Labor Market Equilibrium

1
Labor Market Equilibrium
2
Equilibrium in a Single Market

• Labor market equilibrium coordinates the desires
  of firms and workers, determining the wage and
  employment observed in the labor market.

3
Equilibrium and Efficiency

• Pareto Efficiency an allocation is Pareto
  efficient when
• A corollary is that when an allocation is Pareto
  Efficient, you cannot improve one persons
  welfare without
• In policy applications, the efficiency criterion
  asks whether a change can make any one better off
  without harming anyone else. If the answer is
  yes, then a change is said to be
  Pareto-improving.

4
Equilibrium and Efficiency
Firm Surplus
S
Worker Surplus

• The competitive equilibrium maximizes the sum of
  producer surplus and consumer surplus (also
  called the gains from trade).
• Thus, the employment level E is an efficient
  allocation.

5
Equilibrium Across Markets
w

• This wage gap will lead to migration from A to B.
• In equilibrium,
• Migration also leads to the efficient allocation
  of resources since workers

6
Evidence of Convergence in Wage Across States
7
Payroll Taxes

• Many government programs are funded through
  payroll taxes.
• Social Security
• Medicare
• Unemployment Insurance
• Disability
• What is the effect of these taxes on the demand
  for labor and on wages?

8
Social Security Taxes

• Employer pays
• You pay
• Government gets 15.30 of your earnings.
• If you earn, 66,000/year, the government gets
  about 10,000/year.
• Assuming you work for 40 years, thats 400,000.
• Youll be lucky to get that back when you retire.
• Does it matter whether the employers or workers
  pay this tax?

9
Tax Assessed on Firms
Firms Before SS tax After SS tax
D

• Implication
• Workers pay in the form of lower wages (w1
  instead of w0)
• Firms pay in the form of higher labor costs
  (w1T instead of w0)

10
Tax Assessed on Workers
Workers After SS tax
w1
w1-T
D

• Implication
• Workers pay in the form of lower after tax wages
  (w1-T instead of w0)
• Firms pay in the form of higher labor costs (w1
  instead of w0)

11
Equivalence
SST

S
wf
w0
ww
D
Employment
E0
It doesnt matter whether the tax is assessed on
employers or workers. The burden of the tax is
shared.
12
Tax Incidence

• Tax incidence refers to
• If the reduction in welfare comes mainly out of
  firms surplus, then we say that
• If the reduction in welfare comes mainly out of
  workers surplus, then we say that
• If it doesnt matter whether the law states that
  employers pay the tax or workers pay the tax,
  then what does determine tax incidence?
• Note this material is not in the book.

13
Tax Incidence

S
w0
D
Employment
E0
Green area Firm surplus. Pink area Worker
surplus.
14
Tax Incidence

S
The burden of this tax falls mostly on workers.
Blue area Yellow area
w0
D
Deadweight loss
Tax revenue
Employment
E0

• If the elasticity of labor demand is greater than
  the elasticity of labor supply, then
• If the elasticity of labor supply is greater than
  the elasticity of labor demand, then

15
Mandated Benefits

• The government occasionally mandates that
  employers provide certain benefits to their
  workers.
• Mandated maternity leave
• Mandated health benefits
• What effect do these mandated benefits have on
  wages and employment levels?

16
Mandated Benefits


S0
S0
Value of benefits to worker
S1
S1
w
w
Cost of benefits to firm
w1
D0
w1
D0
D1
D1
E
E1
E
E1
E
E

• Value greater than cost

• Value less than cost

17
Immigration
S1

• If immigrants and native workers are perfect
  substitutes, then immigration causes supply curve
  to shift out.
• Equilibrium wage
• Employment
• Employment of Natives

18
Immigration

• Suppose immigrants and native workers are not
  perfect substitutes (and so function as two
  separate inputs in production).
• Immigration could cause an increase in wages and
  employment if immigrants and natives are
• Theoretical predictions about the effect of
  immigration on employment depend on whether
  immigrants and native workers are gross
  complements or gross substitutes.

19
Studying the Impact of Immigration and Employment

• Observe
• Need
• Suggestion Look for an association between
  employment rates and number of immigrants.
• Problem Immigrants may choose to settle in
  places with high employment rates.
• We want to look for the effect of immigration on
  employment.
• But any association between employment and
  immigration may arise because employment effects
  immigration (and not visa versa).

20
The Mariel Boatlift

• April, 1980 Castro declares that Cubans wishing
  to move to the United States could leave freely
  from the port of Mariel.
• September 1980 125,000 (mostly unskilled
  workers) immigrate to Miami.
• Argument Moved to Miami because its close to
  Cuba and no other reason.
• Study design natural experiment.

21
Result of Study by David Card(Difference in
Difference Estimation)
22
The Effects of Immigration

• Evidence from other countries confirms the
  conclusion that large immigrant flows do not
  adversely affect employment and wages of native
  workers.
• Still an area of considerable debate.

Next class Chapter 6 and dont forget about
homework!