The Labor Market
CHAPTER 16
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Individual Labor Supply
Households supply labor. People in the households allocate their time to
work for pay or not to work (leisure time).
This leads to individuals having to make a labor supply decision based upon
the labor-leisure tradeoff.
The backward-bending labor supply curve results because a person is
willing and able to work more hours as the wage rate increases until, at
some sufficiently high wage, the person chooses to work fewer hours.
The person feels that he or she has enough income, and would rather have
more leisure time.
At a high enough wage rate, the person feels that he or she can afford to take
more leisure time.
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The Backward-Bending Labor
Supply Curve
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Labor Market Supply
If the labor supply curve for each individual slopes upward, then the
market supply curve -- the sum of all individual supply curves -- also
slopes upward.
The labor market supply curve slopes up because the number of people
willing and able to work rises as the wage rate rises and because the
number of hours that each person is willing and able to work rises as the
wage rate rises, at least up to some high wage rate.
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Labor Market Equilibrium
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Wage Differentials
If all workers were identical, if all jobs were identical, and if all information
were perfect, there would be no wage differentials—all workers would earn
the same wage.
The reasons for wage differences include compensating wage differentials
and differences in individual productivity.
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Days Away from Work
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Most Dangerous Jobs
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Compensating Wage
Differentials
Compensating wage differentials: wage differences that make up for the
higher risk or poorer working conditions of one job over another.
Some jobs are more dangerous or more unpleasant. Workers demand
higher wages to be willing to supply their labor to these jobs.
The supply curve of labor for these jobs lies above the supply curve of
labor for less desirable jobs.
This results in a higher equilibrium wage and an equilibrium
differential—the compensation the worker demands and gets for
undertaking the riskier, less desirable job.
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Compensating Wage
Differentials
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Human Capital
People differ with respect to their skills.
These difference influence the level of wages for two reasons:
Skilled workers have higher marginal productivity than unskilled
workers, and the supply of skilled workers is smaller than the supply of
unskilled workers.
As a result, skilled workers will receive higher wages than unskilled workers.
The expectation of higher wages will induce people to acquire human
capital—skills and training acquired through education and on-the-job
training.
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Human Capital
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Investment in Human Capital
Just as firms invest in physical capital, we say that individuals invest in
human capital.
These individuals are purchasing education and training in order to achieve
higher output and income in the future.
As with all other economic decisions, the decision to invest in human
capital is made in terms of whether the expected benefits will exceed
the costs.
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Income Profiles and Educational
Level
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Outsourcing
The knowledge economy makes it possible for many jobs to be
performed anywhere in the world and then transmitted electronically
wherever it is demanded.
If the work can be done as well in India or China at a much lower price,
companies in the U.S. and other developed nations will purchase the
work from these countries.
As a result, an increasing number of jobs are being done offshore. This is
called outsourcing or offshoring.
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Offshoring
Outsourcing is the process of purchasing services from
another firm rather than employing someone to do the
service inside the firm.
Outsourcing is called offshoring when the jobs are
purchased from a firm in another country.
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The Dynamics of Offshoring
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Immigration
People leave their home country and go to another country primarily because
they seek a higher quality of living.
Their own country may be politically repressive or economically stagnant, or
there may be no upward mobility among income classes in their home country.
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Foreign-Born Population of
the United States
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Illegal Immigration in the
United States
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Controlling Immigration
The Immigration Reform and Control Act of 1986 (IRCA) was the first to address
the issue of illegal immigration. It introduced penalties for employers who
knowingly hire illegal immigrants.
The United States currently admits about 700,000 immigrants annually as legal
residents who will be eligible to apply for citizenship after living in the U.S. five
years.
Only about 110,000 of those receiving green cards do not have family
members who are U.S. citizens. Of these, about 65,000 are highly skilled
workers and about 44,000 are low-skilled workers.
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Unskilled Labor Market and
Illegal Immigration
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Illegal Immigration Effects
When the cost of labor declines, the costs of doing business also
decline.
As firms increase output and new firms enter the business, the market
supply of the products being produced by the unskilled labor will rise
and the market price of the good or service will decline.
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Costs of Illegal Immigration
The effects of illegal immigration on unskilled workers
The property damage caused by the illegal immigrants sneaking into the
U.S.
The expenditures on health care for immigrants at emergency clinics and
hospitals, which are unable to legally deny care to anyone or to inquire
whether one is a legal resident
The expenditures on public education caused by the children of
immigrants attending public schools
Burglary and other crimes committed by illegal immigrants
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Benefits of Illegal Immigration
The lower prices on some goods and services
The taxes they pay. Since 2002, the suspense file, a slush fund for social
security payments without matching numbers, has been growing at
more than $60 billion a year.
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Border Enforcement
As illegal immigration has increased, so have government expenditures
on border enforcement.
Between 1986 and 2005 the U.S. Border Patrol more than tripled in size
and the hours spent patrolling increased more than eight times.
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Discrimination
Discrimination is a form of prejudice that occurs when factors unrelated
to marginal revenue product affect the wages or jobs that are obtained.
It is another reason for wage differentials.
Discrimination is costly in that less productive employees or more
expensive but not more productive employees are used by the firm. It is
contrary to profit maximization.
Discrimination may be personally based or statistical.
Personal discrimination is based upon prejudices on the part of employers,
fellow workers, or customers.
Statistical discrimination results when an indicator of group performance is
incorrectly applied to an individual member of that group.
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Discrimination
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Occupational Segregation
Statistical discrimination and imperfect information can lead to
crowding—forcing a group into certain kinds of occupations.
At one time, women were pushed into secretarial, clerical, or support
roles.
The separation of jobs by sex is called occupational segregation.
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Wage Differentials and
Government Policies
With the Civil Rights Act of 1964 it became unlawful for any employer to
discriminate on the basis of race, color, religion, sex, or national origin.
Exceptions are only permitted in cases where religion, sex, or national
origin is a bona fide occupational qualification for the job.
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Tests of Discrimination
Disparate treatment: treating individuals differently because of their
race, sex, color, religion, or national origin.
Disparate impact: it is the result of different treatment, not the
motivation, that matters.
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Comparable Worth
The persistent wage gap between men and women has led to another
approach— “equal pay for equal work.”
More formally, this is called comparable worth—the pay ought to be
determined by the job characteristics rather than by supply and demand,
and jobs with comparable requirements should receive comparable
wages.
Proponents of this approach argue that market-determined wages are
not appropriate because of the market’s inability to assess marginal
products.
Opponents argue that interference with the function of the labor market
will lead to shortages in some occupations and excess supplies in others.
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Comparable Worth
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