include: • Increase the marginal product of union members • Encourage import restrictions • Support minimum wage laws • Support immigration restrictions • Increase demand for the good produced

  33. The Scale of Union-NonunionWage Differentials • On the average, union wage rates are 30% higher than nonunion wage rates. • In services, manufacturing, and transportation the difference is between 11% and 19%. • In wholesale, and retail trade the difference is 28%.

  34. The Scale of Union-NonunionWage Differentials • In construction the difference is 65%. • Allowing for skill differences, the wage differential lies between 10% and 25%.

  35. Monopsony • A monopsony is a market in which there is a single buyer. • Some areas have a major employer. • The employer will pay the last worker hired an amount equal to the extra total revenue brought in.

  36. A Monopsony Labor Market MCL S Wage rate (dollars per hour) 10.00 7.50 5.00 MRP = D 0 50 75 Labor (hours per day

  37. MCL S Wage rate (dollars per hour) 10.00 Competitive equilibrium 7.50 5.00 Monopsony equilibrium MRP = D 0 50 75 Labor (hours per day A Monopsony Labor Market

  38. Monopsony • Monopsony decreases the level of employment and the wage rate. • How much they are able to do so depends upon the elasticity of labor supply.

  39. Monopsony Tendencies • Monopsony is rare • Worker can commute long distances • There is usually a union

  40. Monopsony and Unions • Recall • Unions attempt to monopolize the labor market • Monopsony is the only buyer • A bilateral monopoly exists when a union (monopoly seller) faces a monopsony buyer. • Wages are determined by bargaining.

  41. Monopsony and Unions • The monopsony hires 50 hours and pays $5/hour. • The union can call a strike. • The union may agree to work 50 hours, but seeks the highest wage rate the employer can be forced to pay — $10/hour. • This equals labor’s MRP. MCL S Wage rate (dollars per hour) 10.00 7.50 5.00 MRP = D 0 50 75 Labor (hours per day

  42. Monopsony and Unions • It is unlikely the union will get $10/hour. • It is also unlikely that the firm can keep wages at $5/hour. • The monopsony firm and union bargain over the wage rate (and inflict costs on each other). • It will settle between $5 & $10/hour (depending upon who is stronger). MCL S Wage rate (dollars per hour) 10.00 7.50 5.00 MRP = D 0 50 75 Labor (hours per day

  43. Monopsony and the Minimum Wage • In a monopsony labor market, a minimum wage can increase both the wage rate and employment.

  44. Minimum Wage in Monopsony • If a minimum wage law is passed, the supply curve now becomes perfectly elastic at the minimum wage ($7.50) up to 75 hours. • Above 75 hours, a higher wage must be paid. • To maximize profit, the monopsony sets the marginal cost of labor equal to its marginal revenue product. MCL S Wage rate (dollars per hour) 10.00 7.50 Minimum wage 5.00 MRP = D 0 50 75 Labor (hours per day

  45. Minimum Wage in Monopsony • The monopsony hires 75 hours at $7.50 an hour. • This minimum wage law has made the supply of labor perfectly elastic and made the marginal cost of labor the same as the wage rate up to 75 hours. • The minimum wage has succeeded in raising the wage rate by $2.50 an hour and increasing the amount of labor employed by 25 hours a day. MCL S Wage rate (dollars per hour) 10.00 7.50 Minimum wage 5.00 Increase in employment MRP = D 0 50 75 Labor (hours per day

  46. Learning Objectives • Explain why college graduates earn more, on the average, than high school graduates • Explain why union workers earn higher wages than nonunion workers • Explain why, on the average, men earn more than women and whites earn more than minorities

  47. Wage DifferentialsBetween Sexes and Races • In 1995, the incomes, as a percentage of the wages of white men were: • 73% for white women • 73% for black men • 62% for Hispanic men • 63% for black women • 54% for Hispanic women Why do these differences exist?

  48. Sex and Race Differentials

  49. Wage DifferentialsBetween Sexes and Races • Four Possible Explanations for the Difference in Wages • Job types • Discrimination • Differences in human capital • Differences in the degree of specialization

  50. Wage DifferentialsBetween Sexes and Races • Job Types • Men and women do different jobs. • However, some women and minorities earn less than white men doing the same job • What is a possible explanation? • Discrimination

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