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Labor markets and income distribution

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Title: Labor markets and income distribution


1
Labor markets and income distribution
  • Today Value of work, human capital, unions,
    discrimination, and income distribution

2
Today 5 mini-lectures about labor markets
  • Value of work
  • How much is labor worth?
  • Human capital
  • Training, education, experience, etc.
  • Unions
  • Direct effects and indirect effects
  • Discrimination
  • What does theory tell us about discrimination?
  • Income distribution
  • Is income inequality a bad thing?

3
Value of work
  • Will every person get the same wage for the same
    hour of work?
  • Maybe
  • It depends what the structure of the market is
  • It depends on the marginal value of the hour of
    work

4
Suppose a competitive labor market
  • If each persons hour of work results in 50 in
    additional output, should each worker get paid
    50 per hour?
  • Not quite
  • You have to deduct the firms costs
  • Capital costs
  • Input costs
  • Transaction and handling costs

5
Simple example with input and capital costs
  • I need 20 in supplies and one hour to build a
    small cabinet
  • The firm I work for also needs to rent a cubicle,
    at 8 per hour
  • Once I finish building the cabinet, the firm can
    sell it to a wholesaler for 50
  • What is my worth to the company?

6
What is my worth to the company?
  • The company is willing to pay up to 22 per hour
    for my labor to build cabinets
  • Costs 28 (supplies and cubicle)
  • Benefits 50
  • In a competitive environment, if Firm X offers
    less then 22, Firm Y can offer me more than what
    Firm X does
  • The battling between Firms X and Y will continue
    until one offers 22

7
Marginal product of labor
  • In this example, my marginal product (MP) of an
    hour of labor is 1 cabinet
  • The value of my marginal product (VMP) of an hour
    of labor is the additional value my hour of work
    produces 22
  • All workers just like me will earn 22 per hour
    in a competitive labor market

8
Suppose that you could build two cabinets per hour
  • Should you earn 22 per hour?
  • No
  • Costs per hour 48 (Supplies for two cabinets
    and one hours cubicle rental)
  • Benefits per hour 100 (two cabinets)
  • You should earn 52 per hour for your work

9
Back to an old example
of empl./day Phones per day
0 0

1 20

2 45

3 55

4 63

5 67
10
Recall the following information
  • Phones sell for 18 each
  • Variable cost is 100 per worker
  • Only other costs are fixed

11
Different analysis, same resultProduce as long
as VMP gt 100
of empl./day Phones per day MP (extra phones per day) VMP ( per day)
0 0
20 360
1 20
25 450
2 45
10 180
3 55
8 144
4 63
4 72
5 67
Hire?
Yes
Yes
Yes
Yes
No
12
Recall this table from Lecture 6 We hire 4
workers either way
of empl./day Phones per day MB (/phone) MC (/phone)
0 0
18.00 5.00
1 20
18.00 4.00
2 45
18.00 10.00
3 55
18.00 12.50
4 63
18.00 25.00
5 67
13
When analyzing labor problems
  • You can often choose the method you use to
    maximize a firms benefits
  • Notice that we get the same answer either way

14
Summary Value of work
  • In a competitive labor market, the long-run
    equilibrium wage is a workers VMP
  • More productive workers will get paid more in a
    competitive environment equilibrium
  • Some labor problems that were analyzed using the
    MB/MC approach can also be analyzed using a VMP
    approach

15
Human capital
  • Human capital comprises of the characteristics
    that affect the value of the persons work when
    hired
  • The better the characteristics of human capital,
    the more a person is likely to earn

16
Some human capital qualities
  • Education
  • Direct knowledge
  • Intelligence
  • Signaling
  • Training
  • Work and life experiences
  • Energy level
  • Work habits
  • Trustworthiness
  • Initiative

17
Education sends many messages to a potential
employer
  • I have learned everything needed to finish this
    level of education
  • I am intelligent enough to finish this
    education, which probably means I am smarter than
    those without my level of education
  • I am using this level of education to send a
    signal that I have other good qualities that you
    are looking for others that do not finish this
    level of education can say the same thing

18
Education and employment
  • Many jobs require a minimum level of education to
    be considered for a job
  • M.D. to be hired as a doctor
  • License for many specialized fields
  • Real estate
  • Pilot
  • High school or college diploma for many
    entry-level jobs

19
Education and employment
  • The more education you have, the higher you are
    in demand for your services
  • Exceptions People that get a Ph.D. in the
    humanities often end up in the same type of job
    that they had before

20
For more on education
  • See Mandatory starting dates for kindergarten,
    p. 367
  • See Economic Naturalist 13.4, p. 387
  • A new class is being developed in the Economics
    department

21
Summary Human capital
  • Many characteristics form human capital
  • Education probably most important for most people
  • Human capital is valued by employers due to the
    fact that it increases a workers productivity

22
Unions
  • Unions form so that workers can collectively
    bargain
  • Wages
  • Working conditions

23
Unions and wages
  • Can anyone unionize and demand higher wages?
  • In most cases, yes
  • Demands will not always be agreed to
  • As wage increases, the firm can employ fewer
    people profitably

24
When are unions effective?
  • Finding qualified workers outside of a union is
    difficult or impossible
  • Example Writers strike
  • See Additional reading on class website for
    more on this topic
  • When a firm is making economic profits
  • When a unionized firms can hire better workers
    than nonunionized firms

25
Quote from writers strike article
  • In the world of labor negotiations today, the
    writer of a hot TV show has more power than an
    auto assembly worker with a rivet gun.
  • (From Writers a rarity a union with power.
    Posted 11/5/07. See http//www.msnbc.msn.com/id/2
    1598412/)

26
Why can writers form a powerful union?
  • Few good outsourcing options
  • Requires specialized skills
  • Unionization of all writers means that no writer
    will write for a show without the unions
    blessing
  • Scabs that write without the unions blessing
    during a strike are often unable to obtain work
    once the strike is over

27
What can networks do to combat the writers union?
  • More unscripted programming
  • Reality shows
  • Game shows
  • Sports
  • TV news magazines (60 Minutes, 20/20, etc.)
  • Specials (Barbara Walters, concerts)

28
Summary Unions
  • Unions can be effective in some situations
  • When workers doing the same kind of job are
    heterogeneous in human capital
  • When replacement workers cannot easily be found
  • No good outsourcing options
  • Nobody outside of the union is able to do the job

29
Discrimination
  • The wage gap between men and women has been a
    hot topic for decades
  • How much of this is due to discrimination?
  • How much of this is due to other factors?

30
Recall human capital theory
  • Human capital theory says that wages are
    determined by factors such as education and
    experience
  • Education likely to affect wage gap
  • Mid-20th century More men than women with
    college education
  • Today 4 women graduate college for every 3 men

31
The wage gap, declining
  • As more women enter the work force, the wage gap
    declines
  • More women enter a job with the same education as
    men
  • Despite changes in education, there is still a
    wage gap

32
What else explains the wage gap?
  • Holding constant important factors such as
    occupation, education, field of expertise, and
    years of experience
  • Men often choose majors with high salary
    potential after graduation
  • Math, science

33
What else explains the wage gap?
  • Customer discrimination
  • Examples
  • Lawyers
  • Physicians
  • Incorrect conclusions about the relative
    productivity of men and women

34
Does discrimination actually occur?
  • Probably
  • Likely due to the incorrect conclusions about the
    productivity of men and women

35
Does discrimination actually occur?
  • Example of what might be occurring
  • Some managers may look at two candidates for a
    promotion, one male, one female
  • Both are nearly equally qualified
  • On paper, most managers would promote the woman
  • 90 of managers would promote the woman based
    solely on human capital

36
Does discrimination actually occur?
  • Some managers may have experiences from the past
    that women are family oriented and men are
    career oriented
  • Although todays workforce is more homogeneous
    than it used to be, some managers may
    subconsciously favor the man when the gender of
    both applicants is known
  • When gender of both is known, maybe only 30 of
    managers promote the woman

37
Does discrimination actually occur?
  • In jobs where men are mostly managers, they may
    incorrectly weigh human capital traits
  • High weight to human capital traits that men have
    more of
  • Low weight to human capital traits that women
    have more of

38
Does discrimination actually occur?
  • What will happen when these managers get it
    wrong?
  • Promotion of a lower-productivity worker
  • Lower productivity leads to lower profits
  • Lower profits lead to a higher likelihood that a
    business in a perfectly competitive environment
    will not survive in the long-run
  • Higher productivity worker may find a better job
    at another firm

39
Does discrimination actually occur?
  • Results of this example
  • When human capital differences are clear, the
    best candidate will get the promotion
  • When human capital differences are not clear, the
    promotion may be more likely to go the male
    worker
  • Perfectly competitive firms that discriminate are
    less likely to survive in the long run

40
Summary Discrimination
  • A wage gap between men and womens pay has
    existed for decades
  • Some of this can be explained by controlling for
    education, experience, and other factors
  • Some discrimination may be occurring
  • Firms that do discriminate based on factors such
    as gender and race are less likely to be
    competitive in the long run

41
Income distribution
  • Is income inequality a bad thing?
  • Some argue that people would prefer more income
    equality
  • Others argue that economic incentives are needed
    to keep the economic pie from getting smaller

42
Mean income table (families), from F/B, p. 411
(2000 dollars)
Quintile 1980 1990 2000
Bottom 20 percent 12,756 12,625 14,232
Second 20 percent 27,769 29,448 32,268
Middle 20 percent 41,950 45,352 50,925
Fourth 20 percent 58,200 65,222 74,918
Top 20 percent 97,991 121,212 155,527
Top 5 percent 139,302 190,187 272,349
  • Real income growth, 1980-2000
  • Bottom 20 has been flat
  • Top 20 has seen huge growth (59)

43
The gap between rich and poor widens
  • The rich are getting richer, but the poor are not
    getting poorer
  • The middle class has seen moderate real growth in
    income
  • 16-29 growth for the categories in the middle 60

44
The veil of ignorance
  • John Rawls, a moral philosopher, came up with the
    following argument to create income equality
  • Veil of ignorance
  • Conceals knowledge and talents from people
  • Risk averse people will want to have income
    equality under these conditions
  • No inferiority, jealousy or envy based on income

45
Problems with income inequality
  • Those that are relatively poor may feel inferior
  • This problem may perpetuate to their children
  • Jealousy towards other people
  • Envy towards other peoples accomplishments

46
Problem The economic pie will shrink with
Rawls ideas
  • If income was guaranteed to be equal to everyone,
    nobody will have an economic incentive to gain
    human capital
  • Smaller economic pie
  • Less human capital
  • People work less

47
Is there an optimal amount of income inequality?
  • Impossible to answer
  • Different people have different opinions about
    effectiveness of realistic ways to redistribute
    income

48
Some methods of income redistribution ( their
problems)
  • Welfare payments
  • Little economic incentive to get off of welfare
    without time limits
  • Negative income tax
  • Incentive to work for pay diminishes

49
Some methods of income redistribution ( their
problems)
  • Minimum wage
  • Unemployment
  • Public employment of the unemployed
  • Needs to have enough incentives for unemployed
    people to want to work
  • Needs to have incentives low enough for employed
    people to stay in their old job

50
A success story ofincome redistribution
  • The earned-income tax credit (EITC)
  • The working poor receive a sizable credit for
    working and making an income in a given range
  • Essentially a negative income tax for those
    working and making low incomes

51
Summary Income distribution
  • In recent decades, income inequality has grown
  • Due mostly to large real growth in upper income
    groups
  • Income equality is a moral issue, but with many
    costs when implemented
  • The EITC is a success story of balancing income
    redistribution and economic incentives
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