Nonwage labor costs

1
Chapter 5

• Nonwage labor costs

2
Nonwage labor costs

• Nonwage labor costs include
• hiring costs,

3
Nonwage labor costs

• Nonwage labor costs include
• hiring costs,
• training costs,

4
Nonwage labor costs

• Nonwage labor costs include
• hiring costs,
• training costs, and
• employee benefits.

5
Hiring costs

• Hiring costs include the costs associated with
• placing advertisements,

6
Hiring costs

• Hiring costs include the costs associated with
• placing advertisements,
• selecting candidates for interviews,

7
Hiring costs

• Hiring costs include the costs associated with
• placing advertisements,
• selecting candidates for interviews,
• interviewing candidates,

8
Hiring costs

• Hiring costs include the costs associated with
• placing advertisements,
• selecting candidates for interviews,
• interviewing candidates,
• selecting candidates for job offers,

9
Hiring costs

• Hiring costs include the costs associated with
• placing advertisements,
• selecting candidates for interviews,
• interviewing candidates,
• selecting candidates for job offers,
• negotiating job offers,

10
Hiring costs

• Hiring costs include the costs associated with
• placing advertisements,
• selecting candidates for interviews,
• interviewing candidates,
• selecting candidates for job offers,
• negotiating job offers, and
• processing the worker's employment (filling out
  W4 forms, I9 forms, and adding the worker to the
  company's insurance and pension plans) in the
  human resources department of the firm.

11
Hiring costs differences across firms

• In the secondary labor market, hiring costs are
  generally relatively low.

12
Hiring costs differences across firms

• In the secondary labor market, hiring costs are
  generally relatively low.
• Hiring costs in the primary labor market,
  however, can be very substantial, particularly
  when a firm is operating in a national labor
  market.

13
Training costs

• Training costs include
• the explicit cost of hiring trainers and using
  materials (such as manuals, videotapes, and
  capital equipment) for training purposes,

14
Training costs

• Training costs include
• the explicit cost of hiring trainers and using
  materials (such as manuals, videotapes, and
  capital equipment) for training purposes,
• the implicit cost of using other workers, raw
  materials, and capital during informal on-the-job
  training,

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Training costs

• Training costs include
• the explicit cost of hiring trainers and using
  materials (such as manuals, videotapes, and
  capital equipment) for training purposes,
• the implicit cost of using other workers, raw
  materials, and capital during informal on-the-job
  training, and
• the opportunity cost of the trainee's time during
  training.

16
Training costs and wage offers

• low wages - higher turnover rates and lower
  quality applicants, leading to higher training
  costs.

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Training costs and wage offers

• low wages - higher turnover rates and lower
  quality applicants, leading to higher training
  costs.
• high wages - lower turnover rates and higher
  quality applicants, leading to lower training
  costs

18
Employee benefits

• legally mandated social insurance programs (such
  as social security and unemployment
  compensation),

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Employee benefits

• legally mandated social insurance programs (such
  as social security and unemployment
  compensation), and
• privately provided benefits such as health
  insurance, vacation pay, and pension plans.

20
Quasi-fixed costs

• Quasi-fixed costs are costs that vary with the
  number of workers hired by the firm, but not with
  hours worked per employee.

21
Optimal mix of employment and hours

• Firms may increase their use of labor by
• adding additional workers,

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Optimal mix of employment and hours

• Firms may increase their use of labor by
• adding additional workers,
• increasing the length of the workweek,

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Optimal mix of employment and hours

• Firms may increase their use of labor by
• adding additional workers,
• increasing the length of the workweek, or
• some combination of increases in hours and
  increases in the number of workers.

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Production function

• Qf(M,H)
• where Q quantity of output
• M number of workers
• H length of average work week

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Production function

• Qf(M,H)
• where Q quantity of output
• M number of workers
• H length of average work week
• MP of M declines as M increases

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Production function

• Qf(M,H)
• where Q quantity of output
• M number of workers
• H length of average work week
• MP of M declines as M increases
• MP of H declines as H increases

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Optimal mix of M and H
28
Effect of an increase in mandated overtime premium

• equivalent to an increase in MEH

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Effect of an increase in mandated overtime premium

• equivalent to an increase in MEH
• substitution effect M increases and H decreases

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Effect of an increase in mandated overtime premium

• equivalent to an increase in MEH
• substitution effect M increases and H decreases
• scale effect M and H both decrease

31
Effect of an increase in mandated overtime premium

• In a more complete model, other effects would
  occur
• a substitution of capital and other inputs for
  labor,

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Effect of an increase in mandated overtime premium

• In a more complete model, other effects would
  occur
• a substitution of capital and other inputs for
  labor,
• increased noncompliance,

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Effect of an increase in mandated overtime premium

• In a more complete model, other effects would
  occur
• a substitution of capital and other inputs for
  labor,
• increased noncompliance,
• only limited substitution of less skilled
  unemployed workers for the skilled workers who
  tend to work overtime hours,

34
Effect of an increase in mandated overtime premium

• In a more complete model, other effects would
  occur
• a substitution of capital and other inputs for
  labor,
• increased noncompliance,
• only limited substitution of less skilled
  unemployed workers for the skilled workers who
  tend to work overtime hours,
• increased moonlighting,

35
Effect of an increase in mandated overtime premium

• In a more complete model, other effects would
  occur
• a substitution of capital and other inputs for
  labor,
• increased noncompliance,
• only limited substitution of less skilled
  unemployed workers for the skilled workers who
  tend to work overtime hours,
• increased moonlighting, and
• a decline in the base rate of compensation in
  those industries that use significant amounts of
  overtime.

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Part-time employment and mandated benefits

• The quasi-fixed costs associated with full-time
  employees is usually higher than the quasi-fixed
  costs associated with part-time employees.

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Part-time employment and mandated benefits

• The quasi-fixed costs associated with full-time
  employees is usually higher than the quasi-fixed
  costs associated with part-time employees.
• Mandatory health insurance would reduce the use
  of part-time employment.

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Multi-period demand for labor

• firms may lose money during a training period if
  they can receive a sufficient return on the
  training investment in subsequent periods.

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Present value
40
Present value

• The present value of a future payment is lower
  when
• the payment is received in the more-distant
  future,

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Present value

• The present value of a future payment is lower
  when
• the payment is received in the more-distant
  future, and/or
• the interest rate is relatively high.

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Two period model definitions

• Wo wage during training
• W1 post-training wage
• W wage if no training is received (the same in
  each period)
• Z hiring and training cost (paid during the
  training period)
• MPo marginal product during training
• MP1 marginal product after training
• MP marginal product if no training is received
  (assumed to be the same in each period)

43
Shifts in MP due to training
44
Optimal employment when training costs are present

• PV(MRP) PV(MFC)

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Optimal employment when training costs are present

• PV(MRP) PV(MFC)
• Definitions
• PVP MPo MP1/(1r),

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Optimal employment when training costs are present

• PV(MRP) PV(MFC)
• Definitions
• PVP MPo MP1/(1r), and
• PVE Wo Z W1/(1r).

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Optimal employment when training costs are present

• PV(MRP) PV(MFC)
• Definitions
• PVP MPo MP1/(1r), and
• PVE Wo Z W1/(1r).
• Optimal employment
• PVPPVE

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Optimal employment when training costs are present

• PV(MRP) PV(MFC)
• Definitions
• PVP MPo MP1/(1r), and
• PVE Wo Z W1/(1r).
• Optimal employment
• PVPPVE
• MPo MP1/(1r) Wo Z W1/(1r)

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Optimal employment when training costs are present
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Optimal employment when training costs are present

• Wo Z - MPo (MP1 - W1) / (1 r),

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Optimal employment when training costs are present

• Wo Z - MPo (MP1 - W1) / (1 r), or
• NCo G

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General and firm-specific training

• General training is training that raises a
  worker's productivity in more than one firm.

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General and firm-specific training

• General training is training that raises a
  worker's productivity in more than one firm.
• Firm-specific training increases the worker's
  productivity only in the current firm.

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Costs of general training

• Since general training raises the productivity of
  the worker in more than one firm, the costs (and
  benefits) of general training are expected to be
  borne by the worker.

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Costs of general training

• Since general training raises the productivity of
  the worker in more than one firm, the costs (and
  benefits) of general training are expected to be
  borne by the worker.
• Wo MPo - Z, and

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Costs of general training

• Since general training raises the productivity of
  the worker in more than one firm, the costs (and
  benefits) of general training are expected to be
  borne by the worker.
• Wo MPo - Z, and
• W1 MP1

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Costs of firm-specific training

• If workers bear the costs, there is no reason for
  the firm to keep the worker.

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Costs of firm-specific training

• If workers bear the costs, there is no reason for
  the firm to keep the worker.
• If firms bear the costs, there is no reason for
  workers to stay.

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Costs of firm-specific training

• If workers bear the costs, there is no reason for
  the firm to keep the worker.
• If firms bear the costs, there is no reason for
  workers to stay.
• It is expected that the costs of (and benefits
  from) firm-specific training will be shared.

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Costs of firm-specific training

• If workers bear the costs, there is no reason for
  the firm to keep the worker.
• If firms bear the costs, there is no reason for
  workers to stay.
• It is expected that the costs of (and benefits
  from) firm-specific training will be shared.
• MPo - Z lt Wo lt MP

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Costs of firm-specific training

• If workers bear the costs, there is no reason for
  the firm to keep the worker.
• If firms bear the costs, there is no reason for
  workers to stay.
• It is expected that the costs of (and benefits
  from) firm-specific training will be shared.
• MPo - Z lt Wo lt MP
• MP lt W1 lt MP1

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Layoffs, productivity, and training

• a firm will be more reluctant to lay off workers
  who have received training investments paid for
  by the firm,

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Layoffs, productivity, and training

• a firm will be more reluctant to lay off workers
  who have received training investments paid for
  by the firm,
• firms are more likely to rely on overtime rather
  than using additional employees in those markets
  in which firms pay a substantial share of
  training costs,

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Layoffs, productivity, and training

• a firm will be more reluctant to lay off workers
  who have received training investments paid for
  by the firm,
• firms are more likely to rely on overtime rather
  than using additional employees in those markets
  in which firms pay a substantial share of
  training costs,
• productivity falls during a recession,

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Layoffs, productivity, and training

• a firm will be more reluctant to lay off workers
  who have received training investments paid for
  by the firm,
• firms are more likely to rely on overtime rather
  than using additional employees in those markets
  in which firms pay a substantial share of
  training costs,
• productivity falls during a recession, and
• rises during an expansion.

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Minimum wage and training costs

• For workers to bear part or all of the cost of
  their training, they must be paid less during the
  training period.

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Minimum wage and training costs

• For workers to bear part or all of the cost of
  their training, they must be paid less during the
  training period.
• The minimum wage sets a floor on this wage that
  limits the ability of workers to bear the costs
  of such training by accepting a lower wage.

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Minimum wage and training costs

• For workers to bear part or all of the cost of
  their training, they must be paid less during the
  training period.
• The minimum wage sets a floor on this wage that
  limits the ability of workers to bear the costs
  of such training by accepting a lower wage.
• Firms faced with such a system may respond by
  providing less training, thereby limiting the
  rate of growth of earnings for minimum-wage
  workers.

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Credentials, Signals, and statistical
discrimination

• Firms have imperfect information and may make
  decisions based on observable worker
  characteristics.

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Credentials, Signals, and statistical
discrimination

• Firms have imperfect information and may make
  decisions based on observable worker
  characteristics.
• This may lead to statistical discrimination.

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Credentials, Signals, and statistical
discrimination

• Firms have imperfect information and may make
  decisions based on observable worker
  characteristics.
• This may lead to statistical discrimination.
• Statistical discrimination is expected to be less
  severe when internal labor markets are used.