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12Labor:
The Human InputOctavius (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
● Wage Determination in Competitive Labor Markets
● The Supply of Labor
● Why Do Wages Differ?
● Unions and Collective Bargaining
● Wage Determination in Competitive Labor Markets
● The Supply of Labor
● Why Do Wages Differ?
● Unions and Collective Bargaining
ContentsContents
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FIGURE 1: Index of Trends in Real Wages, Compen., & Hours
FIGURE 1: Index of Trends in Real Wages, Compen., & Hours
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180
160
140
120
100
80
60
40
01919 19291909 1939 1949 1969 19791959 1989 2004
20
Hourly compensation(wages plus benefits)
Hours workedper week
Hourlywages
FIGURE 2: Income Inequality, 1967 versus 2003
FIGURE 2: Income Inequality, 1967 versus 2003
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60.0
50.0
40.0
30.0
20.0
10.0
0.030027691
Poorest one-fifth of U.S. households
Richest one-fifth of U.S. households
4
43.8
49.8
3.4
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● 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
● 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
Wage Determination in Competitive Labor MarketsWage Determination in Competitive Labor Markets
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● 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.
● 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.
Wage Determination in Competitive Labor MarketsWage Determination in Competitive Labor Markets
FIGURE 3: Equilibrium in a Competitive Labor Market
FIGURE 3: Equilibrium in a Competitive Labor Market
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We
ek
ly W
ag
e
Number of Workers
500,000
$300
D
D
S
S
E
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● 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)
● 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)
Wage Determination in Competitive Labor MarketsWage Determination in Competitive Labor Markets
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● 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.
● 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.
Wage Determination in Competitive Labor MarketsWage Determination in Competitive Labor Markets
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● 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
● 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
Wage Determination in Competitive Labor MarketsWage Determination in Competitive Labor Markets
FIGURE 4: Growing Service Sector Jobs in 9 Countries
FIGURE 4: Growing Service Sector Jobs in 9 Countries
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40
10
70
80
20
30
50
60
0
1967
2003
90
Italy
38.3
62.9
Spain
36.2
63.6
Germany
42.8
65.6
Japan
45.1
66.6
France
44.8
73.0
Canada
58.7
74.7
U.K.
50.8
75.2
Sweden
48.8
75.2
U.S.
58.9
78.3
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● Labor supply trends♦ Total labor force increased from about 60
million jobholders right after the WWII to over 140 million today.
♦ Proportion of population with jobs has grown from about 58% after WWII to 66% today.
♦ Entry of new workers into labor force♦ Protracted and substantial relative decline in
union membership
● Labor supply trends♦ Total labor force increased from about 60
million jobholders right after the WWII to over 140 million today.
♦ Proportion of population with jobs has grown from about 58% after WWII to 66% today.
♦ Entry of new workers into labor force♦ Protracted and substantial relative decline in
union membership
The Supply of LaborThe Supply of Labor
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The Supply of LaborThe 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.
● 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.
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● 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)
● 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)
The Supply of LaborThe Supply of Labor
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● 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.
● 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.
The Supply of LaborThe Supply of Labor
FIGURE 5: A Typical Labor Supply Schedule
FIGURE 5: A Typical Labor Supply Schedule
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Quantity of Labor Supplied
Wag
e R
ate
Substitution effects outweigh income effects
Income effects balance substitution effects A
Income effects outweigh substitution effects
B
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The Supply of LaborThe 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.
● 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.
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● 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.
● 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.
Why Do Wages Differ?Why Do Wages Differ?
FIGURE 6: Wage DifferentialsFIGURE 6: Wage Differentials
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Wa
ge
(b)
Number of Workers
Wa
ge
(a)
Number of Workers
S2
S2 D2
D2
S1
S1 D1
D1
w2
w1
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Why Do Wages Differ?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
● 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
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Why Do Wages Differ?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
● 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
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Why Do Wages Differ?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.
● 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.
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Why Do Wages Differ?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.
● 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.
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Why Do Wages Differ?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.
● 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.
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Why Do Wages Differ?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.
● 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.
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Why Do Wages Differ?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.
● 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.
FIGURE 7: The Teenage Unemployment Problem
FIGURE 7: The Teenage Unemployment Problem
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5
10
15
20
25
30
35
40
45
50
01972 1977 1982 1987 1992
White male teenagers
Black male teenagers
All workers
1997 2004
Year
FIGURE 8: The Minimum Wage, 1950-2004
FIGURE 8: The Minimum Wage, 1950-2004
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5
6
Nominal rate
Real rate (adjusted for inflation)
4
3
1
2
01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2004
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● 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.
● 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.
Unions and Collective BargainingUnions and Collective Bargaining
FIGURE 9: Unionization in the United States, 1930-2003
FIGURE 9: Unionization in the United States, 1930-2003
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25
30
20
15
5
10
01930 1940 1950 1960 1970 1980 1990 2003
Uni
on M
embe
rshi
p as
a P
erce
nta
geof
Wag
e a
nd S
alar
y W
ork
ers
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Unions and Collective BargainingUnions 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.
● 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.
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Unions and Collective BargainingUnions 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 1990s owing to stronger competition both at home and from abroad.
● Why has unionism been declining? ♦ American workers’ preferences seem to have
shifted away from unions.
♦ American unions have been under increasing pressure in the 1990s owing to stronger competition both at home and from abroad.
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● 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.
● 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.
Unions and Collective BargainingUnions and Collective Bargaining
● 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
● 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
Unions as a Labor MonopoliesUnions as a Labor Monopolies
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● 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.
● 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.
Unions as a Labor MonopoliesUnions as a Labor Monopolies
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FIGURE 10: Union Control over the Demand Curve
FIGURE 10: Union Control over the Demand Curve
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D1
D1
D0
D0
S
S
Number of Workers
Wa
ge
E
A
● 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.
● 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.
Unions as a Labor MonopoliesUnions as a Labor Monopolies
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● 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
● 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
Monopsony and Bilateral MonopolyMonopsony and Bilateral Monopoly
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● It is almost impossible to develop models to predict the outcomes of collective bargaining.
● It is almost impossible to develop models to predict the outcomes of collective bargaining.
Collective Bargaining and StrikesCollective Bargaining and Strikes
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● 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.
● 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.
Collective Bargaining and StrikesCollective Bargaining and Strikes
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● 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.
● 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.
Collective Bargaining and StrikesCollective Bargaining and Strikes
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FIGURE 11: Work Time Lost in the U.S. Because of Strikes
FIGURE 11: Work Time Lost in the U.S. Because of Strikes
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0.20
0.05
0.10
0.15
0.25
0.30
0.35
0.40
0.50
0.45
01948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2004
Per
cen
tag
e o
f W
ork
Tim
e Lo
st
FIGURE 12: The Incidence of Strikes in 8 Industrial Countries
FIGURE 12: The Incidence of Strikes in 8 Industrial Countries
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160
140
120
100
80
60
40
20
0
200
180
yCanada
190.8
UnitedStates
55.6
Italy
53.1
France
22.7
UnitedKingdom
18.7
Sweden
8.3
German
1.4
Japan
1.3