Wage Structure

1
Wage Structure

• Law of One Price?
• Observed wage differentials
• Occupational
• Industry
• Geographic
• Reasons
• Heterogeneous jobs
• Heterogeneous workers
• Labor market imperfections

2
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

3
Hourly Earnings By Occupational Group, 2003
4
Hourly Earnings By Industry Group, 2003
5
Private Manufacturing Workers Hourly Earnings By
State, 2003
6
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

• 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

7
Heterogeneous Jobs

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

8
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

9
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

10
Heterogeneous Workers

• Differing human capital
• Non-competing groups
• Differing individual preferences
• Time preferences
• Tastes for nonwage aspects

• Married vs Single Males
• Married men received 8-40 higher wages
• Differing personal attributes
• Differing incentives to accumulate HK
• Differing costs of acquiring HK

11
Labor Market Imperfections

• Imperfect information
• Wage rate distributions
• Lengthy adjustment periods

12
Labor Market Imperfections

• Immobilities
• Geographic
• Transportation costs
• Family concerns
• Institutional
• Licensing
• Pension plans
• Health insurance
• Sociological
• Discrimination

13
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

• 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
14
Government Regulation

• Minimum Wage Laws
• Occupational Health and Safety Regulation
• Occupational Licensing

15
Minimum Wage Law

• Fair Labor Standards Act (1938)
• Established federal minimum wage
• 1938 0.25
• 2006 5.15
• Established 1.5 overtime premium
• Prohibited child labor

Ohios minimum wage went up to 6.85 this January
16
The Minimum Wage, 1950-2006
9
8
7
6
minimum wage in 2006 dollars
5
Dollars per hour
4
3
minimum wage in current dollars
2
1
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
17
Minimum Wage Relative to the Average Private
Non-supervisory Wage, 1950 - 2005
18
A majority of the workers earning the minimum
wage

• are males
• are females
• work full-time
• are teenagers

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20
Competitive Model
Covered Sector

• Free Market W1, Q1
• no unemployment
• Govt imposes min. wage at W2
• at W2 QD
• Unemployment occurs
• How can employers offset impact?
• Reduce hours of work
• Reduce fringe benefits
• Raise price
• Reduce quality
• Hire illegal aliens

unemployment
Wage
S1
W2 7
W1 5
D1
Q1
QD
QS
Labor
W
B
new entrants
layoffs
What happens in the uncovered sector?
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Monopsony Model
MWC1
Wage
S1

• Monopsony hiring rule MRP MWC
• Monopsony outcome W1, Q1
• Minimum wage at W creates a kinky supply curve
  and a discontinuous MWC curve
• Monopsonist will hire Q2 workers at W
• Minimum wage increases employment!

W
W1
D1
Labor
Q2
Q1
23
Suppose this labor market is competitive, so that
the wage rate is W2. If W is imposed as the
minimum wage, then employment in this market

• will rise
• will fall
• remain the same
• may or may not change more info is required

24
Suppose this labor market is competitive, so that
the wage rate is W2. If W is imposed as the
minimum wage, then employment in this market

• will rise
• will fall
• remain the same
• may or may not change more info is required

25
Suppose this labor market is monopsonistic, so
that the wage rate is W1. If W is imposed as
the minimum wage, then employment in this market

• will rise to Q2
• will rise to Q4
• will fall
• Remain the same

26
Suppose this labor market is monopsonistic, so
that the wage rate is W1. If W is imposed as
the minimum wage, then employment in this market

• will rise to Q2
• will rise to Q4
• will fall
• Remain the same

27
Empirical Evidence

• Brown (1982)
• 10 increase in MW reduces employment of
  teens/low-skilled workers by 1 to 3
• Card and Krueger (1994)
• MW had no effect on employment at fast food
  restaurants in NJ surveyed before and after the
  increase
• Neumark and Wascher (1995)
• 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
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29
Workplace Safety

• Occupational Safety and Health Act (1970)
• Permissable exposure levels
• Protective equipment
• Process safety management

30
Model of Optimal Safety

• MC slopes upward to reflect the rising
  opportunity cost of providing safety
• MB slopes downward to reflect diminishing returns
  to safety
• Permits paying lower wages
• Reduced worker turnover
• Lower worker comp rates
• MB MC determines optimal safety

MC1
MB1
MB2
Safety
S
S2

• If workers possess perfect information about
  potential risks, then S is socially optimal
• If workers underestimate potential risks, they
  wont demand a proper wage premium
• Safety will be less than optimal S2

31
The profit-maximizing level of job safety is a
probability level of

• 0.65
• 0.75
• 0.80
• 0.85

32
The profit-maximizing level of job safety is a
probability level of

• 0.65
• 0.75
• 0.80
• 0.85

33
OSHA Revisited

• Case for OSHA
• Imperfect information
• Barriers to occupational mobility
• Case against OSHA
• Workers might overestimate potential risks
• Workplace standards often bear no relationship to
  reductions to job injuries and illness
• Empirical evidence
• 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.

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35
Job Search

• External search
• Internal search

• Why Search?
• 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.

36
Job Search Model

• Assumptions
• 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

37
Job Search Model

• Worker formulates an acceptance wage, wA
• If w wA ? accept wage offer
• If w

• Benefits of search
• Get additional wage offers
• Costs of search
• Explicit employment agency fees transportation
• Implicit foregone earnings

38
Job Search Model Implications
If wA 20,000, what is probability that first
offer will be accepted?
wA
.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
• Expected inflation will shift acceptance wage
• Unexpected inflation will not shift the
  acceptance wage
• Unemployment compensation increases acceptance
  wage

___
___
___
_____
39
If 8.50 is the acceptance wage, what is the
probability of Sally finding her next wage offer
acceptable?

• 0.25
• 0.30
• 0.50
• 0.70

40
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

41
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

42
Internal Labor Markets

• A worker typically enters an internal labor
  market at the least-skilled port-of- entry 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.

Port of Entry
43
Reasons for Internal Labor Markets

• Firms use job ladders as method to reduce worker
  turnover.
• 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.

44
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.

45
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

46
The wage rate paid workers at Flow, Inc. will
most likely exceed that at otherwise identical
Stock Co. if

• 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.

47
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

48
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 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

49
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