Employment

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Employment
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Indifference Curves and the Labor Supply
Inc
Slope W
Again, the maximum satisfaction occurs at that
level of hours where the income line is tangent
to the highest indifference curve.
INC0
U0
Leisure
Work
H0
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Indifference Curves and the Labor Supply
Inc
What happening here?
INC1
U1
INC0
U0
Leisure
Work
H0
H1
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Indifference Curves and the Labor Supply
Inc
But this is also possible.
INC1
U1
INC0
U0
Leisure
H0
H1
Work
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Indifference Curves and the Labor Supply
NOTE! This is an unearned income increase.
Inc
This is perhaps the significant effect worldwide
incomes are rising and hours of work are
declining.
INC1
U1
INC0
U0
Leisure
H1
H0
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What about Fringes?
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In many EC countries there is a labor political
party and thus many HR fringes are legislated as
opposed to unilaterally determined or bargained.
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Note! There is a wide variation in holidays and
leave time in the EC countries.
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Its interesting also that in many countries
there is an eligibility period - most 1 YR. Or
more - This creates an incentive to hire PT or
temp to avoid costs.
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Of particular interest is the legislated maximum
weekly hours of work and the nature of overtime
limits.
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In some countries, either unions or the
government must approve overtime before it is
granted.
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Questions About Integration and Employment
Do the statutes actually influence hours of work?
(Or do they reflect economic trends and/or
changes in preferences)?
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Questions About Integration and Employment
Do workers or employers comply with the statutes?
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Questions About Integration and Employment
Why are weekly hours of work in the EC as high as
they are?
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Questions About Integration and Employment
Will nations homogenize their fringes to avoid
social dumping?
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Questions About Integration and Employment
Will jobs move to countries with low fringes?
Perhaps not - if fringe costs are shifted back
onto the worker themselves. Many fringes are
financed by payroll taxes. Remember the
conclusion from our earlier analysis ???
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Payroll Tax to Support Fringes

• Its likely that after the tax, the wage that the
  employer is willing to pay for any level of
  employment will be lowered by the amount of the
  flat tax as shown below

Emp Cost
W1
D1
L1
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Payroll Tax to Support Fringes

• Furthermore, the steeper the supply curve (more
  inelastic) the more the tax is shifted to the
  employees.

This implies that employers in high fringe areas
may not be at a disadvantage for skilled workers
W1
W2
D1
L1
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Payroll Tax to Support Fringes

• Also, the flatter the demand curve (more elastic)
  the more the tax is shifted to the employees.

This implies that employers in highly competitive
international labor markets may shift the tax to
employees.
W
SL
W0
D0
W1
D1
L
L0
L1
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Payroll Tax to Support Fringes

• Also, the flatter the demand curve (more elastic)
  the more the tax is shifted to the employees.

Employers in low fringe countries may not suffer
if they have to bring their fringes up to trading
partner standards.
W
SL
W0
D0
W1
D1
L
L0
L1
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Payroll Tax to Support Fringes

• Also dont forget - If the workers view the
  benefit of the UI to the tax cost, the supply
  curve may shift to the demand shift as shown
  below Note! All of the tax burden falls onto the
  employee, i.e. the wage is lowered by the amount
  of the tax.

SL
W1
D1
L1
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Some interesting Research
Several studies have found that output per
employee is much more highly correlated to TOTAL
labor costs than just to the wage costs. In labor
economics we assume that employers hire workers
up to the point thet W MP x P. Or W/P MP.
But the new studies find that employers hire such
that (W Fringes)/P MP. Thus there can be
much variation in W across countries if Fringes
vary also, as long as WFringes converge. This
is happening in the EC. Any attempt to
homogenize wages, could unbalance labor costs.
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Some interesting Research
It will be interesting to watch NAFTA countries
for convergence. Will Mexico be under pressure to
raise fringes? If they do, will they attempt to
lower wages to adjust their total labor costs? If
then fringe costs are shifted to the workers,
will more U.S. firms find the new lower wages
irresistible?
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Conclusions
There are many unresolved issues concerning human
resource integration.
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Conclusions
Raising fringes in low fringe countries may not
affect comparative advantage if all of the fringe
cost falls on employees.
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Conclusions
But, raising fringes in low fringe countries may
affect comparative advantage if such raises
distort the Total Wage Cost relative to
productivity.
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